Baker Brothers, a healthcare focused hedge fund managed by Julian and Felix Baker, has recently filed with the SEC to disclose significant percentage stakes in two development stage biotechnology companies. The fund now owns 2.6 million shares of InterMune, Inc. (NASDAQ:ITMN), giving it 3.3% of the outstanding shares of the stock, and 1.5 million shares- nearly 9%- of Repros Therapeutics Inc (NASDAQ:RPRX).
InterMune’s focus is on treatments and potential treatments for idiopathic pulmonary fibrosis; the stock’s market cap is only about $650 million, but 1.7 million shares are traded on average per day. Repros’s products in development are aimed at disorders in the hormonal and reproductive systems. It too is a smaller-cap stock, with a market capitalization of about $210 million, but with about 470,000 shares traded per day and a current stock price of over $12 we would say that as with InterMune there is plenty of liquidity available for most investors’ purposes. See more of Baker Brother’s stock picks; the fund’s top healthcare stocks include Pharmacyclics, Inc. (NASDAQ:PCYC), Seattle Genetics, Inc. (NASDAQ:SGEN), and Synageva BioPharma Corp (NASDAQ:GEVA) where we have found some insider buying activity recently (read more about insider purchases at Synageva).
Repros is more or less purely in the development stage of its business; the company was earning essentially no revenue in the first three quarters of 2012. Wall Street analysts expect that it will at least remain unprofitable for 2013, with losses per share for the year expected to come in at $1.28. However, the stock has more than doubled in the last year on positive development news (though a delay in study results announced in January has sent the stock down over 20% year to date). The most recent data shows that 19% of the outstanding shares are held short.
InterMune is generating a small amount of revenue, but it too is still unprofitable and analyst expectations are for negative $3.02 in EPS for 2013. It is an even more popular short candidate than Repros, with almost 30% of shares held short. This company’s stock price has fallen 38% in the last year as news has not been particularly good. While InterMune does have a large cash hoard on its balance sheet (at about $350 million) it also has about $240 million in debt. So while a significant share of its market cap is cash, the company is still priced at an enterprise value of over $500 million.
Billionaire David Shaw’s D.E. Shaw reported a position of 4.8 million shares in InterMune at the end of September (find D.E. Shaw’s favorite stocks). QVT Financial, managed by Daniel Gold, was another major holder of the stock in our database of 13F filings with 5.6 million shares in its portfolio (see QVT’s stock picks). QVT also had significant holdings of Repros. The largest position out of the funds and other notable investors in our database belonged to Joseph Edelman’s Perceptive Advisors; Repros was the second largest 13F position Perceptive owned by market value (check out more stocks Perceptive owns).
Of course, investing in a development stage biotechnology company, even a publicly traded one, is almost the height of speculation particularly if an investor has little experience in healthcare or little understanding of the prospects of the companies’ products. Even the fact that a healthcare focused fund is buying a stock should not be treated as too validating an endorsement. We’d also note that each of these companies Baker Brothers has been buying has a sizable bearish community, as demonstrated by the short interest, and so it’s likely that at least some in that group have a healthcare background as well. If anything the increases in these stakes should be treated as a note or as a suggestion that investors who do feel comfortable evaluating development stage biotechnology companies should put a moderate amount of research into InterMune and Repros.
Disclosure: I own no shares of any stocks mentioned in this article.
