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Steven Cohen Homes in on Otonomy

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·4 min read
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Steven Cohen (Trades, Portfolio), head of Point72 Asset Management, disclosed this week his firm upped its stake in Otonomy Inc. (NASDAQ:OTIC) by 1,354.75%.

With the goal of generating superior risk-adjusted returns, the billionaire guru's Stamford, Connecticut-based firm executes a long-short strategy that involves fundamental, bottom-up research processes, macro investments and insights.


According to GuruFocus Real-Time Picks, a Premium feature, Cohen picked up an additional 2.7 million shares of the San Diego-based biopharmaceutical company on July 13. The stock traded for an average price of $3.89 per share on the day of the transaction.

He now holds a total of 2.9 million shares, which represent 0.09% of the equity portfolio. GuruFocus estimates Cohen has gained 3.85% on the investment since establishing a new position in the first quarter of this year.

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The company, which focuses on developing therapeutics for ear-related diseases and disorders, has a $192.81 million market cap; its shares were trading around $4.01 on Wednesday with a price-book ratio of 4.13 and a price-sales ratio of 222.78, which GuruFocus notes are all near multiyear highs.

The chart shows the stock is trading above both its median price-book ratio and its median price-sales value, suggesting it is overpriced.

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On July 8, the company announced an underwritten public offering. The next day, it disclosed it would be offering 14.5 million shares of its common stock for a price of $3.25 per share. To certain investors, it also extended pre-funded warrants to purchase up to an aggregate of 4 million shares. The $60.1 million offering also granted underwriters a 30-day opportunity to buy up to an additional 2.77 million shares. The offering closed on July 13.

Earlier this month, the company also reported positive top-line results from the Phase 1/2 clinical trial of OTO-313, which is being developed to treat patients with tinnitus, a condition where people perceive they hear a noise, ranging from ringing or clicking to a roar, when there is no sound being made. As a result of the treatment achieving its objectives, it is now being moved on to full Phase 2 development.

GuruFocus rated Otonomy's financial strength 2 out of 10. In addition to debt ratios that underperform both the industry and in comparison to its own history, the company has a low Altman Z-Score of -7.88, warning that it could be at risk of going bankrupt since it has recorded declining revenue per share over the past five years. The Sloan ratio also suggests it has poor earnings quality.

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The weighted average cost of capital significantly outweighs the return on invested capital, indicating that the company spends more money than it makes.

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Otonomy is also suffering from negative margins and returns that underperform a majority of its competitors, as well as a low Pitroski F-Score of 2, which implies operations are in poor shape.

With a 6.04% stake, Cohen is the company's largest guru shareholder. Jim Simons (Trades, Portfolio)' Renaissance Technologies also owns the stock.

Portfolio composition

Cohen's $12.31 billion equity portfolio, which was composed of 746 stocks as of the three months ended March 31, is most heavily invested in the health care, technology and consumer cyclical sectors.

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Additional biotech stocks the guru was invested in as of the end of the first quarter included Iovance Biotherapeutics Inc. (NASDAQ:IOVA), Aurinia Pharmaceuticals Inc. (NASDAQ:AUPH), United Therapeutics Corp. (NASDAQ:UTHR), Insmed Inc. (NASDAQ:INSM), Constellation Pharmaceuticals Inc. (NASDAQ:CNST), Immunomedics Inc. (NASDAQ:IMMU), Axsome Therapeutics Inc. (NASDAQ:AXSM), Amarin Corp. PLC (NASDAQ:AMRN) and Incyte Corp. (NASDAQ:INCY), among many others.

Disclosure: No positions.

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This article first appeared on GuruFocus.