Seth Klarman Buys Pharmaceutical Company's Shares to Fund International Drug Launch

Investment will help the company expand its hit weight-loss drug

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Oct 12, 2015
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True to form, Seth Klarman (Trades, Portfolio) purchased a stake in a pharmaceutical company with a sinking stock but a new blockbuster drug ready to push out the door.

Klarman’s The Baupost Group LLC held a total of 25,821,363 shares of Orexigen Therapeutics (OREX, Financial), a 17.2% stake in the company, as of Sept. 30, it disclosed Oct. 9. Orexigen had previously announced on Sept. 10 that Baupost had acquired 20 million common shares along with 5 million warrants to purchase shares at a price of $3 per share of common stock and one-quarter of a warrant, for a total investment of $60 million. The warrants have an exercise price of $6 per share within five years.

The company plans to put the funds toward the commercial launch of Mysimba, the European name of its FDA-approved weight-loss drug, in Europe. Baupost’s capital will also enable continued partnership discussions for Mysimba and Contrave, the U.S. name of the same drug, in Europe, and to file applications for approval in other international markets. The Europe launch is slated for the second half of 2016.

"In addition, this capital provides us with increased flexibility to structure partnering relationships to retain greater ownership and more of the value of Contrave and Mysimba in certain markets," said Orexigen CEO Mike Narachi.

"Retaining strategic rights to Contrave / Mysimba allows us the option to establish commercial competencies while partnering for broader promotion and distribution capabilities. We can then build from this foundational infrastructure with the acquisition of complementary new assets to accelerate our growth and profitability."

Orexigen, which has a $316.6 million market cap, saw its shares decline roughly 59% year to date, trading around $2.54 on Monday afternoon. In the second quarter, Orexigen said in the eight months since its launch Contrave had become the leading branded weight loss medicine, with 172,050 prescriptions filled the in second quarter, a 47% increase from the first quarter, according to IMS Health.

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Still, the company reported a $22.5 million net loss, or 18 cents per share, compared to a net loss of $24.5 million, or 21 cents per share, for the second quarter of 2014. Contrave generated $3.1 million in royalties on U.S. net sale from its North America partner Takeda Pharmaceuticals (TSE:4502, Financial), for total second quarter revenue of $5.2 million.

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Before the infusion from Baupost, Orexigen had $75.1 million in cash on its balance sheet as of June 30.

Klarman, famed for requiring a sizable “margin of safety” between price and intrinsic value of a stock, holds seven other biotechnology positions in his portfolio, in each of which he has a greater than 5% interest. Of them, he added shares to Keryx Biopharmaceuticals Inc. (KERX, Financial) and Altara Biotherapeutics Inc. (ATRA, Financial) in the second quarter. His largest biotech positions are in Theravance Inc. (THRX, Financial) at 6% of his portfolio and Altara at 4.3% of his portfolio.

Klarman’s total portfolio contained 32 stocks at second-quarter end with a total value of $5.95 billion.

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