Those who seek to profit from shorting strategies should keep a close eye on Kyle Bass’ war against the pharmaceutical industry. The founder of Hayman Capital Management has been filing inter-partes-reviews (IPRs) challenging the patents of numerous drugmakers that “allege innovation”. Bass told CNBC’s “Squawk on the Street” that he is targeting “things that are silly that shouldn’t be backed by the U.S. Patent Office”. He also mentioned his plans to file IPRs on less than 1% of the drugs on the market, claiming that “the ones that we are going after are the kind of egregious examples of evergreening, which end up costing the public at large tens of billions of dollars a year in prescription drug prices”.
But let’s first get you acknowledged with Insider Monkey’s sphere of activity. Besides providing high quality evidence-based articles, we also pay attention to hedge funds’ moves because our research has shown that hedge funds are extremely talented at picking stocks on the long side of their portfolios. It is true that hedge fund investors have been underperforming the market in recent years. However, this was mainly because hedge funds’ short stock picks lost a ton of money during the bull market that started in March 2009. Hedge fund investors also paid an arm and a leg for the services that they received. We have been tracking the performance of hedge funds’ 15 most popular small-cap stock picks in real time since the end of August 2012. These stocks have returned 118% since then and outperformed the S&P 500 Index by around 60 percentage points (see the details here). That’s why we believe it is important to pay attention to hedge fund sentiment; we also don’t like paying huge fees.
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Getting back to our story, Kyle Bass’ activist short strategy has not turned out successful thus far, but he is not going to give up anytime soon. Earlier this month, the Patent Trial and Appeal Board rejected the hedge fund manager’s petitions to review a patent for Biogen Inc. (NASDAQ:BIIB)’s Tecfidera. Acorda Therapeutics Inc. (NASDAQ:ACOR) represents another target of the Coalition for Affordable Drugs, formed by Bass. The Patent Trial and Appeal Board also declined to review two cases on Acorda, saying that the information provided by Bass was not publicly available. However, he has already refiled the IPRs on Acorda, which clearly indicates that he will keep up the fight.
Despite fighting the pharmaceutical industry, Bass’ Hayman Capital Management initiated a number of long positions within the industry during the second quarter. Specifically, the investment firm acquired an 836,593 share-stake in Perrigo Company Public Limited Company (NYSE:PRGO), a new stake in Mylan N.V. (NASDAQ:MYL) that consists of 780,251 shares, and a 63,675 share-position in Pfizer Inc. (NYSE:PFE), to name just a few. Therefore, the aforementioned companies will surely not serve as potential targets of Bass’ campaign.
Kyle Bass has also warned that that the Chinese banking sector will most likely experience significant losses that might hit China’s wounded economy, in an interview with CNBC’s “Squawk on the Street” earlier this week. The hedge fund manager claims that: “those that are watching whether Chinese stocks go up or down aren’t paying attention, in my opinion, to what the real problem is“, while “the real problem is the loans in this banking sector”. The Chinese banking sector has been growing exponentially over the last few years, with bank assets growing by 400% since 2007; therefore, Bass suggests that “when you run a bank expansion that aggressively, that quickly, you’re going to have some losses“. In fact, the investor considers that now is the beginning of a non-performing loans cycle in Asia. As a result, potential losses could eventually force China to use its foreign exchange reserves and raise new debt to recapitalize the banking system, according to Hayman Capital’s founder.
Let’s now take a brief look at Hayman Capital Management’s top stock picks at the end of the second quarter. Perrigo Company Public Limited Company (NYSE:PRGO) and Mylan N.V. (NASDAQ:MYL) are the investment firm’s largest holdings, while the spot of the third-largest holding was occupied by NMI Holdings Inc. (NASDAQ:NMIH). Kyle Bass’ Hayman Capital owns 5.50 million shares of the company as of June 30, accounting for 5.2% of its portfolio.
Disclosure: None
