Why Are These Bio-Tech Stocks Surging Today?

The U.S stock market seems to be heading for a second day of losses, as the morning rally has not lasted. A mixture of poor earnings and sluggish retail sales data are putting pressure on investors, as oil trades lower as well. Not all shareholders are gloomy today however, as several biotech stocks managed to head the opposite way. CASI Pharmaceuticals Inc (NASDAQ:CASI), Intrexon Corp (NYSE:XON), ZIOPHARM Oncology Inc. (NASDAQ:ZIOP) and Zafgen Inc (NASDAQ:ZFGN) each made waves in early trading, although the latter’s surge was short lived. Let’s have a look at the factors that are pushing (or had pushed, in Zafgen’s case) these stocks higher today.

Shares of CASI Pharmaceuticals Inc (NASDAQ:CASI) have surged by more than 50% in the opening hour following reports that its oncology drug candidate, ENMD-2076, has received the go-ahead from the European Medicines Agency. Designed for the treatment of hepatocellular carcinoma, the drug received Orphan Drug designation, which implies ten years of market exclusivity in the European Union. Last year CASI Pharmaceuticals managed to secure the Orphan Drug designation from the US Food and Drug Administration (FDA) as well, which provides the company with seven years of market exclusivity in the United States.

None of the hedge funds that we track reported owning a stake in CASI Pharmaceuticals Inc (NASDAQ:CASI) as of the end of the second quarter. This is a nano-cap stock, as the company has a market cap of $46 million and has only recently reported revenues. Its 2015 second quarter report showed revenues of $20,000 and a loss per share of $0.06. For the current quarter, analysts expect revenues to stay the same and the loss to widen to $0.09 per share.

Moving on, news of a successful cloning process has pushed Intrexon Corp (NYSE:XON)’s shares up as well. ViaGen Pets, one of the company’s subsidiaries, has delivered two litters of healthy, cloned kittens for its clients. The subsidiary offers preservation services for pets and is preparing to go global in 2016 following the completion of a new, state-of-the-art lab.

“As the largest global provider of genetic preservation services for companion animals, we look forward to expanding the life-enriching connections that people form with their pets.  Our goal is to bring this opportunity to all pet owners and their families,” said Blake Russell, President of ViaGen Pets.

Intrexon Corp (NYSE:XON) gained more popularity among elite hedge funds during the second quarter, with the number of funds invested in the stock rising to 21, from 20 at the end of March. Their combined holdings account for 7.3% of the company’s common stock and were valued at $387 million, up by 13.7% during the quarter. Dan Loeb‘s Third Point is the largest holder of Intrexon shares among the funds we follow. In its latest 13F filing, Third Point reported ownership of 2.7 million shares, the same as three months prior to that point. David Cohen and Harold Levy have stepped up their interest in the company as well, increasing their stake by one-quarter to 2.25 million shares by the end of June.

Hedge funds have been underperforming the market for a very long time. However, this was mainly because of the huge fees that hedge funds charge as well as the poor performance of their short books. Hedge funds’ long positions performed actually better than the market. Small-cap stocks, activist targets, and spin offs were among the bright spots in hedge funds’ portfolios. For instance, the 15 most popular small-cap stocks among hedge funds outperformed the market by more than 53 percentage points since the end of August 2012 (read the details here), returning 102%. This strategy also managed to beat the market by double digits annually in our back tests covering the 1999-2012 period.

On the next page, we will discuss the latest developments related to ZIOPHARM Oncology and Zafgen.

After two days in the red, ZIOPHARM Oncology Inc. (NASDAQ:ZIOP) seems to be heading north again, managing to surge by as much as 8.8% during the first hour of trading. The stock fell by as much as 6.2% over the past two days as analysts updated their stance over the weekend, assigning a consensus 2.5 rating on a scale where 1 is a Strong Buy and 5 represents a Strong Sell. On October 1, ZIOPHARM announced a 24-month agreement with Intrexon Corp (NYSE:XON), whereby the former will pay Intrexon $10 million in exchange for access and rights to use some of its technology and patents in their own research projects.

MSDC Management, run by Marc Lisker, Glenn Fuhrman, and John Phelan, holds a significant stake in ZIOPHARM Oncology Inc. (NASDAQ:ZIOP): 4.47 million shares, up by 2% during the second quarter. Dan Loeb sees great upside potential, having initiated a position during the second quarter of 1.95 million shares. In general, ZIOPHARM Oncology gained in popularity among elite funds, as the number of long positions reported at the end of the second quarter among those elite investors that we track grew to 15, from 13 at the end of March. The value of their combined investment increased by 8.5% to $95 million and represents 6.2% of the company’s outstanding stock.

The relief shareholders of Zafgen Inc (NASDAQ:ZFGN) felt this morning was short lived, as the stock is back in the red following two hellish days in which shares lost 54% of their value. The stock opened higher today and, after surging by as much as 14%, slumped again following an anemic reaction from management with regards to the latest developments. Investors started to panic on Monday, as Zafgen cancelled several meetings with investors that were due yesterday and today. Wall Street fears the worst, namely that there is something wrong with beloranib, the company’s leading drug candidate, currently in a Phase III study, with results expected in the first quarter of 2016. The drug was designed to address obesity problems and is meant to alter the way the human body metabolizes fat. Zafgen CFO Patty Allen sent an email to analysts today that did not manage to address investor worries:

“We have received a number of inquiries from the investment community. As you are aware, we do not comment on share price movement or market speculation. We appreciate the concerns of our stakeholders. Zafgen remains committed to developing novel therapies to improve the health and well-being of patients affected by obesity and complex metabolic disorders.”

James E. Flynn‘s Deerfield Management holds the largest stake in Zafgen Inc (NASDAQ:ZFGN) among the hedge funds that we track, with the fund having reported ownership of a little over 1.0 million shares in its latest 13F filing. Julian Baker and Felix Baker are also fans of this stock, having tripled their holding during the second quarter to 287,677 shares. Our data shows that smart money exercised caution when it came of Zafgen, as the number of funds holding the stock fell to 12, from 15 at the end of the first quarter. The value of their investment also fell, by nearly one-third, to some $100 million, while representing 10.8% of Zafgen’s common stock.

Disclosure: None