Seth Klarman Keeps Buying This Biotech Stock

Klarman likely played an influential role in orchestrating its merger

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Ryan Vanzo
May 08, 2019
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Akebia Therapeutics (

AKBA, Financial) was a top stock pick by Seth Klarman (Trades, Portfolio) last quarter. Filings show that he purchased roughly 24.5 million shares of Akebia.

The purchase was largely a bookkeeping transaction, however.

Last June, Akebia agreed to combine with Keryx Biopharmaceuticals (KERX), of which Klarman was a major shareholder, controlling more than 20% of the fully diluted stock. His purchase of Akebia shares merely reflected the consummation of the merger.

Still, Klarman refused to sell any shares, and likely played an influential role in orchestrating the merger.

His original purchase of Keryx stock didnt go as planned. When Klarman initially built his position in 2014, shares were trading as high as $18 each. He added to his position in 2015 at an estimated price of $10 per share.

When the merger was completed in late 2018, Keryx stock was down to just $3.36 apiece.

The combined Keryx and Akebia entity started trading in mid-December of 2018 at roughly $9 per share. Over the next few weeks, the price plummeted to the mid-$5 range. Shares rallied again to nearly $9 by March, but have since sunk back to roughly $6 per share.

Klarman has still refused to sell any shares. Should you follow him into this broken-down biotech stock?

Heres the bet

Investing in biotech stocks is as close to Las Vegas as it gets. Often, investments are completely binary.

If a drug is approved by the FDA, for example, the stock could pop by more than 100% in a single day. If the drug fails, however, immediate downside of 50% or more is fairly common.

Whats the bet with Akebia? Here is the current drug pipeline.

Without know the specifics, youll likely notice that the company has multiple drug readouts in 2019 and 2020, providing plenty of near-term catalysts.

These readouts will make or break the stock price, so gauging their probability and upside is critical.

The company has $431 million in cash and no debt, so it will have no problem meeting the catalyst dates. The only bet youre making is whether the drugs will be approved.

Akebia is focused on improving the lives of people with kidney disease. Chronic kidney disease is usually referred to as CKD.

Vadadustat, Akebias investigational HIF PH inhibitor, intends to treat anemia (a condition that causes your body to receive insufficient oxygen) due to CKD. All of Akebias upcoming readouts are related to this drug and its success in various applications.

Its incredibly difficult to forecast market sizes for new drugs, especially for novel indications, but Akebias management team believes Vadadustat has a multi-billion-dollar global market opportunity. Because the company is pursuing regulatory approval in nearly every major market, it will be well-positioned to capitalize on this opportunity.

According to historical clinical success rates, the FDA has approved 61.2% of Urology related drugs in Phase III trials. Roughly 71% make it to the NDA phase, but not all are ultimately approved.

If management is overly optimistic in its multi-billion-dollar prediction, and sales potential is only $1 billion, Akebia shares would still look undervalued.

Applying a 61.2% odds of approval to its $1 billion sales potential results in an expected value of $612 million. Legendary biotech investor Joseph Edelman often uses a 3 times peak sales multiple to value potential drugs. On occasion, he uses multiples as high as 6 times sales.

At 3 times peak sales of $612 million, Vadadustat would be worth $1.8 billion, more than double the current share price. This is ignoring its cash hoard, as much of that will be dedicated to finishing the trials and scaling the marketing team if approval is met.

If trials fail, Akebia would probably sell close to its cash position of $431 million.

In total, Akebia stock has a roughly 40% chance of dropping 30% if trials fail. If trials succeed (which historically has a roughly 60% chance), the stock would nearly triple.

Investing in biotech is a wild ride, especially given that theres a roughly 40% chance that Akebias new drug fails regulatory trials. That binary result often scares away investors, which is what causes the mispricing in the first place.

If youre willing to stomach the potential downside, Akebia looks like a bet worth taking.

Read more here:

3 Stock Picks From Seth Klarman

5 Lessons From Seth Klarmans 2019 Investor Letter

Here's Why Citron Research Loves This Retail Stock

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Ryan has been covering public equities for more than a decade. He has worked on the investment research teams for several multi-billion dollar hedge funds in San Francisco and New York.