Billionaire Hedge Funds Are Betting Big on This Biotech -- Should You, Too?

Source: Relypsa.

Investors should do their own due diligence before buying biotech stocks, but tracking what healthcare money managers are doing with their billions can yield some intriguing new ideas that investors can consider. For that reason, I dug through the quarterly 13-F reports that these money managers must file with the SEC to see what's being bought and discovered that funds are increasingly betting that Relypsa, Inc shares will head higher. Let's take a closer look at Relypsa and see what it is about this company that interests these stock picking pros.

Catalyst comingClinical-stage companies like Relypsa are hit-and-miss because 90% of drugs entering human trials end up in the dustbin. As a result, investing in companies that are more promise than profit is incredibly risky.

However, Relypsa is a bit further ahead of some of its other small-cap biotechnology company peers. Although it doesn't have any drugs on the market yet, it is getting close. Last fall, the company filed for FDA approval of patiromer for oral suspension, or patiromer FOS, and the agency expects to make a decision on whether to approve that drug on Oct. 21.

If approved, patiromer FOS will become the first new therapy in 50 years approved to treat a dangerous buildup of potassium known as hyperkalemia.

Most patients who suffer from hyperkalemia develop the disease because they're taking renin-angiotensin-aldosterone inhibitors, or RAAS, therapies to treat kidney failure.

Because kidneys are mainly responsible for excreting potassium, failing kidney function results in higher potassium levels. That increase is worsened by the fact that RAAS therapies, while effective at slowing kidney disease, are associated with causing high potassium levels. Hyperkalemia is also found in other patient populations that are prescribed RAAS medicines, including heart-failure patients.

Left unchecked, hyperkalemia can cause muscle weakness, paralysis, and life-threatening cardiac problems.

Source: Relypsa inc.

Potential marketHyperkalemia affects millions of patients every year because most patient intake of potassium is greater than their need, and that's a big problem, given that as potassium levels increase, so does mortality risk.

Because of that, many doctors treat patients with less than the ideal dose of RAAS inhibitors out of fear that higher doses could lead to hyperkalemia. Overall, Relypsa estimates that just 25% of chronic kidney disease patients on RAAS inhibitors are taking the ideal dose.

However, even though so many patients are receiving lower doses of RAAS therapies, 23% of CKD 3 patients, about 40% of CKD 4 patients, and more than 50% of CKD 5 patients still develop hyperkalemia.

Source: Relypsa,

Since estimates call for the prevalence of chronic kidney disease to increase from 13.2% of Americans to 14.4% of Americans in 2020,demand for this treatment could be big, particularly if doctors begin to more actively prescribe RAAS inhibitors knowing that patiromer FOS can keep potassium levels in check.

Betting on successDuring the first quarter, 91 money-management firms boosted their stake in Relypsa by a combined 11.2 million shares, far outstripping the 35 firms that reduced their holdings by a combined 3.3 million shares.

Among those that increased their exposure to Relypsa last quarter are Citadel Advisors LLC, which manages more than $60 billion, and Columbus Circle Investors, which manages $14.8 billion in equity investments. Citadel bought more than 1.05 million shares in the quarter, bringing its position to 1.79 million shares, and Columbus Circle added over 677,000 shares, which brought its position to 949,000 shares.

Orbimed Advisors remained Relypsa's biggest investor last quarter, maintaining its 8.85 million-share position, while other notable funds started new positions in Relypsa, including Healthcor, which made a big splash by buying 875,000 shares.

Looking aheadObviously, these funds believe that Relypsa has an intriguing drug, and since Relypsa owns the rights to this drug wholly and it won't have to split any eventual sales, an approval could be very profit-friendly.

However, there's no guarantee that the FDA will give patiromer FOSa green light, or that if they do, it will become a commercial success. If it does and Relypsa's sales force can win scripts, then Relypsa's current $1.5 billion market cap could end up being a bargain, especially given that the company owes little debt, has $325 million in cash exiting March, and has patents that protect the drug from competition until 2030 in the U.S. and 2029 in Europe. For those reasons, investors willing to accept the risk of a late-stage or commercial failure may want to consider buying a little bit of this high-risk, high-reward company.

The article Billionaire Hedge Funds Are Betting Big on This Biotech -- Should You, Too? originally appeared on Fool.com.

Todd Campbell has no position in any stocks mentioned. Todd owns the institutional equity research firm E.B. Capital Markets, LLC. E.B. Capital's clients may have positions in the companies mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.