Because of their sheer size, multibillion-dollar hedge funds can dramatically influence the behavior of stocks, especially small caps. So when one of these funds starts snapping up shares of a particular company, it's generally a good idea to know why.
The $10 billion healthcare specialist fund run by Felix and Julian Baker, Baker Bros. Advisors, is no stranger to taking out big positions in small companies, and this strategy has paid off handsomely. Over the last nine quarters, for example, the fund has grown by a jaw-dropping 256%.
Recent 13Fs filed with the SEC showed Baker Bros. opened a massive position in the clinical-stage biopharma Bellicum Pharmaceuticals (NASDAQ:BLCM) in the fourth quarter, ostensibly through the company's IPO in December. At current levels, Baker Bros. would hold nearly $100 million worth of Bellicum shares (assuming it has not sold them), giving the fund a 16% stake in the biotech.
What's noteworthy about this large-ish buy is that Bellicum hasn't yet generated much data in humans for its broad-based immunotherapy program. Specifically, the company is tackling immunotherapies such as hematopoietic stem cell transplantation, or HSCT, and CAR-T cell therapy that have been plagued by safety and efficacy problems in the past.
These serious challenges to Bellicum's approach to developing new cancer and blood disorder treatments appear reflected in the stock's uneven performance since its IPO:
So what does Baker Bros. see in this extremely risky stock, and is it worth a deeper look by average investors?
Why Bellicum might have more luck
Bellicum's challenge is clear: make these promising immunotherapies safer and more effective. To meet this goal, the company has inserted so-called "molecular switches" into its clinical candidates that can be triggered by a small molecule known as rimiducid.
In theory, the idea is fairly straightforward: If a patient is experiencing a severe bout of graft-versus-host disease following an allogeneic stem cell transplant, for example, rimiducid could be injected, causing the cells to undergo programmed cell death. The same idea applies to patients receiving CAR-T cell therapy who show signs of cellular or organ-level toxicity after treatment.
By contrast, CAR-T cells with another type of molecular switch could be activated using the same molecule, causing them to rapidly divide to increase any therapeutic benefit.
Putting the complex biochemistry aside for the moment, Bellicum's ultimate goal is to develop next-generation immunotherapies that provide real-time control over their safety and efficacy.
Is this stock worth buying now?
Bellicum's therapeutic platform might prove game changing at some point, but it won't be anytime soon. Therein lies a big risk for early investors.
The company plans on pushing five product candidates into numerous early stage clinical trials by mid-2016 for a host of blood disorders, solid tumors, skin cancer, and other afflictions, according to a recent investor presentation. That means Bellicum is unlikely to have a late-stage candidate on tap until at least 2017, pushing a regulatory approval -- under the best-case scenario -- out to 2018.
Unfortunately, the company's current cash runway only extends into 2016. While we don't have enough data on its burn rate to determine Bellicum's long-term cash needs, this clinical-stage biopharma will probably have to engage in a major financing deal at some point prior to 2016. Dilution is a strong possibility.
On the bright side, Bellicum is operating in the red hot area of immunotherapy, and several big pharmas have shown clear interest in this technology through either buyouts or lucrative research agreements. Bellicum's novel platform could thus attract the interest of major players in the not-so-distant future.
The Baker Bros.' massive stake in Bellicum isn't surprising, given that numerous hedge funds have been taking out huge positions in nearly all immunotherapy companies. That said, the average investor might want to stick to the sidelines until the company's platform matures a bit further, or at least until its long-term financing needs have been met, presumably through a partnership.
George Budwell has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.