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Monday, April 15, 2019 10:10:50 AM
2 Biotech Stock Picks From Legendary Investor Joseph Edelman
GuruFocus.com•April 12, 2019
- By Ryan Vanzo
While famed value investors like Warren Buffett (Trades, Portfolio) and Seth Klarman (Trades, Portfolio) get most of the attention, there are plenty of other portfolio managers that have similar long-term track records. Joseph Edelman, the founder of Perceptive Advisors, is one such investor.
Since its inception in 1999, Edelman's portfolio has generated annual returns in excess of 30%. Down years have been rare. You may not have heard of him since he only manages a few billion dollars. Buffett's Berkshire Hathaway (BRK-A)(BRK-B), for comparison, has a market value of more than $500 billion.
Perceptive Advisors focuses exclusively on the biotech sector, meaning it needs to keep its asset base small. If its portfolio grows too large, it won't be able to invest in many of the smaller companies in the space. While it holds interests in many multibillion-dollar companies, Edelman has dozens of positions that have market caps of under $500 million.
While the limited size of these opportunities likely will never bring Edelman worldwide fame, they're still large enough for most individual investors to follow his best ideas. Here are two of his most intriguing picks, aggregated using Perceptive Advisors' 13-F filings.
Foamix Pharmaceuticals Ltd. (FOMX)
Small-cap biotech stocks are nearly always mispriced, sometimes grossly so. This year, Foamix has multiple milestones that could drive 300% in upside, even using conservative estimates.
The company has two lead drug candidates: FMX101 and FMX103. I suggest you read my full write up for the details, but in total, these drugs could easily generate $300 million in annual sales. Edelman often uses a 3 times peak sales multiple to value potential drugs, though he will occasionally use multiples as high as 6 times sales.
Applying a conservative 3 times sales multiple produces a $900 million potential valuation for Foamix. With a current valuation of just $200 million, the investment case seems very attractive.
That's probably why Perceptive Advisors bought 1,554,400 shares last quarter, bringing its total holding up to 4,661,824 shares, nearly 9% of the company. With an average purchase price of around $5.50, this is a great way to follow Edelman's bet given the stock is currently trading under $4 a share.
MEI Pharma Inc. (MEIP)
With a market cap of $240 million, MEI Pharma is another small-cap in Edelman's portfolio. These stocks are tiny, but often rise by 1,000% or more if the thesis plays out.
Last quarter, Perceptive Advisors took a brand new 4,400,440-share stake in MEI Pharma, representing more than 5% of the entire company. What's so intriguing about this stock?
MEI Pharma currently has around $100 million in net cash, allowing it to reinvest in its drug programs without needing to take additional financing for at least 12 to 24 months. Within that time frame, multiple key events should take place.
MEI Pharma has two drug candidates worth considering, Pracinostat and ME-401, both of which are in their pivotal trials, meaning if the readouts are successful, they could be ready for sale within one year.
Pracinostat is an oral compound for treating advanced hematologic diseases like acute myeloid leukemia and myelodysplastic syndrome. While the trials studying efficacy in MDS are in Phase II, Pracinostat is deep into a Phase III study for AML. There are around 20,000 new cases of AML annually in the U.S.
Currently, Azacitidine is the standard of care. With this drug, the median overall survival is only 10.4 months. For high-risk populations, it's less than seven months.
Pracinostat has been tested on hundreds of patients in multiple Phase I and Phase II trials. In the latest trial with around 50 patients, the overall median survival was an astounding 19.1 months.
If this success can be replicated in the ongoing Phase III trial, it would become the clear go-to standard of care for AML. Additionally, it would be likely that the drug could be successfully used for other indications like MDS, compounding its value.
MEI Pharma sold the rights to this compound for $440 million in development, regulatory and sales milestones. In addition, the company will retain royalties in the mid-teens. In total, if Pracinostat is a success, it would give this stock 300% to 700% upside.
Results aren't expected until May of 2021, but patient investors could be getting a steal at current prices. Edelman seems to agree given his recent buying behavior.
ME-401 could provide more near-term upside. It's a single agent meant to treat Follicular Lymphoma. The science is a bit more complex, but results could come as soon as late 2020. With a $1 billion market potential, this drug provides great optionality to the de-risked Pracinostat bet.
BLADERUNNER
Recent MEIP News
- Form 10-K - Annual report [Section 13 and 15(d), not S-K Item 405] • Edgar (US Regulatory) • 09/19/2024 09:20:19 PM
- Form 8-K - Current report • Edgar (US Regulatory) • 09/19/2024 09:05:07 PM
- MEI Pharma Reports Fiscal Year End 2024 Cash Position • Business Wire • 09/19/2024 08:01:00 PM
- MEI Pharma Engages Oppenheimer & Co. Inc. to Assist in Evaluating Strategic Alternatives • Business Wire • 08/12/2024 12:30:00 PM
- Form 8-K - Current report • Edgar (US Regulatory) • 08/02/2024 08:05:09 PM
- Form 8-K - Current report • Edgar (US Regulatory) • 07/30/2024 08:05:21 PM
- Form 8-K - Current report • Edgar (US Regulatory) • 07/22/2024 09:25:09 PM
- Form 144 - Report of proposed sale of securities • Edgar (US Regulatory) • 07/22/2024 08:06:33 PM
- MEI Pharma to Consider Strategic Alternatives • Business Wire • 07/22/2024 12:30:00 PM
- Form 4 - Statement of changes in beneficial ownership of securities • Edgar (US Regulatory) • 05/21/2024 08:00:05 PM
- Form 8-K - Current report • Edgar (US Regulatory) • 05/21/2024 05:00:22 PM
- Form 4 - Statement of changes in beneficial ownership of securities • Edgar (US Regulatory) • 05/20/2024 08:00:13 PM
- Form 8-K - Current report • Edgar (US Regulatory) • 05/09/2024 08:02:15 PM
- MEI Pharma Reports Third Quarter Fiscal Year 2024 Results and Operational Highlights • Business Wire • 05/09/2024 08:02:00 PM
- Form 10-Q - Quarterly report [Sections 13 or 15(d)] • Edgar (US Regulatory) • 05/09/2024 08:00:47 PM
- MEI Pharma Board of Directors Aligns on Strategy to Advance Voruciclib and ME-344 • Business Wire • 04/11/2024 12:02:00 PM
- MEI Pharma Reports Initial Data from Clinical Study Evaluating ME-344 in Combination with Bevacizumab (Avastin®) in Relapsed Metastatic Colorectal Cancer Patients • Business Wire • 04/11/2024 12:00:00 PM
- MEI Pharma to Present at the Stifel 2024 Virtual Targeted Oncology Forum • Business Wire • 04/10/2024 12:00:00 PM
- MEI Pharma Reports Update from Clinical Study Evaluating Oral CDK9 Inhibitor Voruciclib in Combination with Venetoclax in Patients with Relapsed and Refractory Acute Myeloid Leukemia • Business Wire • 03/26/2024 12:00:00 PM
- Form EFFECT - Notice of Effectiveness • Edgar (US Regulatory) • 02/29/2024 05:15:45 AM
- Form 8-K - Current report • Edgar (US Regulatory) • 02/21/2024 09:00:17 PM
- Form S-3 - Registration statement under Securities Act of 1933 • Edgar (US Regulatory) • 02/20/2024 10:33:58 PM
- Form 8-K - Current report • Edgar (US Regulatory) • 02/13/2024 10:05:14 PM
- MEI Pharma Reports Second Quarter Fiscal Year 2024 Results and Operational Highlights • Business Wire • 02/13/2024 10:05:00 PM
- Form 8-K - Current report • Edgar (US Regulatory) • 01/17/2024 09:00:08 PM
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