James E. Flynn’s Deerfield Management disclosed that it has upped its position in Neos Therapeutics Inc. (NASDAQ:NEOS) by 545,833 shares since the fund’s most recent public filing, via a 13G form filed with the Securities and Exchange Commission. Deerfield Management currently owns 858,332 shares of the pharmaceutical company, which represent 5.64% of the company’s outstanding common stock. At the current stock price, the recently-acquired stake is worth $16.60 million.
Deerfield Management is a healthcare-focused, long/short hedge fund launched on January 13, 1994. The New York-based firm has been overseen by its managing member James Flynn since 2000. As already mentioned, Deerfield Management primarily focuses on the healthcare sector, which includes pharmaceuticals, biotechnology, and generic drugs, to name just a few, which altogether account for nearly 94% of the firm’s entire public equity portfolio. Deerfield Management, launched with $17 million in equity in 1994, currently manages over $5 billion in assets under management, which might serve as an indicator that the hedge fund has been successful during the course of its existence. The hedge fund’s investment strategy is mainly based on comprehensive, bottom-up analysis of various companies operating in the healthcare industry, which pinpoints investment opportunities in the entire healthcare spectrum, from early stage drug research businesses to mature healthcare service providers and medical device companies. According to its most recent 13F filing with the SEC, Deerfield Management oversees a relatively concentrated public equity portfolio worth $3.09 billion, with its top ten holdings accounting for 47.16% of its entire portfolio.
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But why do we track hedge fund activity? From one point of view we can argue that hedge funds are consistently underperforming when it comes to net returns over the last three years, when compared to the S&P 500. But that doesn’t mean that we should completely neglect the hedge funds’ activities. There are various reasons behind the low hedge fund returns. Our research indicated that hedge funds’ long positions actually beat the market. In our back-tests covering the 1999-2012 period hedge funds’ top small cap stocks edged the S&P 500 index by double digits annually. The 15 most popular small cap stock picks among hedge funds also bested passive index funds by around 66 percentage points over the 34 month period beginning in September 2012, returning over 123% (read more details).
Neos Therapeutics Inc. (NASDAQ:NEOS) is a Grand Prairie-based pharmaceutical company that focuses on developing, manufacturing and commercializing products using its proprietary modified-release drug delivery technology platform. This technology platform has already been used to develop three branded product candidates for the treatment of attention deficit hyperactivity disorder, or ADHD. We’ll be discussing in more detail some of the company’s products later on in the article.
Neos Therapeutics recently joined a list of more than 50 healthcare-related companies that have filed for IPOs so far this year. On July 28, Neos announced the closing of its previously-announced initial public offering of 5.52 million shares of common stock at a price of $15.00 per share, which also includes the greenshoe options allowing the purchase of up to an additional 720,000 shares by the underwriters of the offering. Meanwhile, the shares of the company’s common stock began trading on the NASDAQ on July 23 under the ticker symbol “NEOS”. The pharmaceutical company raised $82.8 million in gross proceeds from the initial public offering, which includes the proceeds from the sale of additional shares subject to the underwriter’s option. Even though the net proceeds from the IPO will be slightly lower, as the aforementioned figure of $82.8 million does not consider the underwriting discounts, commissions, and offering expenses, Neos Therapeutics will hold a substantial amount of capital to move its product candidates towards commercialization.
As Neos enters a market crowded with a high number of other healthcare stocks, the company will have to prove that its products are unique in one way or another in order to outperform its peers. Although the pharmaceutical company is already manufacturing and marketing a generic cough and upper respiratory drug, the value of the company undoubtedly lies in its ADHD liquid medications, which have not received approval from the Food and Drug Administration yet. Neos Therapeutics has filed a new drug application with the U.S. FDA for a dosage form for the treatment of ADHD created through the company’s proprietary technology platform. Therefore, the approval of this dosage form for ADHD by the FDA would bring to market the first-of-its-kind product, which would surely unlock a flourishing revenue stream for the company. However, the delay, limiting, or denial of the company’s dosage form for ADHD still represents a major risk for Neos. At the same time, the fact that Neos has already been marketing its approved cough medication might offer more security to current and potential investors in the company. Neos has already generated revenues of $1 million in 2013 and $758,000 in 2014, which clearly indicates that the failure of one of its product candidates would not mean the end of the company.
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