Krensavage Partners gained 8.45% during the first quarter, driven by long positions in Enanta Pharmaceuticals Inc (NASDAQ:ENTA), RTI Surgical Holdings Inc (NASDAQ:RTIX) and Invacare Corporation (NYSE:IVC)Invacare Corporation (NYSE:IVC). Two biotech shorts negatively impacted the fund’s returns. Krensavage outperformed its benchmark S&P Healthcare Index Return’s 6.6% gain but came up short of the S&P 500’s 13.6% gain.
Top-performing position: Enanta Pharmaceuticals
The fund’s top performer during Q1 was Enanta with its 35% gain. Enanta benefited from royalty payments from Abbvie for sales of the hepatitis C medication Mavyret. Managing Member Michael Krensavage said in his Q1 letter, which was reviewed by ValueWalk, that the Mavyret royalties “represent the foundation of value” for their investment in Enanta.
During Q1, Enanta also finished enrollment in two phase 2 clinical trials, one to treat respiratory syncytial virus (RSV), which can kill those with compromised immune systems, and one for nonalcoholic steatohepatitis. The results of both trials are expected by the end of this year, and Krensavage believes either of these drugs "could create significant value and attract suitors to Enanta.
RTI Surgical and Invacare
Their second-best performer during Q1 was RTI Surgical, which supplies orthopedic implant. Its stock climbed 62% during the quarter following better-than-expected guidance for the year. RTI also acquired privately-owned Paradigm Spine, which also boosted its stock. The Paradigm acquisition brings RTI its coflex device, which is designed to treat lumbar spinal stenosis. Krensavage estimates that if RTI speeds up sales of this device, it could capture over $9 per share in a takeover offer.
The fund's third-biggest contributor during the quarter was electric wheelchair and oxygen tank maker Invacare. The stock climbed 85% during the quarter, almost reversing half the losses recorded since management warned in November that tariffs were taking a bite out of profits and Medicare changes threatened sales. The changes to Medicare have been delayed until 2021, and Invacare cut expenses in response to the tariffs.
Krensavage initially bought Invacare shares in 2012 following quality-control issues at one of its factors, which caused regulators to halt sales of its wheelchairs. He expected Invacare to rebound after the problems were fixed, and it has been rebuilding its wheelchair business since it received approval to restart production in July 2017. Krensavage sees Invacare shares in the mid-$20 range eventually.
Problematic biotech shorts
He highlighted two biotechnology shorts as problems for the portfolio during Q1. The first was a biotech company whose stock climbed after better-than-expected sales of its only drug, which launched in Q4. Patients have been on a waiting list for the medication, so he believes once that initial surge is past, he expects demand to drop dramatically. He also doesn't feel the drug justifies the "multi-billion-dollar valuation" Wall Street has assigned because the drug treats only a "tiny patient population, sells for tens of thousands of dollars a year and competes not only with prescription generics that cost pennies, but also with widely available products that require no prescription."
The fund's other detractor during Q1 was another biotech short which "also sports an outrageous, multi-billion-dollar valuation." This company is still preparing to launch its first drug, and it targets the hospital market, which Krensavage notes is very difficult to penetrate. The drug also competes with "dozens of generics that sell for pennies a day," he adds. Thus, he expects insurance companies to force patients to try less expensive alternatives first. The company's second medication hasn't won approval yet, but he said it will also be up against "dozens of cheap generics."
This article first appeared on ValueWalk Premium