By Pete Gallo
Sometimes running a successful pharma and biotech hedge fund portfolio can be a practice in making a good prognosis about a company’s earnings potential. Other times it can be like preventive medicine, stopping fiscal folly before it starts. These days, Sam Isaly’s approach at Orbimed Healthcare Fund Management seems to be a mix of both.
First, the positive prognosis: Orbimed is the largest shareholder in Allos Therapeutics, a stock that is up 28% for the year, hitting $7.82 per share on September 14. Orbimed owns an 8% stake in the company. That’s 7.2 million shares—in all—worth a hefty $56.3 million, up from $44 million at the start of the year.
Why the surge? Allos has been seeking approval for its lymphoma drug, Folotyn. That effort received promising results in early September when a Food and Drug Administration advisory panel voted 10-to-4 in favor of using of Folotyn (pralatrexate) to treat a form of aggressive blood cancer called peripheral T-cell lymphoma.
As of September 17 the FDA had yet to make its final decision on the drug. Internal debate at the advisory panel was divided. Still, studies suggest the drug to be effective for many patients with advanced disease, helping some of them to become strong enough to attempt other treatments, including stem-cell therapy.
Healthy optimism aside, the stock gave up 47 cents per share following the preliminary ruling September 2.
Orbimed is well positioned to exploit eventual approval. Helping is the fact that Folotyn is being scrutinized under the FDA’s new “fast track” guidelines, which for better or worse allow drug companies to fully prove the clinical success of a drug after it receives a regulatory green light. And Orbimed knows the market exists. About 15% of all non-Hodgkin’s lymphoma falls under the umbrella of the kind of peripheral T-cell lymphoma that Folotyn targets, a large potential patient population.
Orbimed’s investment team is also likely hoping the new Allos drug succeeds in lung cancer trials, tests that put it up against the niche cancer drug Tarceva, pioneered and produced by OSI Pharmaceuticals.
Either way, Orbimed has the field covered. The hedge fund is also a big investor in OSI Pharmaceuticals, holding roughly 2 million shares in the biotech-and-drug discovery company, based on the most recent SEC filings.
As of the middle of September, OSI was trading at roughly $35, down from close to $40 at the start of the year. The better news is that the stock, which hit a low of about $27 in July, showed solid improvement throughout August and the first half of September, helped by positive results for tests of Tarceva as well as a new treatment aimed at ovarian cancer. (Orbimed’s 2 million share stake in OSI weighs in at roughly $70 million as of mid-September.)
But don’t think for a moment that Isaly’s investment team is merely playing drug company roulette, placing bets on companies that are apt to get drugs and treatments approved and into the product pipeline.
Orbimed knows good medicine is often preventive medicine. A good example is Orbimed’s investment in Onyx Pharmaceuticals, about 2.3 million shares for a 4% stake in the company. (D.E. Shaw is a bigger investor with 3.6 million shares.)
Orbimed is afraid Onyx will borrow itself into a hole. The company recently expressed interest in raising an additional $300 million on top of close to $500 million already on hand, regulatory filings suggest. That’s quite a lot of cash on deck for a $2 billion market-cap company.
Isaly’s team is keeping a close eye on management and has issued an early warning, calling for change in company governance that would force a shareholder vote on any transaction amounting to 25% of the company’s market cap. Why? Clearly the hedge fund foresees that fundraisingwould be used for acquisitions, and Isaly’s team wants investors to have a say.
Ironically, the team already knows this well having seen another of Orbimed’s current portfolio companies, none other than OSI Pharmaceuticals, execute an ill-fated $1 billion acquisition of a company a few years ago, without a shareholder vote—a move that knocked OSI’s stock in 2006 from a previous high of $73 to a low of $26 per share.
Still, Onyx has proved to be a winner for Orbimed, rising from $24.02 per share in June to $36.55 as of September 16, suggesting other investors are less fearful of dilution or the prospects of likely M&A activity by the company.
