Why Do Hedge Funds Like AMAG Pharmaceuticals?

AMAG Pharmaceuticals, Inc. (NASDAQ:AMAG) is an $817 million platform company with four products: Feraheme, a treatment for iron deficiency anemia (IDA), MuGard, an oral rinse for oral wounds, Cord Blood Registry, a registry for women to store stem cells contained in the umbilical cord of newborns, and Makena, an FDA-approved therapy to reduce recurrent preterm birth in certain at risk women.

In this article, we’ll take a closer look at AMAG and use the latest 13F filing data to determine hedge fund activity in the stock during the second quarter among the select group of funds that we monitor.

We believe that imitating hedge funds and other large institutional investors can be helpful in identifying stocks capable of outperforming the broader market. Through extensive research that covered portfolios of several hundred large investors between 1999 and 2012, we determined that following the small-cap stocks that large money managers are collectively bullish on, can generate monthly returns nearly 1.0 percentage points above the market (see the details here).

blood-315278_1280

AMAG Pharmaceuticals, Inc. (NASDAQ:AMAG) acquired Cord Blood Registry in the third quarter of 2015 and Makena in 2014. Makena is AMAG’s crown jewel, with $78.4 million in net product sales and 37% share of the total market in the second quarter (up by 23% year-over-year in terms of sales and up by 4% sequentially in terms of market share). Makena’s share of the market has steadily increased as AMAG has consistently expanded distribution and introduced new versions of the product. In the first quarter, AMAG entered into a new agreement with a leading provider of home nursing services, in which the provider will exclusively provide at-home administration of Makena instead of using the previous compounded hydroxyprogesterone caproate. In July, the company also received approval from the FDA to introduce a single-dose, preservative-free formulation of Makena. Because of its efforts, AMAG’s management believes Makena sales will increase by 23%-to-35% year-over-year to $310 million-to-$340 million in 2016.

Follow Amag Pharmaceuticals Inc. (NASDAQ:AMAG)
Trade NASDAQ:AMAG Now!

Although AMAG shares have retraced sharply from last year due to investors selling off platform companies that acquire other companies with debt to generate growth, due to Valeant Pharmaceuticals Intl Inc (NYSE:VRX)’s troubles, AMAG doesn’t face as big of a problem as Valeant does. AMAG’s total-debt-to-2016-expected-adjusted-EBITDA ratio of 4 is relatively low, and the company doesn’t need to raise prices to generate higher revenue as Valeant does. In the second quarter, all of AMAG’s Makena sales growth was due to an increase in volume rather than price. AMAG’s second quarter earnings were also better-than-expected, coming in at $1.45 per share versus estimates of $1.20 per share. Guidance was on point as well, as AMAG’s management expects adjusted net income of $195 million-to-$225 million and adjusted EBITDA of $255 million-to-$285 million, giving AMAG a bargain priced valuation of 3.7-times-to-4.3-times 2016 EPS guidance and 4.5-times-to-5-times EV/2016 EBITDA. The bargain priced valuation is likely the reason why many hedge funds are long AMAG.

Follow Bausch Health Companies Inc. (NYSE:BHC)
Trade NYSE:BHC Now!

On the next page, we’ll examine hedge fund activity concerning AMAG in the second quarter.