Data Show Hedge Funds Like One of these Two Volatile Healthcare Stocks More than the Other

Eli Lilly and Co (NYSE:LLY) and Incyte Corporation (NASDAQ:INCY) are experiencing volatility at Tuesday’s open, initially moving in different directions before both started above yesterday’s close, even though both companies have announced that the results of a Phase 3 study for their rheumatoid arthritis drug are positive. Shares of Eli Lilly opened the day up nearly 1%, and are climbing, as the firms announced that their baricitinib monotherapy was shown to be non-inferior to methotrexate monotherapy in the Phase 3 study based on the ACR20 response rate after 24 weeks of treatment. However, shares of Incyte initially opened down over 1% before paring losses and eventually trading up nearly 2%. Interestingly, the latest round of 13F filings showed that hedge funds are more bullish on one company than the other. Read on to see which company you should bet on based on the hedge fund sentiment. 

At Insider Monkey, we track hedge funds’ moves in order to identify actionable patterns and profit from them. Our research has shown that hedge funds’ large-cap stock picks historically delivered a monthly alpha of six basis points, though these stocks underperformed the S&P 500 Total Return Index by an average of seven basis points per month between 1999 and 2012. On the other hand, the 15 most popular small-cap stocks among hedge funds beat the S&P 500 Index by an average of 95 basis points per month (read more details here). Since the official launch of our small-cap strategy in August 2012, it has performed just as predicted, returning 118% and beating the market by more than 60 percentage points. We believe the data is clear: investors will be better off by focusing on small-cap stocks utilizing hedge fund expertise.

The successful results for the drug being co-developed by Eli Lilly and Co (NYSE:LLY) and Incyte Corporation (NASDAQ:INCY) in this latest Phase 3 study called RA-BEGIN comes after positive results in two other Phase 3 studies. Baricitinib was successful compared to Enbrel and Humira in results announced in 2014, and it also had positive marks in a study against placebo conducted this summer. RA-BEGIN included patients with inadequate responses to traditional disease-modifying antirheumatic drugs and had limited or no prior exposure to methotrexate. Furthermore, both companies said that adverse effects triggered by baricitinib were similar for all treatment groups in the study. A fourth Phase 3 study’s results are expected later this year, and if all goes well, the drug may be approved and marketed in 2016.

The positive opening today for Eli Lilly is welcomed, since it experienced an over 5% decline yesterday as the healthcare sector registered a 2% fall. The decline came on the back of a settlement deal with Sanofi SA (ADR) (NYSE:SNY) regarding the latter’s patents for insulin product Lantus SoloStar. The same cannot be said for Incyte seeing its shares opening down today, extending yesterday’s decline of nearly 11%. On the year, however, it is a different story as Eli Lilly’s stock has gained 14.82% and Incyte’s stock has advanced by an even more impressive 28.13%.

According to Insider Monkey’s data, 43 hedge funds owned about $1.33 billion of Eli Lilly and Co (NYSE:LLY)’s outstanding stock at the end of the second quarter, up by six from the first quarter. Their holdings also increased by 13.61%, amid a 14.92% growth of the stock during the quarter. Moreover, only 1.40% of the Eli Lilly’s float was owned by these funds. Adage Capital Management, led by Phill Gross and Robert Atchinson, owned 2.59 million shares of Eli Lilly at the end of June, up by 49% from the end of March.

Similarly, Incyte Corporation (NASDAQ:INCY) saw more hedge funds going long during the second quarter, according to our data. There were 35 funds, five more than the previous quarter, owning 12.60% or $2.34 billion worth of Incyte shares, up by 15.93% on the quarter at the end of June. Meanwhile, the stock gained just 13.69% during the same period. Julian and Felix Baker‘s Baker Bros. Advisors owned 14.87 million shares of Incyte at the end of the second quarter, up by 1% from the previous quarter.

Disclosure: None