Billionaire Seth Klarman’s Top Biotech Stock Picks

A high majority of hedge fund managers delivered a terrible performance in 2015 and widely-known value investor Seth Klarman was no exception. Baupost Group, a $27 billion Boston-based hedge fund founded in 1982 by Klarman, saw the value of its public equity portfolio decline by 6.7% in 2015, whereas the value of the fund’s private investments gained 2.4%. Similarly, our data shows that Baupost’s long positions in companies with market capitalizations above $1 billion lost 27.7% in 2015, based on their weighted average returns in each quarter. This marked just the third losing year for the fund since its inception, so clearly this is not the end for value investing.

Seth Klarman is considered an expert in said value investing, and this is one of the key reasons Insider Monkey pays close attention to his equity portfolio. Having said that, the following article will discuss the billionaire’s top biotech stocks as of the end of the fourth quarter. The biotech sector has been hit particularly hard over the past year or so, with the S&P Biotechnology Select Industry Index losing 29.88% over the past 12-month period, which has investors and analysts believing that the industry is in a bottoming-out phase at the moment. Without further ado, let’s take a glimpse at the top biotech stocks of value investor Klarman for early 2016.

At Insider Monkey, we track around 730 hedge funds and institutional investors. Through extensive backtests, we have determined that imitating some of the stocks that these investors are collectively bullish on can help retail investors generate double digits of alpha per year. The key is to focus on the small-cap picks of these funds, which are usually less followed by the broader market and allow for larger price inefficiencies (see more details about our small-cap strategy).

#5 Forward Pharma A/S (NASDAQ:FWP)

 – Shares Owned by Baupost Group (as of December 31): 5.37 Million

 – Value of Baupost’s Holding (as of December 31): $101.98 Million

Seth Klarman’s hedge fund held its position in Forward Pharma A/S (NASDAQ:FWP) unchanged during the fourth quarter of 2015 at approximately 5.37 million shares. The shares of the Denmark-based biopharmaceutical company are downby  nearly 12% year-to-date and are trading significantly below their IPO of $21.00 per American Depositary Share (ADS). The company completed its IPO during the fourth quarter of 2014, selling 11.2 million of ADSs to the public. Forward Pharma A/S has been preparing to start a Phase 3 clinical trial on FP187, which is a proprietary formulation of dimethyl fumarate (DMF) for the treatment of multiple sclerosis patients. The company anticipates that the trial will begin in the first half of 2016, which is somewhat dependent on the outcome of other trials and studies. Jim Simons’ Renaissance Technologies LLC upped its position in Forward Pharma A/S (NASDAQ:FWP) by 2,620 ADSs during the fourth quarter, ending the year with 17,120 units.

#4 Theravance Biopharma Inc. (NASDAQ:TBPH)

 – Shares Owned by Baupost Group (as of December 31): 6.42 Million

 – Value of Baupost’s Holding (as of December 31): $105.22 Million

The Boston-based hedge fund also didn’t make any adjustments to its position in Theravance Biopharma Inc. (NASDAQ:TBPH) during the October-to-December quarter, with its stake remaining at 6.42 million shares. The company’s first commercial product, VIBATIV (telavancin), is an antibiotic approved in the United States, Europe, and other countries for particularly difficult-to-treat infections. To be more detailed, VIBATIV is approved in the U.S. for the treatment of adult patients who suffer from complication skin and skin structure infections caused by susceptible Gram-positive bacteria, but the drug is also approved for the treatment of adult patients with hospital-acquired and ventilator-associated bacterial pneumonia. The company generated product sales of $5.72 million for the nine months that ended September 30, up from $3.11 million reported for the same period of the prior year. Earlier this year, Theravance Biopharma announced the commercial launch of VIBATIV in Canada, which should boost product sales in the upcoming quarters. The shares of the company are down by 25% over the past 12 months after having lost 9% since the beginning of 2016. Royce & Associates, founded by Chuck Royce, cut its stake in Theravance Biopharma Inc. (NASDAQ:TBPH) by 105,100 shares during the final quarter of 2015, ending the year with 408,600 shares.

#3 Keryx Biopharmaceuticals (NASDAQ:KERX)

 – Shares Owned by Baupost Group (as of December 31): 25.79 Million

 – Value of Baupost’s Holding (as of December 31): $130.25 Million

Keryx Biopharmaceuticals (NASDAQ:KERX) was Seth Klarman’s tenth-largest equity position at the end of the fourth quarter. The value-oriented investor again made no changes to his position during the quarter. It should be mentioned that this equity position weighed significantly on Baupost’s performance in 2015, as the stock has lost more than 70% over the past year due to weaker-than-expected Auryxia sales. The Boston-based fund purchased its initial position in the company at an average price of $14.50, but Keryx shares are currently trading below $4.00 per share. As revealed by a recent letter to investors, Baupost Group overestimated the potential of the company’s approved drug for the control of phosphorous levels in patients with chronic kidney disease on dialysis. The company generated gross Auryxia product sales of only $8.80 million during the first three quarters of 2015, while analysts anticipated sales of as much as $1 billion in the U.S. for the entire year. Nonetheless, billionaire Klarman believes that the market “took a much harsher view [on Auryxia sales] and punished the stock” and remains confident in the long-term potential of the drug. Eric Bannasch’s Cadian Capital Management reported owning 600,000 shares of Keryx Biopharmaceuticals (NASDAQ:KERX) as of December 31.

#2 Atara Biotherapeutics Inc. (NASDAQ:ATRA)

 – Shares Owned by Baupost Group (as of December 31): 5.36 Million

 – Value of Baupost’s Holding (as of December 31): $141.55 Million

Baupost Group owned 5.36 million shares of Atara Biotherapeutics Inc. (NASDAQ:ATRA) on December 31, a stake that remained unchanged quarter-over-quarter. The shares of the clinical-stage biopharmaceutical company are 41% in the red year-to-date, mainly owing to disappointing clinical results related to its lead molecularly targeted product candidate, PINTA 745. The product candidate was being studied in a Phase 2 clinical trial for protein energy wasting, a condition that affects numerous end-stage renal disease patients, but failed to improve the physical condition, level of inflammation or blood sugar in patients under its Phase 2 proof-of-concept trial. Nevertheless, the company is not solely dependent on PINTA 745, so it determined that it would not continue the development of the drug and would instead focus its resources and efforts on advancing other candidates. Jacob Gottlieb’s Visium Asset Management LP reduced its exposure to Atara Biotherapeutics Inc. (NASDAQ:ATRA) by nearly 110,000 shares during the fourth quarter, remaining with 722,626 shares.

#1 Innoviva Inc. (NASDAQ:INVA)

 – Shares Owned by Baupost Group (as of December 31): 19.82 Million

 – Value of Baupost’s Holding (as of December 31): $208.86 Million

Innoviva Inc. (NASDAQ:INVA) is Seth Klarman’s top biotech stock as of the end of 2015. The value investor’s fund left its position in the royalty management company unchanged during the final quarter of 2015. Last month, Theravance Inc. changed its name to Innoviva Inc., a move that comes a year and a half after the company spunoff from pharmaceutical research and development company Theravance Biopharma. The company’s portfolio includes late-stage partnered respiratory assets partnered with Glaxo Group Limited. Innoviva recently registered its first profitable quarter since inception, generating fourth quarter net income of $4.3 million or $0.04 per share. That represented a big improvement from the net loss of $4.6 million reported for the third quarter of 2015. At the same time, the company received royalties amounting to $26.1 million during the fourth quarter, which marked an increase of 55% quarter-over-quarter. Iridian Asset Management, founded by David Cohen and Harold Levy, reported owning 12.42 million shares of Innoviva Inc. (NASDAQ:INVA) through its 13F for the fourth quarter.

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