Seth Klarman (Trades, Portfolio) is the value investor and portfolio manager of the investment partnership The Baupost Group.
He started to buy Keryx Biopharmaceuticals Inc (KERX) during the first quarter of the year 2014 and then went on increasing his stake quarter by quarter. The last buy has been done during the first quarter of 2015 and now he holds 22,380,200 shares at an average price of $14.59/share. The investor went on increasing his stake while the price was dropping. Since he started to buy the price of the stock dropped by 30%, and the investment is returning him the same percentage of loss.
KERX is a biopharmaceutical company focused on the acquisition, development and commercialization of pharmaceutical products for the treatment of renal disease. It has a market capitalization of 1.05 billion and an enterprise value of 881.63 million.
The company is not under the spotlights for its profitability. GuruFocus gives a rating of 2/10 to the company’s profitability & growth and it is well explained by the very negative returns (ROE -103%, ROA -85%, ROC -10562%) that are underperforming the 80% of KERX’s industry. Just growth rate is acceptable, with a revenue that over the last 3 years grew by 19.70%, EBITDA by 41.60% and earnings per share by 43.10%. In contrast with that negative returns is the financial situation. The company is out of debts if we look at the cash to debt ratio and the interest coverage ratio.
The Baupost Group now holds 21.6% of KERX’s outstanding shares, and this investment is about 4.82% of the total assets of its portfolio.
These large positions are not common for a hedge fund and investors know this. Why does the fund continue buying KERX? The fund is well known to have a very long-term return and to hold companies for a very long time. Looking at the past, investors compare this investment to the one done the last year in Idenix Pharmaceuticals Inc (IDIX). In Q1 2014 the fund heavily increased his stake in IDIX, closing the quarter with a significant 35% of outstanding shares held. Two months later the stock rose by 230%. Investors are asking themselves if the same will happen for KERX.
Something moved even regarding the management. The first days of May, Mr. Greg Madison was nominated CEO of the company from his previous position as COO and head of the Boston office.
The company’s main product : Auryxia (ferric citrate)
A supplemental new drug indicated in the U.S. for the control of serum phosphorus levels in patients with chronic kidney disease (CKD) on dialysis and was approved by the U.S. Food and Drug Administration on September 5, 2014
The net loss represents an increase of $14.2 million.
Research and development expenses decreased by $6.8 million and the change was due to a $2.9 million decrease in regulatory and clinical study expenses related to Auryxia.
The European review of the marketing authorization application (MAA), seeking regulatory approval of Auryxia is ongoing, and the company is seeking to expand the indication for Auryxia which is on track to complete the study by the end of 2015. The study include treatment of iron deficiency anemia in patients with stages 3 through 5 non-dialysis dependent chronic kidney disease who have previously not responded to oral iron therapy. With this successful study, Keryx intends to file a supplemental new drug application with the FDA seeking label expansion of Auryxia. Of course as a result of commercial activities and associated personnel costs related to Auryxia, selling, general and administrative expenses increased by $11.6 million
The European review of the marketing authorization application (MAA), seeking regulatory approval of Auryxia is ongoing. Keryx expects a mid-2015 opinion from the Committee for Medicinal Products for Human Use and subsequent regulatory approval from the EMA.
Conclusion
The company’s financials and returns are not attracting investors, and Seth Klarman (Trades, Portfolio) is now they only Guru with shares of the company. Based on his background and his fame, it's possible he knows something that other investors don’t know, as we cannot think he is just doing a BET. Other investors shouldn’t bet against him.
