Healthcare Hedge Fund is Selling This Pharma Stock, Should You Too?
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Between April and June of this year, Orbimed Advisors sold 18% of its shares of Pacira Pharmaceuticals (NASDAQ: PCRX), finishing the second quarter with exactly 2 million shares in its portfolio. According to a more recent 13F filing with the SEC, Orbimed has continued selling shares during the third quarter, and as of September 25th owned just over 1.6 million shares, placing it under the 5% ownership mark. This means that Orbimed cut its stake 20% in the last three months.
Pacira is a development-stage pharmaceutical company whose drugs incorporate the firm’s own drug delivery technology. It went public in February 2011 and the stock has since risen 154%, including doubling in price this year. Its market capitalization is now about $580 million (with sufficient volume for most investors to take a position in the stock). We would recommend any investors who have seen a stock double while they owned it to sell out of at least a portion of their position, and the fact that Orbimed may be doing this makes it even better advice.
At least in the course of the second quarter, however, some hedge funds were buying in to Pacira. Jacob Gottlieb’s Visium Asset Management and Richard Schimel’s Diamondback Capital both increased their stakes from the first quarter of the year between April and June. See more stock picks from Jacob Gottlieb and former SAC Capital portfolio manager Richard Schimel. Obviously, these transactions are a few months old, and with the stock having risen substantially these funds may have sold shares during the third quarter.
Pacira did double its revenue in the first half of 2012 versus the same period in 2011, on the strength of licensing and development. The company still shows a net loss, and Wall Street analysts expect a loss in 2013 as well despite Pacira’s continued sales of EXPAREL, one of the company’s primary products launched in April of this year. Pacira burned $25 million in cash during the first six months of 2012, and closed June with $21 million in cash and cash equivalents and $63 million in short term investments on its balance sheet following a stock offering in April.
We think that other development-stage pharmaceutical companies generally make for good peers for Pacira. Nektar Therapeutics (NASDAQ: NKTR), Alkermes (NASDAQ: ALKS), Hospira (NYSE: HSP), and Rigel Pharmaceuticals (NASDAQ: RIGL). Rigel, at about $740 million, is the only one of these companies with under a $1 billion market capitalization, so overall this group is considerably larger than Pacira.
As development-stage companies all four of these peers are unprofitable on a trailing basis; Nektar and Rigel also resemble Pacira in that the sell-side expects negative earnings per share next year as well. Alkermes and Hospira, conversely, are breaking into the black: specialty injectable drug provider Hospira even trades at a forward P/E of 13 and could be a value candidate if it can deliver that level of business performance, while drug developer Alkermes trades at 21 times forward earnings estimates.
We think that it is a good idea for investors in Pacira to sell some of their shares and lock in some profits they have earned from the rise in the stock, as Orbimed seems to be doing, and potentially look at other pharmaceutical companies as investment prospects. Certainly investors should do more work before buying, but if the story checks out Hospira or Alkermes are more attractive than the rest of these companies as they near profitability.
This article is written by Matt Doiron and edited by Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article. The Motley Fool has no positions in the stocks mentioned above. 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.If you have questions about this post or the Fool’s blog network, click here for information.