Bain Capital’s Bet Against Romney

As debate season heats up, we had an interesting takeaway from the first 2012 Presidential debate yesterday. Obama failed to mention anything about Romney’s old firm, Bain Capital. That is not going to stop us from mentioning it—in the issues that Romney and Obama did discuss, Romney continued to take the hardline that he would repeal Obamacare if elected.

As mentioned, the fact that Obama failed to discuss anything Bain-related made us think about the firm even more. In looking over Bain’s long/short public equity fund, Brookside Capital, we noticed the company had almost 10% of their 2Q 13F portfolio invested in biopharmaceutical companies—see all of Bain’s Brookside Capital holdings.

David Shaw

With Romney noting that he plans to repeal Obamacare, we believe that Bain might be betting on a Romney presidential win, but not on Romney following through with an Obamacare repeal. While most of the talk surrounding Healthcare Reform and Obamacare has been about the managed healthcare companies, such as WellPoint and Aetna, we believe there will be other impacts for pharmaceutical companies. Of course, big pharma companies, like Johnson & Johnson (NYSE:JNJ) and Pfizer Inc. (NYSE:PFE), will see increased demand due to the spike in the number of individuals with healthcare. However, we believe there will also be an increase in drug development, presenting the case that Obamacare would be beneficial for biopharmaceutical companies.

Worth noting is that not everyone agrees that Obamacare would be positive for the largest pharmaceutical company in the world, Pfizer included. The overhanging issue for Pfizer is that if Obamacare stands, the company will be affected by the ‘donut hole’ that the Medicare plan would produce. Pfizer would be required to be make a series of payments by 2020, which would likely force it to raise prices, therefore impacting the company’s margins. Despite this risk, it is still numero uno of the ten most popular healthcare stocks among hedge funds.

We believe that more healthcare coverage from Obamacare should begat a greater need for preventative care and prescription drugs. As well, the healthcare reform law establishes an FDA infrastructure that governs biosimilar drug approvals, which grants a 12-year exclusivity to branded drug makers. Two of the four holdings by Brookside have a biosimilar drug portfolio.

Brookside owned 5.6 million shares of Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX) at the end of 2Q, which was 3.5% of their 13F portfolio. Vertex is in the business of developing and manufacturing small molecule drugs for the treatment of serious diseases. S&P recently increased its price target to $67 based on an enhanced pipeline. Vertex is by far the biggest biopharma company of Bain’s four, having a market cap of over $12 billion, versus all the others at sub-$2 billion. For fund investors, D.E. Shaw was the only fund owning more shares of Vertex at the end of 2Q than Brookside, with over 4 million. However, a negative for the company has been the recent number of insider sales, in the range of $55-$60, with the stock currently trading around $60 a share.

Amarin Corporation PLC (NASDAQ:AMRN) is a late-stage biopharmaceutical company with a focus in the treatment of cardiovascular disease. The company was a new position for Brookside in 2Q. Wedbush recently downgraded Amarin, citing that the speculation premium might be overdone. The company is up 60% year to date on the thought that Amarin could be a prime takeover target. Insiders may be fearful of no deal as well, with a number of insiders selling of late.

MAP Pharmaceuticals Inc. (NASDAQ:MAPP) is a development-stage company, with a current focus on orally inhaled migraine therapy. Brookside owned 3 million shares at the end of June, and held their position steady throughout the quarter. In August the company announced plans to sell shares of stock to raise money for development of its key drug, Levadex. MAP has put its sole focus on the migraine market, but the market appears to be ripe. Statistics show that nearly 30 million people suffer from migraines in the U.S. and over 113 million days of work are lost. Brookside is by far the largest fund owner, but notable investor Ken Griffin is also invested in the stock.

Idenix Pharmaceuticals, Inc. (NASDAQ:IDIX) is a biopharmaceutical company engaged in the discovery and development of drugs for the treatment of human viral diseases. Brookside had 3% of its 13F invested in Idenix and was the firm’s eleventh largest holding. Merrill Lynch recently downgraded the company based on limited hope that Idenix can convince the FDA to allow further clinical testing of its drug for hepatitis C. The company received a letter from the FDA that a clinical hold had been placed on testing the drug. Idenix is one of Seth Klarman’s top picks. Klarman’s Baupost Group owns nearly as many shares as Brookside, both owning over 10 million shares each, collectively owning over 16% of the company.

Given the nature of the operations that these biopharmaceutical companies partake in, their P/E ratios trade in wide ranges. MAP and Amarin have incalculable P/E ratios, where IDEX trades at a 17 P/E and Vertex at 31X. Although Vertex trades at the highest P/E, we see it as the most stable and least risky stock. However, all the companies should be considered speculative. For a longer look at Brookside Capital’s 13F portfolio, continue reading at Insider Monkey.

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