In this piece, we will take a look at the 10 largest biotech hedge funds and their top stock picks.
The ability to successfully make money through investment requires deep thinking and analysis. Even then, it’s not a sure shot, and oftentimes, investors end up losing money regardless of how sound their decisions might have appeared on the surface. This is why most business schools teach portfolio diversification, to ensure that an investor’s risk is managed by allocating money across different stock categories.
One of the riskiest categories in which anyone can invest their money is the biotechnology industry. While the broader pharmaceutical sector enjoys some stability in the form of large pharma companies being able to stay cash flow positive through selling approved drugs, the biotechnology industry removes this stability by focusing only on future treatments. These treatments might or might not see the light of day, and developing them is expensive, so if they fail to yield any benefits, the shares drop.
Since their business is dependent on their treatment development, the risk associated with investing in biotechnology stock reduces the further down the development pipeline a firm is. Drugs that are in late stage clinical trials are more likely to secure regulatory clearance, and drugs that have secured approval are more likely to make money for companies in the market. Looking at these trends, the next question to ask is, what effect do clinical trials have on the stock returns of biotechnology stocks?
On this front, research from Harvard University provides some insight. It analyzed the research and development activities of large biopharmaceutical firms which earned at least 50% of their revenues (greater than $5 billion) from branded products. Then, data was gathered for FDA unapproved positive or negative outcomes from clinical trials. These data points were analyzed to check for the simple effect of positive or negative trial news on the stock returns of the companies. The results of the research confirmed that stock prices react accordingly to positive or negative news, but interestingly, it also revealed that the reactions were asymmetric.
For instance, the median cumulative annual returns (CAR) for t0, t+1, and t+2 (the day of the announcement and the two following days) saw the negative returns generate by negative news outpace the returns for the positive news by approximately 1.25 percentage points, 1.35 percentage points, and 0.50 percentage points, respectively. The researchers use these findings to “confirm and extend previous scholarship on the significant market reactions to clinical trial results for biotechnology companies with few compounds in development.” As for the asymmetry, they speculate that the “negative events may have a ‘reputational’ effect” on management’s ability to conduct trials and add that ” one could argue that as the results of clinical trials are anticipated events, market participants have already factored risk-adjusted expectations about their outcomes into the stock price.”
So, this makes it clear that biotechnology stocks are among the riskiest investments in the market, and even well capitalized firms are very vulnerable to bad news. Adding to this, raising funds for research often requires issuing more stock, which ends up diluting value for existing shareholders. For early stage and small biotechnology companies, this dilution is inevitable. Data from Deloitte shows that the average cost to develop a drug from R&D to launch sits at $2.3 billion while the average peak sales sat at $362 million in 2023. This suggests that, on average, it should take a little under eight years for a firm to completely recover the money that it has invested in a drug. This picture is further complicated by the fact that the average ROI for R&D investment sat at 4.1% in 2023, and R&D intensity for these firms is 35 percentage points higher than the average intensity of all other firms.
Combining all these data points shows that biotechnology companies might very well be ‘investment graveyards’ for inexperienced investors. The investment horizon for these stocks stretches for years, which means that only the most disciplined investors who are capable of not only conducting in depth research but also having nerves of steel to hold the shares, make it out on the other side with more money in their pockets than they put in. The nerves of steel are particularly important when we analyze the two decade performance of a biotechnology index and compare it with the performance of broader global stocks.
While biotech stocks do lead the world stocks, the difference between the returns varies from ~125 percentage points to a whopping ~420 percentage points within a time span of less than two years. These uncertainties also appear to be priced into the biotechnology stocks themselves, as data shows that 15% of these stocks trade below their net cash value – a figure that grows to 25% during times of economic peril.
To find out which biotechnology stocks might be worth investing in, one approach to take is to see what hedge funds are doing. These funds spend considerable resources analyzing biotechnology stocks, which means that they might be able to separate the wheat from the chaff as they say.
A doctor holding a test tube of the biopharmaceutical company’s NicAlert drug product while providing patient care.
Our Methodology
To make our list of the ten biggest stocks of the 10 largest biotechnology hedge funds we scanned through the Q2 2024 SEC filings of OrbiMed Advisors, Deerfield Management, Magnetar Capital, Farallon Capital, RA Capital, Survetta Capital, Glenview Capital, Cormorant Asset Management, EcoR1 Capital, and Redmile Group and picked out their ten biggest biotechnology stakes.
For these stocks, we also mentioned the number of hedge fund investors. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
10. Legend Biotech Corporation (NASDAQ:LEGN)
Number of Hedge Fund Investors in Q2 2024: 24
RA Capital’s Q2 2024 Investment Stake: $332 million
Legend Biotech Corporation (NASDAQ:LEGN) is a mid sized biotechnology company developing treatments for lung, pancreatic, and other cancers. A key distinction for the firm is that it is a commercial stage biotechnology company, which makes it less riskier than other biotechnology stocks. Legend Biotech Corporation (NASDAQ:LEGN)’s primary product on which its hypothesis currently rests is its Carvytki drug for myeloma. The firm sells roughly $160 million of this drug each quarter, and it has also partnered up with pharma giant JNJ for the treatment. Legend Biotech Corporation (NASDAQ:LEGN)’s short term future appears to be bright when we look at its Carvytki sales. During its second quarter, the firm sold $186 million of this drug, which marked a sequential 19% growth. Growing production, and ensuring that it matches future demand will be key to Legend Biotech Corporation (NASDAQ:LEGN)’s hypothesis moving forward.
Legend Biotech Corporation (NASDAQ:LEGN)’s management shared key details for its blockbuster drug during the Q1 2024 earnings call:
“So we do anticipate continued growth for CARVYKTI, particularly in the second half of the year, as we continue to add more slots and expand our capacity. Right now, there’s no higher priority in the company than making more supply available to the market and reducing the vein-to-vein time. We’re working to expand production from every angle. We are continually increasing production at our Raritan, New Jersey, where we have doubled cell processing capacity since the beginning of 2023.
We are laser focused on completing physical expansion of our Raritan site this year. We plan to double CARVYKTI capacity by the end of 2024 compared to the end of 2023. Our production capacity will be augmented later in the year when our Obelisc facility in Ghent, Belgium is approved for commercial production. Clinical production already started back in January. With the second-line FDA approval, the specifications for manufacturing CARVYKTI were widened, which should give us greater yield going forward. Finally, Legend and J&J expanded a previous agreement with Novartis to perform commercial manufacturing for CARVYKTI through the end of 2029. The increases to our production capacity will help ensure we meet our target of annualized capacity of 10,000 patient slots by the end of 2025.”
9. Sinovac Biotech Ltd. (NASDAQ:SVA)
Number of Hedge Fund Investors in Q2 2024: 3
Orbimed Advisors’ Q2 2024 Investment Stake: $340 million
Sinovac Biotech Ltd. (NASDAQ:SVA) is a Chinese biotechnology company headquartered in Beijing, China. Like LGND, it is also a commercial stage company. Sinovac Biotech Ltd. (NASDAQ:SVA) rose to global fame during the coronavirus pandemic when its CoronaVac vaccine was one of the few treatments for the virus. Apart from the COVID drug, it also makes and sells treatments for influenza, Enterovirus 71, mumps, Hepatitis A, and chickenpox. Since Sinovac Biotech Ltd. (NASDAQ:SVA)’s primary market is China, it struggled during its H1 2024 when its revenue of $121 million dropped by 16% annually. The firm explained that dropping birth rates in China contributed to the revenue shortfall. Over the long term, Sinovac Biotech Ltd. (NASDAQ:SVA) has to develop alternative drugs that target aging populations or expand its international presence if it is to mitigate the effects of these headwinds.
