We recently compiled a list of the 10 Largest Biotech Hedge Funds and Their Top Stock Picks. In this article, we are going to take a look at where Ascendis Pharma A/S (NASDAQ:ASND) stands against the other biotech stocks.

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.

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).

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.”

Overall ASND ranks 2nd on our list of hedge funds’ top biotech stock picks. While we acknowledge the potential of ASND as an investment, 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 ASND but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

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Disclosure: None. This article is originally published at Insider Monkey.