Horizon Pharma Inc (NASDAQ:HZNP) made an attempt in May to acquire the small drugmaker Depomed Inc (NASDAQ:DEPO), which the latter quickly shot down by refusing to open talks with the former, while also rejecting the initial bid from it. This has pushed Horizon Pharma Inc (NASDAQ:HZNP) to go hostile with its takeover efforts, with the firm offering $29.25 per Depomed share directly to its shareholders in a proposed all-stock transaction valued at around $3 billion. This offer price from Horizon Pharma represents a 42% premium to shareholders from Depomed’s closing share price on Monday; those shares have since soared by over 36% in early trading this morning. Horizon Pharma’s own stock has been flying high since the beginning of this year, gaining a whopping 168% so far. In the last three months the stock has jumped more than 30%. However this morning it’s dipped by more than 2% on news of the offer.
The smart money has been increasingly along for the ride when it comes to Horizon’s success. At the end of first trimester, a total of 43 of the hedge funds tracked by Insider Monkey had a total investment of $1.23 billion in Horizon Pharma Inc (NASDAQ:HZNP). That compares to just 28 hedge funds with approximately $598 million in shares of the stock at the end of 2014. This indicates a 106% increase in hedge fund investment in the stock during the first three months of the year and a greater than 50% increase in overall fund ownership. During the same period, Horizon Pharma Inc (NASDAQ:HZNP)’s stock gained 60%, so hedge funds were buying up shares even as the stock was rapidly appreciating, showing extreme bullishness on the company. Shares have gained more than 25% since the end of the first quarter.
Most investors don’t understand hedge funds and indicators that are based on hedge fund and insider activity. They ignore hedge funds because of their recent poor performance in the long-running bull market. Our research indicates that hedge funds underperformed because they aren’t 100% long. Hedge fund fees are also very large compared to the returns generated and they reduce the net returns enjoyed (or not) by investors. We uncovered through extensive research that hedge funds’ long positions in small-cap stocks actually greatly outperformed the market from 1999 to 2012, and built a system around this. The 15 most popular small-cap stocks among funds beat the S&P 500 Index by more than 80 percentage points since the end of August 2012 when this system went live, returning a cumulative 135% vs. less than 55% for the S&P 500 Index (read the details).
Likewise, other research (not our own) has shown insider purchases are also effective piggybacking methods for investors that lead to greater returns. There were no insider purchases of the shares of Horizon, but a Director at Horizon Pharma, Jeff Himawan sold around 2.17 million shares of the company in March.
Let’s take a look at the recent hedge fund activity in Horizon Pharma Inc (NASDAQ:HZNP).
What have hedge funds been doing with Horizon Pharma Inc (NASDAQ:HZNP)?
Of the funds tracked by Insider Monkey, Deerfield Management, led by James E. Flynn, holds the biggest position in Horizon Pharma Inc (NASDAQ:HZNP). Deerfield Management holds around 12.8 million shares valued at $332.2 million as of the end of March, comprising 10.8% of its 13F portfolio. Coming in second is Kevin Kotler of Broadfin Capital, with around 7.0 million shares; 14.3% of his 13F portfolio is allocated to the stock. Remaining hedgies with similar optimism consist of Arthur B Cohen and Joseph Healey’s Healthcor Management LP, Mark Kingdon’s Kingdon Capital, and Jacob Gottlieb’s Visium Asset Management.
As one would reasonably expect, key smart money managers were opening new positions in Horizon Pharma Inc (NASDAQ:HZNP). LionEye Capital Management, led by Stephen V. Raneri, opened up the most valuable position in Horizon Pharma Inc (NASDAQ:HZNP), purchasing 1.9 million shares during the first three months of the year. Carl Goldsmith and Scott Klein’s Beach Point Capital Management also opened a new position in the stock during that time, buying around 1.2 million shares. The other funds with brand new Horizon positions included Scott McLellan‘s Marble Arch Investments, Jason Karp’s Tourbillon Capital Partners, and Joe DiMenna‘s Zweig Dimenna Partners.
Many hedge funds managers were rightly bullish on Horizon Pharma Inc (NASDAQ:HZNP) by the end of the first quarter. The hostile bid for Depomed from Horizon also works in favor of the stock. The bio-pharmaceutical company has shown tremendous growth so far this year, and is aggressively seeking more. Considering the growth potential of this company and bullish hedge fund behavior we recommend buying this stock, especially on its slight dip this morning.
Disclosure: None
