A Look at Top Picks of This Billion-Dollar Healthcare-Focused Fund

Deerfield Management, a healthcare-focused fund managed by James E. Flynn  has issued its 13F filing for the end of the third quarter, revealing an equity portfolio worth $2.5 billion held as of the end of September. Among Deerfield’s top picks are Horizon Pharma PLC (NASDAQ:HZNP), NxStage Medical, Inc. (NASDAQ:NXTM), GlaxoSmithKline plc (ADR) (NYSE:GSK), Aetna Inc (NYSE:AET), and Flamel Technologies S.A. (ADR) (NASDAQ:FLML) and in this article we are going to take a closer look at these companies and see if Flynn’s peers have the same opinion about these stocks.

Why do we pay attention to hedge fund sentiment? Most investors ignore hedge funds’ moves because as a group their average net returns trailed the market since 2008 by a large margin. Unfortunately, most investors don’t realize that hedge funds are hedged and they also charge an arm and a leg, so they are likely to underperform the market in a bull market. We ignore their short positions and by imitating hedge funds’ stock picks independently, we don’t have to pay them a dime. Our research has shown that hedge funds’ long stock picks generate strong risk adjusted returns. For instance the 15 most popular small-cap stocks outperformed the S&P 500 Index by an average of 95 basis points per month in our back-tests spanning the 1999-2012 period. We have been tracking the performance of these stocks in real-time since the end of August 2012. After all, things change and we need to verify that back-test results aren’t just a statistical fluke. We weren’t proven wrong. These 15 stocks managed to return 102% over the last 37 months and outperformed the S&P 500 Index by 53 percentage points (see the details here).

#5 Flamel Technologies S.A. (ADR) (NASDAQ:FLML)

Shares held (as of September 30): 4.07 million
Total Value (as of September 30): $66.43 million
Percent of Portfolio (as of September 30): 2.57%

Deerfield kept its position in Flamel Technologies S.A. (ADR) (NASDAQ:FLML) unchanged in the third quarter at 4.07 million shares. On November 12, Flamel reported third-quarter earnings per share of $0.28 on revenue of $47.3 million, exceeding EPS estimates by $0.05. Revenue surged by 1,531% year-over-year as the company’s Bloxiverz and Vazculep did well and management reiterated yearly sales guidance in the range of $170 million to $185 million. Moreover, the company licensed its LiquiTime drug delivery platform to Perrigo for the OTC drug market for an upfront payment of $6 million and additional milestone payments and mid-single digit royalties. Among the funds we track, 17 reported stakes equal to nearly 29% of the company’s outstanding stock as of the end of September.

#4 Aetna Inc (NYSE:AET)

Shares held (as of September 30): 636,039
Total Value (as of September 30): $69.59 million
Percent of Portfolio (as of September 30): 2.69%

Deerfield is a fan of Aetna Inc (NYSE:AET), as the fund upped its holdings in the company by 72% to 636,039 shares. Given that more Americans have health insurance than before because of the Affordable Care Act, analysts are bullish on Aetna. One analyst has a ‘Strong Buy’ rating, 15 have a ‘Buy’ rating, and three have a ‘Hold’ rating, with a consensus price target of $132.61 per share among them. Larry Robbins’ Glenview Capital owned 5.56 million shares of Aetna at the end of the third quarter.

#3 GlaxoSmithKline plc (ADR) (NYSE:GSK)

Shares held (as of September 30): 2.28 million
Total Value (as of September 30): $87.77 million
Percent of Portfolio (as of September 30): 3.40%

Deerfield raised its stake in GlaxoSmithKline plc (ADR) (NYSE:GSK) by 65% to 2.28 million shares in the third quarter. Shares of the British company sport an attractive 5.84% dividend yield, and trade at 15.82 times forward earnings, lower than the S&P 500’s forward P/E of around 17. Hedge funds are becoming more optimistic on the drug company, as the number of funds long the stock (among those we track) increased by two quarter-over-quarter to 35 at the end of September. Among the believers is Ken Fisher’s Fisher Asset Management, with a holding of 11.53 million shares.

#2 NxStage Medical, Inc. (NASDAQ:NXTM)

Shares held (as of September 30): 6.32 million
Total Value (as of September 30): $99.64 million
Percent of Portfolio (as of September 30): 3.85%

NxStage Medical, Inc. (NASDAQ:NXTM)’s System One is the only FDA-approved portable hemodialysis system for home use. Studies show that more frequent dialysis from System One produces better healthcare outcomes than peritoneal dialysis. Due to strong System One sales, NXTM’s home division has grown by 15%+ per year for the last decade. Management anticipates the strong growth to continue and for the company to be profitable in three years. NXTM reported better-than-expected results for the third quarter, with a loss of $0.03 per share on revenue of $86.52 million, beating estimates by $0.05 and $4.46 million, respectively. Sales jumped by 14.9% year-over-year, driven by robust Home and Critical Care product demand. Because of the strong results, NXTM increased full-year 2015 revenue guidance to the range of $332 million to $333 million from the previous $324 million – $328 million range, and also trimmed its full year net loss estimate to between $15 million and $16 million from the previous guidance of $18 million – $20 million. However, when looking at other funds we track, we see that their interest in NxStage Medical declined in the third quarter, as 20 funds reported long positions in the company, compared to 30 a quarter earlier.

#1 Horizon Pharma PLC (NASDAQ:HZNP)

Shares held (as of September 30): 8.08 million
Total Value (as of September 30): $160.17 million
Percent of Portfolio (as of September 30): 6.20%

Although Deerfield trimmed its holding in Horizon Pharma PLC (NASDAQ:HZNP) by 34%, it still had 8.08 million shares, good for 6.2% of its portfolio. After withdrawing its merger offer for Depomed, Horizon Pharma continued its acquisition spree by buying Crealta Holdings LLC for $510 million in cash. Crealta Holdings LLC makes Krystexxa, a later-line enzyme indicated for the treatment of chronic gout for adults. Management estimates the acquisition will add between $45 million and $50 million to Horizon’s non-GAAP EBITDA in the first year after it’s completed. Shares of Horizon have stabilized in recent weeks as investors worry less about potential drug pricing regulation from Washington. A total of 44 funds from our database, amassed stakes equal to nearly 36% of the company’s outstanding stock heading into the fourth quarter.

Disclosure: none