Amid a broader market sell-off, several biotechnology stocks have surged in today’s trading session, although the industry overall has declined with the NASDAQ Biotech Index down by almost 3%. We have previously covered the developments that stood behind today’s gains of Arrowhead Research Corp (NASDAQ:ARWR) and Capnia Inc (NASDAQ:CAPN), and in this article we will discuss on what has been driving up the share prices of two other biotech companies, namely Keryx Biopharmaceuticals (NASDAQ:KERX) and Conatus Pharmaceuticals Inc (NASDAQ:CNAT). At the same time, we will also take a brief look at the hedge funds sentiment on these two stocks in order to assess whether top money managers had faith in the risky biotech companies.
Why do we pay attention to hedge fund sentiment? Most investors ignore hedge funds’ moves because as a group their average net returns trailed the market since 2008 by a large margin. Unfortunately, most investors don’t realize that hedge funds are hedged and they also charge an arm and a leg, so they are likely to underperform the market in a bull market. We ignore their short positions and by imitating hedge funds’ stock picks independently, we don’t have to pay them a dime. Our research has shown that hedge funds’ long stock picks generate strong risk-adjusted returns. For instance, the 15 most popular small-cap stocks outperformed the S&P 500 Index by an average of 95 basis points per month in our backtests spanning the 1999 – 2012 period. We have been tracking the performance of these stocks in real-time since the end of August 2012. After all, things change and we need to verify that back-test results aren’t just a statistical fluke. We weren’t proven wrong. These 15 stocks managed to return more than 118% over the last 36 months and outperformed the S&P 500 Index by 60 percentage points (see more details here).
Going back to today’s biotech winners, Keryx Biopharmaceuticals (NASDAQ:KERX) announced earlier this morning that the European Commission had approved its drug Fexeric for the control of high serum phosphorus levels in patients with chronic kidney disease (CKD), including both dialysis and pre-dialysis patients. It is worth mentioning that Fexeric was also approved by the U.S. FDA back in 2014 under the Auryxia brand name; however, the drug is indicated only for the patients with CKD on dialysis. Moving on to the potential gains from the freshly-announced approval, the company stated in a press release that there are approximately 1.3 million people diagnosed with CKD in five biggest markets in Europe, 750,000 of whom are estimated to have hyperphosphatemia. The market potential in Europe is way larger than in the U.S., where the drug is indicated for only 450,000 people with hyperphosphatemia and end-stage renal disease who require dialysis, the statement added. The stock opened sharply higher but is currently up by less than 2% and it still has lost over 70% since the beginning of 2015.
Keryx Biopharmaceuticals (NASDAQ:KERX) lost some charm among the hedge funds tracked by Insider Monkey, with 18 investors holding shares at the end of the second quarter, compared to 23 a quarter earlier. Similarly, the value of hedge funds’ holdings in Keryx decreased to $325.25 million from $457.84 million. Nevertheles, these 18 hedge funds owned approximately 31.60% of the company’s outstanding shares at the end of June. Seth Klarman’s Baupost Group is by far the largest shareholder of Keryx within our database, owning 25.79 million shares.
Let’s now turn our attention to Conatus Pharmaceuticals Inc (NASDAQ:CNAT), which released positive results from a recent study earlier this morning. Precisely, the biotechnology company announced that its exploratory Phase II Portal Hypertension (PH) clinical trial of emricasan, which is a first-in-class, orally active pan-caspase inhibitor, met its primary endpoints. For those interested in what emricasan is up to, the drug is aimed at lowering high portal pressures, which may eventually diminish the risk of hepatic decompensation in liver cirrhosis patients over a short-term spectrum. Additionally, emricasan is believed to enhance liver function and structure over a longer-term spectrum via anti-inflammatory and anti-fibrotic effects. The stock of Conatus has also gradually diminished to slightly over 3% in green. The stock has been gaining ground during the previous trading sessions of this week as well, fueled, among other things, by HC Wainwright initiating coverage on the stock with a “Buy” rating and a $15 price target on Tuesday (read more details here).
Hedge funds’ sentiment towards Conatus Pharmaceuticals Inc (NASDAQ:CNAT) was positive during the second quarter, as the number of investors with positions in the stock increased to nine from six, while the value of their investments in the biotech stock surged to $12.22 million from only $2.3 million. Despite the relatively small number of bullish investors, they still amassed 12% of the company’s outstanding common stock at the end of June. Hal Mintz’s Sabby Capital and Ken Griffin’s Citadel Investment Group are two of the nine funds with stakes in Conatus Pharmaceutical, owning 373,500 shares and 284,200 shares as of June 30.