Trellus Management’s Top Biotech Stock Picks For Q4

Trellus Management is a New York-based long/short equity hedge fund founded by Adam Usdan in 1994. The fund manages client focused equity portfolios and invests in public equity markets around the world. Trellus Management recently filed its 13F with the SEC for the reporting period of September 30. According to the filing, the fund had open positions in 86 stocks and options at that time, and its U.S equity portfolio was worth $68.16 million. The filing also revealed that during the July-September period Trellus Management initiated a stake in 25 stocks, and sold out of its stake in 36 stocks. In a previous post we analyzed Trellus Management’s top tech stock picks and in this article we will be taking a closer look at the fund’s top biotech stock picks.

But before that, let’s first understand why we pay attention to hedge fund sentiment. Most investors ignore hedge funds’ moves because as a group their average net returns trailed the market since 2008 by a large margin. Unfortunately, most investors don’t realize that hedge funds are hedged and they also charge an arm and a leg, so they are likely to underperform the market in a bull market. We ignore their short positions and by imitating hedge funds’ stock picks independently, we don’t have to pay them a dime. Our research have shown that hedge funds’ long stock picks generate strong risk adjusted returns. For instance the 15 most popular small-cap stocks outperformed the S&P 500 Index by an average of 95 basis points per month in our back-tests spanning the 1999-2012 period. We have been tracking the performance of these stocks in real-time since the end of August 2012. After all, things change and we need to verify that back-test results aren’t just a statistical fluke. We weren’t proven wrong. These 15 stocks managed to return 102% over the last 37 months and outperformed the S&P 500 Index by 53 percentage points (see the details here).

#5 Ampio Pharmaceuticals Inc (NYSEMKT:AMPE)

Shares Owned by Trellus Management (as of September 30): 116,700 shares

Value of Holding (as of September 30): $337,000

Trellus Management didn’t made any changes to its stake in Ampio Pharmaceuticals Inc (NYSEMKT:AMPE) during the third quarter. Apart from owning equity shares, the fund also continued to hold call options underlying 80,000 of the company’s shares, valued at $231,000 as of September 30. Ampio Pharmaceuticals Inc (NYSEMKT:AMPE) is a biopharmaceutical company that develops therapies to treat prevalent inflammatory conditions. After more than doubling during the first quarter, shares of the company witnessed a massive fall in April when it announced that the multiple injection STRIDE study it conducted for its pain reliever Ampion did not reach its primary endpoint. Though the stock has recovered since then, it still trades down by 2.33% year-to-date. On November 2, the company announced that it intends to distribute most of its 11.63 million shares of Aytu BioScience stock directly to Ampio Pharmaceuticals’ shareholders. With almost 3.39 million shares, Fred Knoll‘s Knoll Capital Management was the largest shareholder of the company at the end of June among the hedge funds we track.

#4 Lion Biotechnologies Inc (NASDAQ:LBIO)

Shares Owned by Trellus Management (as of September 30): 60,539 shares

Value of Holding (as of September 30): $349,000

Even though shares of Lion Biotechnologies Inc (NASDAQ:LBIO) slumped by more than 37% during the third quarter, Trellus Management displayed its conviction in the stock by adding an additional 57% or 22,039 shares of the company to its holding during the quarter. Similar to Ampio Pharmaceuticals, shares of Lion Biotechnologies Inc (NASDAQ:LBIO) also saw a rapid rise during the first quarter. However, they have lost nearly half of their market cap from their peak in mid-March and are currently trading down by 10.55% year-to-date. Lion Biotechnologies is engaged in developing adoptive cell therapy (ACT) for the treatment of metastatic melanoma and other solid cancers. On October 7, the company was awarded an exclusive worldwide license by the National Institutes of Health (NIH) to develop and commercialize TIL therapy in four additional tumor indications. Following this announcement, analysts at Chardan Capital reiterated their ‘Buy’ rating on the stock later that day and also upped their price target on it to $20 from $15. Julian Baker and Felix Baker‘s Baker Bros. Advisors increased their stake in the company by 492,429 shares to 1.82 million shares during the April-June period.

See if Trellus Management’s top three biotech stock picks are worth adding to your healthcare portfolio on the next page.

#3 Fibrocell Science Inc (NASDAQ:FCSC)

Shares Owned by Trellus Management (as of September 30): 114,936 shares

Value of Holding (as of September 30): $443,000

With year-to-date gains of 71.43%, Fibrocell Science Inc (NASDAQ:FCSC) is among the only two biotech stocks in this list that is trading in the green this year. Trellus Management initiated a stake in the company during the second quarter and didn’t made any changes to its holding during the third quarter, even though shares of the autologous cell therapy company saw extreme volatility during the July-September period. A major part of this volatility was witnessed on and after September 25, when shares of the company slumped heavily on the back of a regulatory update it provided for its product candidate, FCX-007. Following this update, on September 28, analysts at Wedbush downgraded the stock to ‘Neutral’ from ‘Outperform’ and also lowered their price target on it to $6 from $7. For its third quarter results scheduled for tomorrow, analysts expect Fibrocell Science Inc (NASDAQ:FCSC) to report a loss of $0.16 per share, $0.02 per share more than the loss it reported for the same quarter last year. Marc Lisker, Glenn Fuhrman and John Phelan‘s MSDC Management was the largest shareholder of the company among the hedge funds we cover, holding over 1.72 million shares of the company as of June 30.

#2 Regulus Therapeutics Inc (NASDAQ:RGLS)

Shares Owned by Trellus Management (as of September 30): 100,000 shares

Value of Holding (as of September 30): $654,000

Moving on, Trellus Management added 25% or 20,000 additional shares of Regulus Therapeutics Inc (NASDAQ:RGLS) to its portfolio during the third quarter. Regulus Therapeutics Inc (NASDAQ:RGLS) is a biopharmaceutical company engaged in developing microRNAs to treat a variety of diseases. The steady decline that the stock of has endured since March has resulted in it trading down by 52.68% year-to-date. However, in the last few days the stock has climbed up by more than 15% in anticipation of the company’s third quarter results, which are also scheduled to be reported tomorrow. Analysts are expecting the company to report a loss of $0.37 per share on revenue of $2.85 million for the quarter, compared to a loss of $0.41 per share on revenue of $3.80 million that it reported for the same quarter of last year. Yesterday, Regulus announced that it has expanded the development of its product, RG-101, through a clinical trial collaboration and formulation development agreement with GlaxoSmithKline plc (ADR)(NYSE:GSK). Analysts at Wedbush reiterated their ‘Buy’ rating on the stock on November 2, while increasing their price target on it to $39 from $23. Paul Orlin and Alex Porter‘s Amici Capital was one of the hedge funds that initiated a stake in the company during the second quarter, purchasing 75,000 shares.

#1 Synergy Pharmaceuticals Inc (NASDAQ:SGYP)

Shares Owned by Trellus Management (as of September 30): 162,900 shares

Value of Holding (as of September 30): $863,000

Finally, Synergy Pharmaceuticals Inc (NASDAQ:SGYP) remained Trellus Management’s top biotech pick, even though the stock lost 36% during the third quarter and Trellus Management didn’t acquire any additional shares of the company. The developer of drugs to treat gastrointestinal (GI) disorders and diseases has been one of the best performing biotech stocks this year despite the recent slump, with year-to-date gains of almost 120%. A significant portion of those gains followed the company’s announcement on June 17 that its drug to treat idiopathic constipation, Plecanatide, met its main goal in a late-stage trial. On October 29, Michael Higgins, analyst at Roth Capital released a note to investors in which he reinitiated coverage on Synergy Pharmaceuticals Inc (NASDAQ:SGYP) with a price target of $9.50. In his note, Higgins mentioned that he expects Synergy to launch Plecanatide in 2017, “with the most impressive clinical profile in a category that’s growing 39 percent and on track to become a $3 billion market in 2018.” Billionaire investor John Paulson‘s Paulson & Co was the largest shareholder of the company at the end of June among the hedge funds covered by Insider Monkey, with ownership of over 5.78 million shares.

Disclosure: None