More than 500 biotech companies operate in the US, doing their part to make it the world’s hub for innovation. Only about 20 of them turn a profit, though, highlighting the dangers of the biotech sector. High overhead, long research terms, and the uncertainties of clinical testing and regulatory approval all weigh on them, making biotech at once the riskiest and most potentially profitable of the stock market’s segments.
Enter Joseph Edelman. The hedge fund veteran started Perceptive Advisors back in 1999 with just $6 million, and his hedge has grown to hold over $5 billion in assets under management today. Edelman’s fund’s flagship, the Perceptive Life Sciences Fund, specializes in small- and mid-cap biotech companies. That Edelman knows how to spot the winners is clear from the Life Sciences Fund’s annualized gains of 30% since its inception.
In the words of Brad Loncar, of Loncar Investments, biotech is the “most volatile sector in the stock market… More so than any industry, it’s important to be diversified... Even excellent companies with great science fail all the time and have big setbacks, because it’s that difficult of a business.” Edelman has thrived in this difficult business for the last twenty years, and in his most recent 13F filing, for the quarter ending this past September 30, he doubled down on three companies.
We’ve looked up each in the TipRanks database, to find a line on why.
Amarin Corporation (AMRN)
A mid-cap company, valued at $7 billion, Amarin is the largest of the companies on this list. Perceptive bought over 1.4 million shares of AMRN in the third-quarter, bringing the fund’s total holding to 7.6 million shares. Edelman’s fund first bought into Amarin in Q3 2018, and now holds more than $173 million of AMRN shares.
It’s not hard to understand why a biotech-focused hedge fund would go large on Amarin. The company has only one product on the market, but that one is a true humdinger. The medication, Vascepa, is an omega-3 based treatment for hypertriglyceridemia, with a proven record of reducing triglycerides in adult patients. Vascepa has been commercially available since 2013, and is predicted to reach $2.2 billion in annual sales by 2024.
Vascepa’s success in the open market is clear from Amarin’s quarterly results. The company reported Q3 revenues of $112 million, up 103% from the year-ago quarter, and a cash-on-hand position of $677 million. Underneath these strong numbers was equally strong prescription performance for Vascepa – the company reported over 865,000 new and repeat orders for the drug in the quarter, up 9.9% sequentially. Importantly, the FDA is set to make a final decision on a label expansion for Vascepa to include patients at risk of a heart attack and other major adverse cardiovascular events (MACE). The company should get either green or red light by December 28, 2019.
AMRN shares have been getting plenty of love lately from Wall Street’s analysts, but also some skepticism.
Louise Chen, writing from Cantor, says, “The peak sales potential of Vascepa is underappreciated and that upward earnings revisions should drive Amarin shares higher.” Her price target of $35 suggests an upside of over 70% to the stock. (To watch Chen's track record, click here)
Jefferies analyst Michael Yee is also bullish on AMRN, citing the upcoming FDA decision. He states, “While some investors do not like the risk/reward debate on the December 28 potential FDA approval and label wording, [we are] not too concerned about the exact wording. Based on commentary by the FDA at the end of the panel, [we think] the agency might be broader on the label than some investors expect. Expect Amarin to rise toward $30 per share...” Yee’s price target implies a 51% upside. (To watch Yee's track record, click here)
Meanwhile, Amarin stock has hit a new 52-week high last Friday, with a valuation that almost reached the $9 billion level. Indeed, the stock's valuation is way too high for Oppenheimer analyst Leland Gershell who initiated coverage on AMRN with an "underperform" rating (i.e. Sell) and a $7.00 price target. Gershell opined, "We forecast sales growth to underwhelm and heavy selling costs to impede profitability. Furthermore, we believe that a ~12-month stream of late-stage competitor data starting next month will increasingly weigh on shares as these products, which we believe offer superior profiles, are factored into models. While some may regard AMRN as a probable M&A target, we see the likelihood of this outcome as only shrinking with time." Gershell's price target implies about 60% downside from current levels.
Overall, the word on the Street rings largely bullish on this fish oil drug maker, with TipRanks analytics demonstrating AMRN as a Buy. Out of 10 analysts tracked in the last 3 months, 7 are bullish on Amarin stock, 2 remain sidelined, and 1 is bearish on the stock. With a return potential of nearly 35%, the stock's consensus target price stands at $27.30. (See Amarin stock analysis on TipRanks)
Solid Biosciences (SLDB)
This small-cap biotech focuses on developing treatments for Duchenne muscular dystrophy (DMD), the most common form of the devastating genetic disorder. DMD is a sex-linked recessive trait, and affects about 1 in 5,000 male children at birth. SLDB’s main product, drug candidate SGT-001, is at the Phase I/II stage of development.
Clinical failures and safety concerns have dogged Solid through much of this year. Back in May, SGT-001 saw disappointing numbers in an early testing readout, leading to a 64% drop in share value for SLDB – but also to an increased dosage in ongoing test. That led to a ‘patient event’ in May, in which a test subject reported an adverse reaction. The FDA stepped in and put a clinical hold on the drug at that point.
The company was able to address FDA concerns and resume testing, but last week it saw another FDA clinical hold. This hold was again the result of a patient experiencing an ‘adverse event.’ According to reports, the patient suffered kidney damage. SLDB shares, which had not truly recovered from February’s hit, dropped an additional 64% on the news.
With this as background, we can look at Edelman’s purchase. His fund bought more than 2.8 million shares of SLDB in Q3, bringing the total holding to 6.7 million shares. At the end of the quarter, the shares were priced near $10 each; they are now trading at just $3.68. This is down 64% from the end of Q3. Edelman has a history of holding on to his biotech purchases for a long time, regardless of performance or clinical testing results. He has said that "an investor who doesn’t like risk should not be in this business."
Solid hasn’t been getting much love on Wall Street analyst lately. Credit Suisse analyst Martin Auster writes of the SGT-001 program, “This is the second time that the program has had a clinical hold, which supports our view that the drug has a more challenging safety profile relative to competitors. While the company tried to refocus investors on the upcoming biopsy data from the first 2 high dose patients later this year, we see investors as likely discounting this efficacy update until the company receives clarity on the path forward for the program and shores up its balance sheet.” Auster’s $2 price target implies a downside risk to the stock of 45%. (To watch Auster's track record, click here)
All in all, the analyst consensus on SLDB is a Moderate Sell, based on 2 recent sell ratings issued in the past 3 months. Analysts are worried about the company’s path forward when its prime drug candidate has lost the trust of regulators. (See SLDB stock analysis on TipRanks)
VBI Vaccines (VBIV)
VBI aims at developing a new generation of vaccines, targeting, in the company’s words, ‘unmet needs in infectious disease and immune-oncology.’ The company’s most advanced programs are prophylactic treatments for Hepatitis B, Sci-B-Vac, which has been approved for use in 10 countries, and VLP, which is in Phase 3 testing.
In the immune-oncology field, the company has VBI-1901 in testing for patients with recurrent glioblastoma. The company’s Chief Medical Officer said, “We are encouraged by the data we’ve seen to-date in Part A of the study.” VBI-1901 is now in Phase 1 testing.
Also in Q3, Edelman and his Life Sciences Fund bought 20 million shares of VBIV, increasing their holding of the company by 78%. The fund now holds 45.9 million shares of the company, with a value of $27 million. This is a significant drop in value from the $45 million recorded at the end of last quarter.
Canaccord analyst John Newman sees upside potential in this small company. He writes, “VBIV expects to present top-line data in January from the CONSTANT Phase 3 trial, which we expect to be positive… We expect the data will include key immune repression measures such as geometric mean concentration (GMC) of antibodies across the three independent manufactured lots of Sci-B-Vac.” Newman does, however, lower his price target to $4. Even so, his implied upside is an impressive 577%. (To watch Newman's track record, click here)
VBI Vaccines has received 2 recent reviews, both Buys. Shares are selling for minimal 59 cents, but the stock has a $3.50 price target which suggests an-opening 466% upside potential. (See VBI Vaccines stock analysis on TipRanks)