3 Small Biotechs Top Hedge Funds Are Investing In

Shas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Small biotech companies have great investment potential if you can identify them properly. A small biotech with a differentiated treatment approach and strong commercialization plans can become a rainmaker. However, given the level of cutting edge technology they use, a layperson without an MD or an advanced degree in statistics can hardly get a grip on these companies and what they are all about. Unless you know just how good their technology is, how are you going to invest your money in them?

Well, there’s a way, and that is called following in the footsteps of the big boys. Hedge funds have billions of dollars to invest, and a few million to throw in for performing proper due diligence on small biotechs. For small investors, it’s best to piggyback on their research, see who they are buying into, and then take a call.

A different approach to R&D

Idenix Pharmaceuticals (NASDAQ: IDIX) has Baupost Group putting their money on it in recent times. Baupost bought over 8 million shares in Idenix for $100 million. Baupost Group is the world’s 11th largest hedge fund and their portfolio value is about $3.1 billion. Their assets have grown six-fold over the past decade. Baupost focuses on superior long-term returns rather than ending each year with a positive return.

Idenix has one drug in the market and three others in various developmental stages. So what could be so alluring about this company? I think it’s the R&D route it has selected. The company is targeting development of medications that will add to the arsenal against viruses using the latest technology.

For their drug development efforts they have collaborated with Novartis and Johnson & Johnson. The all-oral direct-acting combination therapy that Idenix is aiming at will be able to treat a larger patient base by offering alternatives to those whom existing therapies do not help. This approach is a differentiating factor for the company.

Also, the company is not considering the path of creating solo blockbusters; rather they are building medications that are potent by themselves and effective in combination therapies as well. The HCV market has big players in it already, but given the vast potential for growth, Idenix can find a place given its product is of such good quality.

Idenix is in the infectious disease market, and has mainly targeted viruses such as HBV, HCV and HIV to date. The company co-developed and co-launched an HBV medication, telbivudine (Tyzeka/Sebivo), with Novartis Pharma. This big pharma company has worldwide commercialization rights for telbivudine, giving confidence to investors that an experienced big player will be in charge of generating sales for this product. Therefore, chances of the drug’s initial success as well as long-term viability are bolstered. Idenix has now focused its attention toward HCV. Its HCV drugs are in the preclinical and phase I stages of development.

For FY 2012 the company reported revenues worth $69.7 million, which is a 1,000% increase from the $7 million revenues generated in 2011. The company’s cash and cash equivalents total $230.8 million, which it expects will be sufficient for sustenance of operations into the later part of 2014.

Getting to diseases earlier

Another pharmaceutical company that has attracted a top hedge fund, BlackRock Advisors, is Alnylam Pharmaceuticals (NASDAQ: ALNY). BlackRock has invested $27.56 million by buying more than 635,000 shares of Alnylam. This giant hedge fund’s value is about $99 billion. BlackRock is the world’s largest money manager.

Alnylam is an interesting company. The company’s R&D vision is what medicine’s future is mainly going to be about. From treating symptoms, to blocking molecular pathways in disease, we are now moving toward inhibiting gene transcriptions. Therefore, it is going to be possible to target disease-causing genes and block a molecular cascade at a much earlier stage than has been possible so far.

In fact, diseases that could not be targeted using small molecules will now come within the reaches of therapy. I am quite excited about Alnylam’s RNA interference technology. Companies that are devising technologies to create medications along this new therapy dimension look very promising.

Alnylam has several drugs in the developmental and clinical trials phases. The therapy areas being targeted are diverse and new markets can be entered through the “Alnylam 5x15” program, for genetically defined diseases.

The stock price has been rising for the past few months as the company’s molecules have been moving further along the drug pipeline and collaborations with other companies have been entered into. Genzymes and The Medicines Company have decided to partner with Alnylam for the development of medications.

Revenues for the company were lower in FY2012 as compared to FY 2011 by $16.1 million. Part of the decrease in revenues was due to the completion of the amortization period for the company’s alliance with Roche, which ended in 2012. Overall, BlackRock Advisors has selected a company that is very likely to succeed in the long term.

Good news for stroke patients ... and investors

Acorda Therapeutics (NASDAQ: ACOR) is yet another company that has grabbed investors’ attention. Recently BlackRock Advisors have bought over 75,000 shares in this company for about $35.8 million. Very recently this company made headlines by saying that its drug Ampyra helped stroke patients recover their ability to walk during the mid-stage of a clinical trial. This company is focused on the development of therapies for people affected with spinal cord injuries, multiple sclerosis and other nervous system disorders. Ampyra brings in about 90% of the revenues for the company. Shares of this company are on the rise with the positive news brought in by Ampyra.

Other drugs by the company are Zanaflex (for muscle spasm treatment), and a new drug delivery technique by nasal spray for Valium (for anxiety and seizures).

The uniqueness of Acorda comes from the fact that it has high-quality products serving several indications. As I continue my study of the evolution of pharmaceutical companies over the years, I have realized that studying the potential of existing molecules to treat newer indications is a useful and cost-effective R&D approach with greater promise of future yield. Acorda is well on its way along this path.

Conclusion

All in all, the smaller biotech companies are becoming lucrative to large investors due to the strategies they are adopting. I believe that small biotechs have learned a lot from the successes and failures of big biotech and pharma companies. Hence, they are able to introduce flexibility in their business model at an earlier stage of their company’s lifetime, and build on R&D practices that can significantly improve healthcare in the future. This positions them very well for good growth. Also, these very same large pharma and biotech companies the smaller ones learned from are now partnering with them and backing them up in their unique and high-potential efforts.


This article is written by Shilpi Ghosh (BS, MS in Biomed, UCLA, MBA in Finance, IIFT) and edited by Shas Dey, StockRiters' Editor-in-Chief. Neither StockRiters nor any of its Directors or employees have any position in any stock mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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