The collapse in the shares of Prothena (PRTA.O) this week after the failure of its flagship drug has richly rewarded Kerrisdale, which was 'shorting', or betting against, the stock, and punished Woodford, the biotech company's biggest investor.
Kerrisdale labelled Prothena ‘the next big biotech blow-up’ in November as it announced its short on the stock, claiming the shares could fall as much as 80% and saying it was ‘certain’ of the failure of NEOD001, a potential therapy for AL Amyloidosis, a rare disease caused by the build-up of amyloid proteins.
Less than six months later, Kerrisdale has been vindicated. Prothena has ceased further research into the drug after the failure of the phase 2b Pronto study into the treatment. The shares are down 82% since Kerrisdale started shorting them.
It’s the second time Kerrisdale, a small hedge fund operation running around $150 million (£108 million) in assets, has taken on Woodford, who ran £17.8 billion at the last count.
In 2015, Kerrisdale launched a short-selling attack on long-term Woodford holding Allied Minds (ALML), branding the company, which commercialises intellectual property from universities, ‘a dressed up collection of high-risk, low-reward gambles’ and saying the shares could fall by ‘at least’ 70%. Three years on, the shares are down 78%.
Both episodes have delivered major blows to Woodford’s funds. Allied Minds was a top 10 holding when Woodford launched his Woodford Patient Capital (WPCT) investment trust in 2015, and sat just outside the top 10 when he launched his Woodford Equity Income fund a year earlier.
Over the three years to the end of March, no stock has weighed more heavily on the performance of his Woodford Equity Income fund than Allied Minds, in a period that has also feature heavy share price falls from holdings like Provident Financial (PFG), Capita (CPI) and AA (AAAA).
Prothena’s impact on the Woodford Patient Capital investment trust has been even more dramatic. Prothena was the trust’s largest holding when Kerrisdale launched its attack, representing a huge 16.3% of the fund's assets, although that had fallen to 9.1% by the end of March. The stock’s 69% collapse on Monday saw shares in Woodford’s trust tumble by more than 10%.
The Woodford Equity Income fund, which held a 3.1% stake at the end of last month, and the Income Focus fund, with a 1.8% holding, have also been dented.
Prothena’s fall is likely to sting all the more for Woodford given Kerrisdale was a beneficiary, following the war of words between the two.
Woodford branded Kerrisdale’s Allied Minds attack as ‘opportunistic’, going further after the hedge fund took aim at Prothena.
‘Their job is to scare the market when the market is prepared to be scared. It doesn’t matter if what they said about Allied Minds and Prothena is totally inaccurate and unsubstantiated,’ he said earlier this year.
‘What matters is Bloomberg and others giving them the oxygen of publicity and hey presto there is a self-fulfilled prophecy and the share price falls.’
Kerrisdale had in turn gone on the attack against the UK’s most famous fund manager, arguing in its 29-page report on Prothena that investors should be wary of Woodford’s ‘repeated large mistakes in the biotech sector’.
On Twitter, Kerrisdale claimed Woodford would ‘lose money on your bad investments regardless of whether we write on them. But hopefully our work helps the widows and orphans who invest in your Patient Capital trust recognise how poor your diligence is on the stocks you pick’.
'We tend to be right'
Speaking to Citywire following Prothena’s announcement, Kerrisdale founder and chief executive Sahm Adrangi (pictured) took issue with Woodford's claim that the stocks they had targeted had fallen as a result of the short-selling noise they had created.
‘I think we have a good track record,’ he said. ‘We tend to be right. We are taking a lot of firepower to a very small number of situations.
‘We only publish five or 10 times a year. [The team] don’t have to monitor 100 stocks. They don’t spread themselves too thin.’
He said he had been surprised by the lack of engagement from Woodford in the arguments Kerrisdale had been making about Prothena.
‘If someone publishes short on one of our longs – we would have definitely gotten on the phone to them,’ he said. ‘The nuttiest thing of all is we explained in excruciating detail.’
Performance of Adrangi’s small Kerisdale Partners hedge fund has been spectacular since launch, with the fund up by more than 1,800% since launch in September 2009, according to data from Lipper.
Much of those stellar returns were delivered in the early days of the fund, when a series of bets against Chinese internet stocks delivered.
Over the last five years, returns have been less stratospheric, but still strong, with the fund having more than doubled investors money over the period.
Not every short has worked, as Adrangi admits. ‘We’ve made mistakes – there are companies we publish on that have got bought out.’
A short on mobile communications group Straight Path Communications (STRP.N) stands out - the shares surged 150% after a bid from AT&T, although Kerrisdale closed the small position before a bidding war helped the shares double again.
With Prothena now behind, it Kerrisdale has now moved on to its next target, Florida real estate company St Joe (JOE.N).
Woodford has pointed to the value of the company's other drugs in its portfolio, which include a drug for Parkinson’s being developed in partnership with Swiss pharmaceutical giant Roche (ROG.S) and the treatments for neurodegenerative diseases it is working on with Celgene (CELG.O).
But as shown by Monday’s fall, the market doesn’t agree: it had ascribed the bulk of Prothena's value, which stood at $1.5 billion last week, to NEOD001, which has now failed. Analysts covering the stock, agree, having slashed their price targets after Monday’s news.
Adrangi has little to say on Prothena’s future without NEOD001. ‘We don’t have a strong opinion on that. We understand that most of the value has been ascribed to that drug,’ he said.