A Growing Biotech Sees Hedge-Fund Buying

 | Apr 16, 2013 | 6:30 PM EDT  | Comments
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Visium Asset Management, a hedge fund that has more than $3.5 billion in assets under management and is run by Jacob Gottlieb, has reported a position of 3.8 million shares in Santarus (SNTS), a $1.2 billion market cap biotechnology company.

Visium, which tends to invest more than half of its total capital reported in 13F filings in healthcare companies (these filings disclose many of a hedge fund's long equity positions in U.S. stocks), now owns 6% of the total shares outstanding. From the most recent 13F, we can see that the fund had owned 1.5 million shares as of the beginning of January 2013, and this had been a new position for the fourth quarter.

Santarus' stock price has risen more than 200% in the past year as the company has stepped up sales. Specifically, revenue from sales of Glumetza grew to $145 million in 2012 (up from $36 million in 2011), and that drug composed about two-thirds of total sales. Glumetza is used by patients who have type 2 diabetes to supplement the effects of diet and exercise in improving glycemic control.

The No. 2 selling drug from Santarus, Zegerid, experienced little change in sales from 2011 to 2012 and brought in 22% of revenue -- that drug treats upper gastrointestinal conditions. Most of the rest of the company's revenue came from Cycloset, another type 2 diabetes drug, which experienced considerable sales growth in percentage terms but remained at a much smaller share of sales than Glumetza. Santarus also has a portfolio of drugs in development.

While costs of goods sold, royalties and other operating expenses rose strongly last year, Santarus still reported $19 million in earnings for the year, up from $4.7 million in 2011. Earnings per share were $0.27; this places the current valuation of the stock at 68x trailing earnings.

However, financial performance had picked up in the second half of the year. Specifically, during the fourth quarter, revenue was up 65% from a year earlier, and net income nearly tripled. As a result, Santarus earned $0.21 per share in the last six months of 2012. If we annualize that figure, the resulting price-to-earnings multiple is still high, but it's possible that these drugs are gaining more of a foothold in the marketplace, and so sales will increase further.

Of course, there is also the potential for other drugs from the company to be approved and generate income. Santarus generated positive cash flow from operations during 2012, and it engages in very little capital expenditure. Since it has about $95 million in cash, cash equivalents and short-term investments on its balance sheet, the company is in a good cash position.

Wall Street analysts expect earnings per share to swell to $0.73 this year and then grow further to $1.18 for 2014. If Santarus hits those targets -- note that this would require quarterly earnings per share to roughly triple from their levels in the second half of 2012 in two years -- then the forward P/E at this point would be 15, somewhat close to the earnings multiples of much larger drug companies. We'd note that Santarus beat expectations in three out of four quarters last year, though while the outperformance was often high in percentage terms, consensus forecasts were generally correct within $0.03 per share.

Santarus certainly isn't a value stock at this point, but the company has moved beyond the development stage with positive earnings and cash flow from operations. Biotech-savvy investors could certainly dig into the products in more detail and evaluate the likelihood of current offerings achieving high sales growth, as well as the prospects of Santarus' products in development. But we aren't going to recommend it on growth grounds without more data that shows earnings per share tracking sell-side forecasts.

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