I recently published a report over at Chimera Research Group titled 13F Analysis of Best Performing Healthcare Hedge Funds (Q1 2015).
As free preview to the Chimera article, below is a list of the best performing healthcare specialists, judged by replicating the holdings disclosed in their 13F filings. For details on how these portfolios were constructed, see the geek notes below.
As implied by the article title, I identify the best performing healthcare focused hedge funds from the list of 35+ 13F filers I track. From this list I created a "best ideas" portfolio by looking for stocks that multiple managers own. The intuition is this: if two biotech specialists with great track records, who are presumably competitors, are both in the same stock, its worth a look. The entire article, including stock picks, is available over at Chimera Research Group.
To be perfectly clear: These are the not returns of the funds listed, rather they are the returns of buying the stocks listed on the fund's 13F filing.
Portfolio Construction Notes:
While this blog has been focused on biotechnology as of late, I do have interests in a few other sectors. Inspired by Bershire Hathaway and the mini-Berkshires, I have compiled a few resources on insurance company investing.
Have something to add to this list? Put in the comments below:
EDIT 2/27/15: I should have included Shreyas Patel's Insurance Investor blog. This value oriented blog, which appears to have been unfortunately short-lived, has a several great posts:
Have a recommendation? Put it in the comments section or contact me. I am particularly interested in a book recommendation.
My favorite way to generate investment ideas is reviewing Form 13F filings from great healthcare investors. I first read of this approach years ago in Mebane Faber's book.
If searching for investment ideas is like looking for a needle in a haystack, then 13F filings are a stack of needles.
I later found out the great Mohnish Pabrai also uses filings for idea generation.
I've backtested the filings of 60+ healthcare focused investors, and I have ten that are worth following. These include the well known Perceptive Advisors, and Baker Bros Advisors, but also more under- the-radar firms such as Broadfin Capital. It is important that 13Fs are the beginning of an investment research process. Due diligence is still critical.
Some of my most successful biotechnology stock picks generated by 13Fs have been in the oncology space. An example would be when I bought Pharmacyclics (PCYC) at $19 in February 2012, and held it for a multibagger.
The most recent set of 13Fs were as of September 30, 2014. Here are the two most popular oncology stocks held by my group of hedge funds.
Pharmacyclics (PCYC): A long time favorite of Baker Bros., also owned by Perceptive and BB Biotech, as of September 30, 2014. Ibruvica is currently approved for Mantle cell lymphoma (MCL) and Chronic lymphocytic leukemia (CLL) patients who have received at least one prior treatment.
PCYC is in growth mode, after having Ibruvica approved, the company swung into profitability during the 3rd Quarter of 2014. Analysts expect 37% year over year revenue growth in 2015.
At the upcoming ASH conference the company will be presenting data in the effort to get indication expansion into B-Cell Lymphoma.
Investors are clearly very excited about the growth story here, as the stock currently trades at 11x next years estimated revenue. The bear case revolves around next generation competitors to Ibruvica.
The stock does appears to be near full value, as analyst average price target is $161, which is only 16% higher than current prices.
Celgene (CELG): Owned by RA Capital, Orbimed, BB Biotech, and Perceptive as of September 30, 2013. Celgene is a major player in the oncology space and has products approved for many indications. Revlimid represents 66% of Celgene's revenue. It is approved for Multiple myeloma (MM), myelodysplastic syndromes (MDS), and Mantle cell lymphoma (MCL). Furthermore, there will be many presentations at ASH 2014.
It is worth noting this company has a less concentrated product portfolio than PCYC, with a single product on the market.
Analyst are expecting very strong growth from CELG specifically from their Revlimid, and Abraxane franchises. Celgene's IR site tracks analyst estimates, and it states that EPS growth of 32% is expected in 2015.
CELG investors have been impressed with the growth story. The company trades as 9.7x forward sales estimates, and 25x forward EPS estimates. These valuations could be justified if the firm can pull off its growth plans without any miss-steps.
No value investor would call this either PCYC or CELG "cheap".
Most analyst would not call CELG cheap either. The current analyst price target is $116, which is about where the stock trades now. Investors would be wise to wait for a pull back, or wait for analyst upgrades.
Disclosure: I own none of the stocks mentioned in these articles and have no plans on buying them in the next 48 hour
Data: Ycharts.com/Morningstar and 4-Traders.com/Thompson Reuters.
One of the most controversial names in biotech has been Arrowhead Research (ARWR).
The market was very disappointed with ARWR's late-breaking abstract for the American Association for the Study of Liver Disease (AASLD) meeting, part of the ongoing Phase 2a study of ARC-520 for hepatitis B. The abstract was released October 8th, 2014. The meeting is November 7-11, and is commonly referred to as The Liver Meeting.
Investors were looking for a 1 log reduction in Hepatitis B virus from Arrowhead's ARC-520. However the company delivered a 0.3 log reduction in HBV, falling short of expectations.
The stock has declined more than 50% on the news. Management has tried to assuage investors with an open letter to shareholders.
For a good summary of the situation, I'll refer you to Adam Feuerstein's article at TheStreet.com. For a more scientific take on the data, check out Dirk Haussecker's RNAi Therapeutics blog.
However, this hasn't stopped Daniel Gold's QVT Financial from increasing it's stake to 4,030,882 shares as of October 8, 2014. The stock closed at $7.03 that day after trading as low as $5.47, they now own 7.62% of the company . This position is up from 1,819,982 shares as of June 30, 2014.
QVT Financial manages more than $8 billion, and has 27% of its 13F portfolio in healthcare. QVT originated as a non-traditional proprietary trading group, lead by Deutsche Bank alumni Daniel Gold.
The bull case for Arrowhead Research centers around the signs of efficacy we have seen thus far, and ARC-520 clean safety profile. Bulls think the viral knockdown to be demonstrated in higher/multiple doses (3-4mg/kg) will be sufficient for a high level of HBV knockdown.
We've all heard of doubling down on an investment. How about doubling down 11-fold? This is exactly what RA Capital Management did, raising their holdings of ACHN from 2m shares to 23m as the stock moved against them from 2012 to 2014. Their conviction paid off when shares rallied from as low as $2.52 to over $13 in the summer of 2014.
RA Capital is a a Boston-based healthcare crossover fund, and according tothis study (original here), a great stock picking firm.
I have been following RA for a few years now, and had the pleasure of seeing this trade play out in real time. I also had the good fortune of following them through this trade for myself and client accounts.
RA Capital first disclosed their position in Achillion in the summer of 2012. You can see the shares held (green and orange) on the right side of the chart above, with the stock price as the blue line. Over the next year, biotech industry observers pontificated that Gilead would dominate the space HCV space with sovaldi.
However, things were just beginning to get interesting. The FDA put a clinical hold on Achillion's lead drug sovaprevir on July 1, 2013 due to toxicity concerns. On July 22, 2013 Peter Kolchinsky, Managing Partner of RA Capital Management, wrote a piece for xconomy, defending Achillion, and refuting the idea of Gilead capturing the entire market, stating that Achillion would compete on price, carving out its own niche in the HCV space. By this time, RA had increase their holding from 2m shares to 7.4m. For those interested, Kolchinsky's book The Entrepreneurs Guide to a Biotech Startup is a great read and can be found here.
When the FDA declined to lift the hold in September 2013, the stock took a beating from the $7's to the high $2's. However, RA Capital stepped up their buying in the rest of 2013, eventually owning 23m shares and over 20% of the company.
During this time,bulls argued that the liver toxicities only occurred in a small subset of HIV patients, and therefor could be overcome. Bears saw a drug with toxicity issues that was late to market (if at all), and a pipeline that was not mature enough to get excited over.The shares traded as low as 2x cash on the balance sheet. However, those paying attention to RA Capital noticed the buying, and had ample opportunity to buy during the nine months the stock was down, which I did.
In June of 2014, two events occurred that boosted Achillion price. HCV rival Idenix was acquired, and the next day, the clinical hold was lifted. RA Capital's stake rocketed from $65m to $217m in about two months.
Since then, RA Capital has began to unwind its very large position, selling it down, presumably for risk management purposes, and to book some monster gains. The willingness to go against the grain, the deep level of conviction, and the huge win makes this one of my favorite biotech trades of all time.
Notes for the data geeks:
You knew that somebody would figure out how to game the quarterly 13F filings that institutional investors must make.
The SEC says: “the purpose of this disclosure requirement is to collect and disseminate to the public information about the holdings and investment activities of institutional money managers in order to assist investors, issuers and government regulators.” (In the Matter of Quattro Capital Management, LLC, August 15, 2007).
According to this research paper, some firms are using the 13F to pump and dump stocks.
This is the personal blog of Emory Redd.
This blog is not investment advice. This is not a solicitation to invest. Don't take candy from strangers.
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