AxoGen and Blueprint Medicines Help Opaleye Return 91% Over the Last Year

James A. Silverman founded Opaleye Management back in 1996 and it was formerly known as Risk/Reward Capital. The fund invests primarily in healthcare with a focus on biotech companies and has around $300 million in regulatory assets under management. While Opaleye is a small fund, it should not be overlooked due to its strong performance. According to our calculations, Opaleye’s stock picks generated an impressive return of nearly 23% during the first quarter and over the 12-month period ended March 31, Opaleye’s returns stand at a whopping 91%. With this in mind, let’s take a closer look at Opaleye’s performance and the stock picks that helped it achieve this feat.

At Insider Monkey, we calculate a fund’s returns taking into account the performance of its holdings in companies with market caps above $1.0 billion. This allows us to evaluate a fund strictly for its stock-picking ability, which is very useful when assessing whether or not we should imitate it. Following hedge funds is very useful, because even though, as a group hedge funds might not be performing as they used to, they are still great at picking stocks. To reduce risk and increase the chance of success, we have devised a strategy that identifies the best stocks that best-performing hedge funds are collectively bullish on. This approach has returned over 74% when our strategy was launched in May 2014, outperforming the S&P 500 ETF (SPY) by over 20 percentage points. The stock picks that are part of our strategy are shared in our premium quarterly newsletters, which you can access now free of charge for up to 14 days.

Before we get to its picks, a couple of words about the fund and its manager. Mr. Silverman changed the fund’s name into Opaleye from Risk Reward Capital and registered the fund with the SEC in 2013. In 2011, Mr. Silverman and RRC were involved in a lawsuit alleging insider trading. Mr. Silverman was accused of using information provided by doctors working as consultants for Guidepoint Global LLC. Massachusetts Secretary of the Commonwealth William Galvin said in the complaint that access to Guidepoint helped RRC Bio Fund generate strong returns of 55% in 2009 and 52% in 2010, while when Mr. Silverman began trading in 2007, it lost 17%. After he began paying Guidepoint for access to doctors, Silverman made bets on Ariad Pharmaceuticals and Questcor, which proved very profitable. However, Mr. Silverman denied the accusations and said that he outperformed his peers during the market drop of 2007. He also said that he invested in Questcor before getting information from consultants and continued to hold the stock.

Copyright: mikkolem / 123RF Stock Photo

The investigation into Mr. Silverman continued well into 2013, when his fund’s assets reached $100 million and he had to register it with the Securities and Exchange Commission. In 2013, Silverman filed a complaint against Galvin, saying that the Secretary of the Commonwealth was meddling in its transition to federal registration, after his office reversed its decision to grant Opaleye’s request to withdraw its state registration. In 2014, Silverman and the office of the Secretary of the Commonwealth entered into a Consent Order and agreed to settle the matter, with Opaleye paying a $50,000 fine, but didn’t admit or deny the allegations. When filing the complaint in 2011, Galvin requested that the fund should be shut down, pay a fine and return all the profits made from the alleged wrongdoing.

The case led to the introduction of a new set of regulations in Massachusetts that would require state regulated investment advisers to get disclosure regarding all the areas that a consultant in an expert network is not allowed to discuss before the advisers get to talk to consultants.

In any case, Mr. Silverman’s bets paid off very well during the first quarter. While the fund has 35 positions according to its last 13F filing, it’s heavily weighted into just two companies: AxoGen, Inc (NASDAQ:AXGN) and Blueprint Medicines Corp (NASDAQ:BPMC). On the next page, we will take a closer look at these two companies, as well as a couple of new positions that were added to the fund’s equity portfolio during the fourth quarter.

In AxoGen, Inc (NASDAQ:AXGN), Opaleye held 1.97 million shares worth $55.75 million heading into 2018. Aside from Opaleye, there were 16 other funds long the company that provides products to improve surgical treatment algorithms for peripheral nerve injuries. Since the beginning of the year, AxoGen, Inc (NASDAQ:AXGN)‘s stock is up by 50% and it has surged by over 200% over the last 12 months. Opaleye has seen even more impressive returns from AxoGen, as it has held the stock since the first quarter of 2015 and has jumped tenfold over this period.

Over the last couple of years, Axogen, Inc (NASDAQ:AXGN) has seen its revenue climb consistently following increased interest in the company’s portfolio of products, which include Avance Nerve Graft, AxoGuard Nerve Connector, Avive Soft Tissue Membrane, and AxoGuard Nerve Protector, which generate the bulk of the revenue. In the first quarter of 2018, AxoGen, Inc (NASDAQ:AXGN) registered record revenue of $17.3 million, up by 41% on the year and beating the consensus estimate of $17.08, while the net loss of $0.11 per share was in line with expectations. The management also reiterated its 2018 guidance that includes revenue growth of at least 40% and gross margins above 80%.

Opaleye also held 735,000 shares of Blueprint Medicines Corp (NASDAQ:BPMC) valued at $1.97 million at the end of 2017. Over the last year, Blueprint Medicines Corp (NASDAQ:BPMC)’s stock has almost doubled and its 274% in the green since the third quarter of 2015 when the fund first acquired the stake. Blueprint Medicines Corp (NASDAQ:BPMC) is working on developing kinase medicines and has several products in various stages of trial. In April, the company disclosed its results from Phase 1 trial of BLU-667, a medicine for treating RET-altered solid tumors. The data from the dose-escalation part of the study showed treatment with once-daily BLU-667 reduced tumors in 84% of patients and the preliminary overall response rates in patients with non-small cell lung cancer and medullary thyroid cancer were 50% and 40%, respectively.

Among the funds tracked by Insider Monkey, 30 funds held shares of Blueprint Medicines Corp (NASDAQ:BPMC) at the end of December, up by eight over the quarter. For the first three months of 2018, Blueprint Medicines Corp (NASDAQ:BPMC) reported revenue from collaboration of just $900,000, down from $5.80 million a year ago, mainly due to the termination of an agreement with Alexion Pharmaceuticals, Inc. (NASDAQ:ALXN). The company also said it had cash and cash equivalents of $621.10 million at the end of March and it expects that its existing cash, equivalents and investments will allow it to fund its operations into the middle of 2020.

The third largest position in Opaleye’s equity portfolio is represented by FibroGen Inc (NASDAQ:FGEN), in which the fund disclosed a $17.06 million stake containing 360,000 shares. The position in FibroGen Inc (NASDAQ:FGEN) amasses just 5.50% of Opaleye’s equity portfolio, significantly smaller than the previous two positions, which represent nearly 18% of the portfolio each. FibroGen Inc (NASDAQ:FGEN)’s stock has slid by 5% year-to-date, but is 76% in the green over the last 12 months. As a biopharmaceutical company, FibroGen Inc (NASDAQ:FGEN) generates most of its revenue from collaboration agreements. In collaboration with AstraZeneca plc (ADR) (NYSE:AZN), FibroGen is working on anemia drug Roxadustat, which is currently in Phase 3 trials. FibroGen Inc (NASDAQ:FGEN) is also developing Pamrevlumab for Idiopathic Pulmonary Fibrosis, Pancreatic Cancer and Duchenne Muscular Dystrophy. In March, the US FDA granted Fast Track designation for Pamrevlumab for the treatment of pancreatic cancer.

There were 22 smart money investors bullish on FibroGen Inc (NASDAQ:FGEN) at the end of 2017, versus 21 funds a quarter earlier.

Opaleye’s largest new position initiated during the fourth quarter was in ABLYNX NV/ADR (NASDAQ:ABLX). Opaleye acquired 420,000 shares valued at $10.50 million. Right at the beginning of 2018, ABLYNX NV/ADR (ASDAQ:ABLX)’s stock went through the roof after Novo Nordisk (NYSE:NVO) made a $3.1 billion offer. A couple of weeks later, Sanofi stepped in with a larger bid of $4.65 billion.

Last but not least, Opaleye also added Fennec Pharmaceuticals Inc (NASDAQ:FENC) to its equity portfolio during the fourth quarter, amassing 846,900 shares worth $8.49 million. Since the beginning of the year, Fennec Pharmaceuticals Inc (NASDAQ:FENC)’s stock is up by 14% on the back of some positive developments. In March, the US FDA designated for Fast Track review and later granted Breakthrough Therapy for Fennec Pharmaceuticals Inc (NASDAQ:FENC)’s PEDMARK (a formulation of sodium thiosulfate) for the treatment and prevention of cisplastin-related ototoxicity in pediatric patients with standard-risk hepatoblastoma, a rare liver tumor that primarily affects young children.

Disclosure: none