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.
8. Sarepta Therapeutics, Inc. (NASDAQ:SRPT)
Number of Hedge Fund Investors in Q2 2024: 55
Farallon Capital’s Q2 2024 Investment Stake: $362 million
Sarepta Therapeutics, Inc. (NASDAQ:SRPT) is a mid sized American biotechnology company developing treatments for diseases such as dystrophy and children with Duchenne complications. Since it is a commercial stage biotechnology firm, the two keys to Sarepta Therapeutics, Inc. (NASDAQ:SRPT)’s hypothesis are its treatment for Duchenne called Elevidys and its exon-skipping therapies called phosphorodiamidate morpholino oligomer (PMO) for the same disease. Sarepta Therapeutics, Inc. (NASDAQ:SRPT) is one of the few companies in the industry that develops a proprietary exon skipping technology, which opens up its valuation to develop treatments for other diseases as well. Moving forward, if Elevidys sales remain strong and PMO continues to expand treatment options, Sarepta Therapeutics, Inc. (NASDAQ:SRPT)’s shares could see significant tailwinds. Elevidys is a $3.2 million drug that is one of the few of its kind. As an illustration of how Sarepta Therapeutics, Inc. (NASDAQ:SRPT)’s stock depends on the drug’s sales, consider the shares’ 12% drop in August after the firm announced that Elevidys’ quarterly sales had missed estimates. The firm could also see competitors for the drug, with Dyne Therapeutics also developing a Duchenne treatment.
Sarepta Therapeutics, Inc. (NASDAQ:SRPT)’s management commented on its PMO business during the Q2 2024 earnings call where it shared:
“Turning to PPMO. Early in the first quarter, we announced positive results from Part B of our MOMENTUM study, or study SRP-5051 201. MOMENTUM is an ongoing study of SRP-5051, our investigational peptide conjugated PMO or PPMO. We are actively engaging with Cedar regarding the Phase 3 study that could serve as a post-marketing requirement or PMR study for a potential accelerated approval. Agreement on the Phase 3 PMO study is a prerequisite for an accelerated approval filing. Our intent is to gain an agreement for a study that considers the current landscape can be completed in a reasonable time frame and reflects patients reluctance to enroll in a placebo-controlled trial.”
7. Revolution Medicines, Inc. (NASDAQ:RVMD)
Number of Hedge Fund Investors in Q2 2024: 43
Farallon Capital’s Q2 2024 Investment Stake: $378 million
Revolution Medicines, Inc. (NASDAQ:RVMD) is a pre commercial stage biotechnology company headquartered in Redwood City, California. This makes it a significantly more risky player than compared to firms that have secured FDA approval and are shipping their products to the market. Therefore, Revolution Medicines, Inc. (NASDAQ:RVMD)’s hypothesis depends on the treatments that the firm is currently developing. On this front, the firm’s future is heavily dependent on the RM-6236 inhibitor which can target multiple cancers, including pancreatic and small cell lung cancer. Revolution Medicines, Inc. (NASDAQ:RVMD) plans to enter a Phase 3 study for RM-6236’s potential for pancreatic cancer later this year. Results from this study will be crucial, especially as early stage results released in June showed that the drug shrank tumors in roughly 25% of the participants. Revolution Medicines, Inc. (NASDAQ:RVMD) ended Q2 with $1.59 billion in cash which should be sufficient to fund its operations for more than a year.
Revolution Medicines, Inc. (NASDAQ:RVMD)’s management shared key details for RM-6236 during its Q2 2024 earnings call which could help determine the treatment’s future:
“Yes. I mean I think we said before, and I know you and I talked about that, the monotherapy RMC-6236, I think, already qualifies to be included in such a trial. And really, the question is around what — how to play with chemotherapy, what role should that play, should that be an arm in the study? And if so, how should that be done? And that’s principally a safety and tolerability question more than it is an efficacy question. And RMC-6236 clearly is a broad-based inhibitor of RAS. It’s by design. It’s generally well tolerated and safe, but it does have some side effects. Chemotherapy is typically replete with side effects. And so when you put those two together, we need to have confidence going into the study, going into a registration study that, that combination will not blow up for patients.
So that’s really what we’re doing is trying to figure that out. There are many combinations, as you point out, that we couldn’t pursue. I wouldn’t consider RMC-9805, specifically, part of that determination for 6236 going into front line. It’s it own entity, and how we’ll deal with that, we’ll describe over time as we reveal data about that interesting compound.”
6. Janux Therapeutics, Inc. (NASDAQ:JANX)
Number of Hedge Fund Investors in Q2 2024: 31
RA Capital’s Q2 2024 Investment Stake: $383 million
Janux Therapeutics, Inc. (NASDAQ:JANX) is a small California based biotechnology company that is developing treatments for prostate, colorectal, head, lung, and other cancers. A pre commercial company, its key product under development is the JANX007 drug for pancreatic cancer. JANX007 is currently in the Phase 1 human clinical trial for pancreatic cancer, and Janux Therapeutics, Inc. (NASDAQ:JANX) is currently enrolling patients. The firm’s second under development drug is JANX008, which is a more diversified tumor drug that seeks to help patients with all of the cancers, except pancreatic cancers, that we’ve mentioned above. Janux Therapeutics, Inc. (NASDAQ:JANX) is also working with MERCK, and successful milestone payments from the pharma giant could inject tailwinds into the stock along with positive trial data.Yet, there might be trouble brewing under the hood, as hedge fund Orbimed advisors sold 2.3 million Janux Therapeutics, Inc. (NASDAQ:JANX) shares in June and July which represented 4.4% of the shares outstanding.
5. Apellis Pharmaceuticals, Inc. (NASDAQ:APLS)
Number of Hedge Fund Investors in Q2 2024: 38
ECOR1 Capital’s Q2 2024 Investment Stake: $445 million
Apellis Pharmaceuticals, Inc. (NASDAQ:APLS) is a commercial stage biotechnology company that develops treatments for immune system disorders, eye diseases, and other ailments. It is a well diversified firm, with drugs in development and on the market. Apellis Pharmaceuticals, Inc. (NASDAQ:APLS)’s two primary revenue generating treatments EMPAVELI and SYFOVRE are primarily targeted towards people with eye diseases. The firm is also trying to expand its market for EMPAVELI, by trying to target the drug for people with serious kidney diseases. On this front, Apellis Pharmaceuticals, Inc. (NASDAQ:APLS) completed a Phase 3 trial of EMPAVELI in August and demonstrated positive results. The firm now plans to submit an FDA application for the drug, which could lead to much needed tailwinds to Apellis Pharmaceuticals, Inc. (NASDAQ:APLS)’s stock, which is down by 36% year to date.
While EMPAVELI represents Apellis Pharmaceuticals, Inc. (NASDAQ:APLS)’s future potential, its bread and butter right now is SYFVORE. Here is how management described this drug during the Q1 2024 earnings call:
“SYFOVRE is key to delivering this long-term value and the growth in Q1 underscores the strong demand we continue to see from both physicians and patients. Through March, eye care professionals administers 250,000 SYFOVRE injections and in the first 12 months of launch, SYFOVRE generated over $400 million in sales, substantially exceeding both our and Wall Street’s expectations. This is extraordinary performance for any new product launch. SYFOVRE’s leadership in the market is driven by three important factors. First, treatment with SYFOVRE results in increasing effects over time with up to 42% slowing of GA progression in year three of GALE, building on the meaningful effect demonstrated in DERBY and OAKS. Second, SYFOVRE has a well-documented safety profile based on extensive experience both clinically and in the real world.
And third, SYFOVRE offers flexible dosing as described in our label, which means that patients can benefit from SYFOVRE’s impressive clinical profile in as few as six doses per year. As the market leader, we are only getting started. Our performance to date reaffirms our belief that SYFOVRE has the potential to become a multi-billion dollar product in the U.S. alone. We are also working to bring SYFOVRE to patients worldwide. We recently announced that the European Medicines Agency reset the review of the SYFOVRE application back to day 180 of our initial assessment, which is the last phase of that procedure. This decision follows a judgment made by the Court of Justice in the EU regarding the competing interests of experts. The decision for SYFOVRE is strictly procedural and not related to the SYFOVRE application.”
4. Exelixis, Inc. (NASDAQ:EXEL)
Number of Hedge Fund Investors in Q2 2024: 32
Farallon Capital’s Q2 2024 Investment Stake: $608 million
Exelixis, Inc. (NASDAQ:EXEL) develops treatments for cancer and hypertension. Some of its products target kidney, thyroid, and skin cancer. It is another commercial stage biotechnology stock, which provides it with a lot of stability compared to other firms that are in clinical trial stages. Exelixis, Inc. (NASDAQ:EXEL)’s bread and butter drug is cabozantinib, which is a diversified cancer drug that targets thyroid, kidney, and liver cancer. Exelixis, Inc. (NASDAQ:EXEL) is also a profitable biotechnology firm as it generates positive earnings per share (Q2 adjusted EPS was $0.77 which more than doubled analyst estimates of $0.34). Cabozantinib, sold as Cabometyx, showed positive impacts on patients suffering from neuroendocrine cancer in October last year, and if the drug is approved for this ailment by the FDA, then Exelixis, Inc. (NASDAQ:EXEL)’s shares could see more fireworks. The stock is up 9.95% year to date, making it a rare biotechnology firm that has done well in a tough economy, and the shares gained 15.86% in August after Exelixis, Inc. (NASDAQ:EXEL)’s Q2 2024 earnings report.
During the call, management shared key details for cabozantinib’s expansion to include neuroendocrine tumors. Here’s what they said:
“I’m happy to share our progress across our pipeline with you all today, starting with Cabozantinib and an exciting status update on our filing activities with the Phase III CABINET study in neuroendocrine tumors, or NET. As Mike mentioned, we are pleased to report that Exelixis’ filing for a supplementary NDA for Cabozantinib in pancreatic or extrapancreatic neuroendocrine tumors has been accepted by the FDA with a target PDUFA date of April 3, 2025. The FDA also granted orphan drug designation to Cabozantinib in pancreatic NET. As a reminder, the Phase III CABINET study evaluated Cabozantinib 60 milligrams daily versus placebo in patients with previously treated advanced or metastatic pancreatic or extrapancreatic neuroendocrine tumors, which I will refer to as pNET or epNET, respectively.
By way of background, NET sometimes referred to as carcinoid tumors are a diverse group of malignancies that arise from neuroendocrine cells of various organs. While previously thought to be fairly uncommon, there has been a marked increase in the incidents over the past 20-years. And in 2024, approximately 15,000 people in the U.S. will be diagnosed with this tumor type. Well-differentiated neuroendocrine tumors develop most commonly about 55% of the time in the GI tract, followed by lung at approximately 25% and the pancreas just under 10%. They may also arise from other tissues like prostate, breast, thymus and skin. To-date, FDA-approved therapies have been directed at stimulating somatostatin receptors and inhibiting angiogenesis. Somatostatin analogs were first approved for the treatment of symptoms related to functional tumors and subsequently to delay disease progression.”
3. Vaxcyte, Inc. (NASDAQ:PCVX)
Number of Hedge Fund Investors in Q2 2024: 37
RA Capital’s Q2 2024 Investment Stake: $619 million
Vaxcyte, Inc. (NASDAQ:PCVX) is a small California based biotechnology company developing anti bacterial treatments. Since it is another pre clinical stage biotechnology company, the firm is yet to generate sales turnover or turn a profit. Its two leading drug candidates are VAX-24 and VAX-31. Both of these target pneumonia causing bacteria, and as of now, VAX-31 is Vaxcyte, Inc. (NASDAQ:PCVX)’s leading drug candidate that is currently in Phase1/2 clinical trials. This makes it a central part of Vaxcyte, Inc. (NASDAQ:PCVX)’s hypothesis, a fact that was clear as daylight in September 2024. The firm had hoped to announce the data for the trial in September 2024 and it delivered well. Vaxcyte, Inc. (NASDAQ:PCVX)’s stock shot up by a whopping 48% after the data release to a record high. This was because the drug matched the efficacy profile of Pfizer’s treatment with the robust results increasing Vaxcyte, Inc. (NASDAQ:PCVX)’s chance to play in a $10 billion market. Vaxcyte, Inc. (NASDAQ:PCVX)’s management also expects to bring VAX-31 into phase three trials next year, with data expected a year later.
Vaxcyte, Inc. (NASDAQ:PCVX)’s management shared details for the phase three trial during the Q4 2023 earnings call:
“And we are in the final stages of manufacturing the product needed for several of the potential Phase 3 studies, including the pivotal non-inferiority study. In advance of the potential initiation of this VAX-24 study in the second half of this year, we expect to announce the topline safety, tolerability, and immunogenicity data from our VAX-31 adult Phase 1/2 study in the third quarter.
This timing and the overlapping timeline for the completion of the VAX-24 and VAX-31 adult Phase 3 studies provide us the opportunity to make a strategic decision regarding which adult program we now move into Phase 3, following the VAX-31 data readout. As we advance VAX-24, we intend to initiate the pivotal non-inferiority study in the second half of this year and the balance of the Phase 3 studies, which are shorter in duration than the non-inferiority study in 2025 and 2026. If we advance VAX-31, we expect to initiate the full complement of the Phase 3 studies in 2025 and 2026. Regardless of which program, we move forward we expect to initiate the final Phase 3 studies in 2026. And subject to the results of these studies, submit a BLA shortly following the completion of the last study.”
2. Ascendis Pharma A/S (NASDAQ:ASND)
Number of Hedge Fund Investors in Q2 2024: 35
RA Capital’s Q2 2024 Investment Stake: $1.3 billion
Ascendis Pharma A/S (NASDAQ:ASND) is a commercial stage biotechnology company whose drugs target hormonal disorders and cancer. Its commercially available drug is Skytrofa, and it is used to treat children who suffer from growth hormone deficiency. Crucially for Ascendis Pharma A/S (NASDAQ:ASND), Skytrofa targets a rare disease market, which means that it has few competitors. This means that the firm’s ability to grow revenue is simply dependent on its ability to scale up production, allowing it to benefit from robust margins stemming from lower marketing and other expenses. Ascendis Pharma A/S (NASDAQ:ASND) also has an upcoming drug to treat hypoparathyroidism in adults. This drug, called TransCon PTH, has already secured approval in the European Union, and its approval in America should further expand Ascendis Pharma A/S (NASDAQ:ASND)’s revenue base. However, since the firm generates 73% of its revenue from Skytrofa, any slowdown in the rare disease drug’s sales will hit its shares hard. This was also the case in September when Ascendis Pharma A/S (NASDAQ:ASND)’s shares tanked by 11% after it cut Skytrofa sales estimates by €100 million and pricing pressures led to a 27% annual drop in quarterly revenue despite a 134% annual jump in prescriptions.
So what happened to Skytrofa? Here’s what Ascendis Pharma A/S (NASDAQ:ASND)’s management had to say during the Q2 2024 earnings call:
“Key component of our strategy to make SKYTROFA a blockbuster product in the US include simplifying broaden market access for both treatment naive or switch patients as well as expanding our label. In the first half of the year, the reset to broader market access for SKYTROFA was largely completed. While this broader access to SKYTROFA will support long-term demand, in the short term, it negatively impacted our first half net revenue. Scott will share more details. With our market access transition largely completed, SKYTROFA is now positioned as a premium product with a net value per patient of around 3 times compared to daily growth hormone. We are now focused on using our new market access coverage to drive further demand, continue to expand the overall growth hormone market and are aiming to reach blockbuster data for SKYTROFA in the US alone.”
1. Nuvalent, Inc. (NASDAQ:NUVL)
Number of Hedge Fund Investors in Q2 2024: 29
Deerfield Management’s Q2 2024 Investment Stake: $1.5 billion
Nuvalent, Inc. (NASDAQ:NUVL) is a small, pre commercial stage biotechnology company based in Cambridge, Massachusetts. It is developing treatments for cancer, tumors, and nervous system disorders. Its lead candidate is the NVL-655 drug, which aims to target small cell lung cancer and tumors. This drug is currently in Phase 1 trial, and estimates suggest that if all goes well, then Nuvalent, Inc. (NASDAQ:NUVL) could launch the product in 2026 and continue with additional treatments until 2029. This means that any outcomes of the undergoing trials will be make or break events for the firm’s stock especially since the firm does not generate any revenue. Nuvalent, Inc. (NASDAQ:NUVL) is also developing another drug for lung cancer. This drug is called zidesamtinib, and it is further ahead in the development pipeline with Phase 2 enrollment currently ongoing. The firm’s stock jumped by 4.4% in September, when it revealed that NVL-655 trials had shown market competitive median response rates for patients that had already tried other cancer treatments.
NUVL leads the pack when it comes to top biotech hedge funds’ top biotech stocks. But our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than NUVL but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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