Why Do Hedge Funds Like Five Prime Therapeutics?

Five Prime Therapeutics Inc (NASDAQ:FPRX) is a $1.25 billion biotech company that focuses on the discovery and development of protein therapeutics that block cancer and inflammatory disease processes. In this article, we analyze hedge fund activity in the stock in the second quarter and take a closer look at the stock’s prospects.

Hedge fund sentiment is an important metric for assessing the long-term profitability. At Insider Monkey, we track around 750 hedge funds, whose quarterly 13F filings we analyze and determine their collective sentiment towards several thousand stocks. However, our research has shown that the best strategy is to follow hedge funds into their small-cap picks. This approach can allow monthly returns of nearly 95 basis points above the market, as we determined through extensive backtests covering the period between 1999 and 2012 (see the details here).

Five Prime Therapeutics Inc (NASDAQ:FPRX)’s lead product candidate is FPA008 (cabiralizumab), an antibody that inhibits CSF-1R and blocks the activation and survival of tumor-associated macrophages and monocytes. FPA008 is in Phase 1 trials for various potential tumor indications and is beginning Phase 2 trials for the indication of pigmented villonodular synovitis. The company’s other drug candidates include FPA144 and FP-1039, which are in Phase 1b trials for the potential indications of gastric cancer and mesothelioma, respectively. FPA144 received the Orphan Drug designation from the FDA for the treatment of gastric cancer in July.

Hedge funds are long Five Prime Therapeutics Inc (NASDAQ:FPRX) mainly due to FPA008’s potential. On October 15, 2015, Five Prime entered into a license and collaboration agreement over FPA008 with Bristol-Myers Squibb Co (NYSE:BMY) worth up to $1.74 billion. Five Prime will combine FPA008 with Bristol-Myers Squibb Co (BMY)’s Opdivo to examine the drug combination’s safety and efficacy on various tumors indications including lung, pancreatic, and head & neck cancer. Under terms of the deal, Five Prime received an upfront payment of $350 million, and is eligible for another $1.4 billion in development and regulatory milestone payments. In addition, the company is entitled to tiered royalties in the high teens to low twenties on sales. The billion dollar market sizes of each potential tumor indication and Bristol-Myers Squibb’s willingness to pay $350 million upfront for a drug in Phase 1 both indicate how big of a financial impact FPA008 can make for Five Prime and how promising the early stage data is. If the data over FPA008 remains positive in Phase 2, Five Prime shares have substantial upside.

Given that Five Prime had cash and cash equivalents worth $469.2 million on June 30, 2016, the market is basically valuing FPA008 and the rest of Five Prime’s drug candidates at $780 million when the potential regulatory and development milestone payments for FPA008 total $1.4 billion alone.

On the next page, we analyze hedge fund activity surrounding Five Prime in the second quarter.

Of the around 750 funds that Insider Monkey tracks, 22 funds owned shares of Five Prime Therapeutics Inc (NASDAQ:FPRX) at the end of the second quarter, down by three funds from the previous quarter. These investors amassed $178.95 million worth of Five Prime Therapeutics Inc (NASDAQ:FPRX)’s stock at the end of June, compared to 25 funds that held $256.43 million worth of shares at the end of March.

In terms of meaningful individual smart money activity, Phill Gross and Robert Atchinson‘s Adage Capital Management trimmed its stake by 9% on the quarter to 2.37 million shares, worth around $78 million at the end of June, while James E. Flynn‘s Deerfield Management cut its holding by 35% to 448,000 shares. Of the top five shareholders in our database, the top three reduced their exposure to the stock, while the other two increased their positions.

Although hedge fund activity in Five Prime Therapeutics was restrained in the second quarter, the fundamental prospects of the stock haven’t changed and Five Prime remains a biotech with great potential.

Disclosure: None