Mariner Investment’s Top Healthcare Picks

Among some 800 hedge funds we track at Insider Monkey, we seldom come across funds that specialize in investing in a particular sector or have a penchant for investing in companies that trade above or below a particular market capitalization. However, it’s rare to find a fund that has a long track record of  investing  primarily in two or three different sectors that are uncorrelated with each other. And that’s exactly what makes William Michaelcheck‘s Mariner Investment Group special. In the past few years that we have been tracking the equity portfolio of the New York-based fund, we found that the fund normally allocates a large amount of capital it manages only towards two sectors – finance and healthcare. The latest 13F filing submitted by Mariner Investment Group with the Securities and Exchange Commission (SEC) goes on to reinforce this notion. According to the filing, the fund’s US equity portfolio at the end of March was worth $362.55 million and 59% and 31% of it comprised of stocks from financial and healthcare sectors, respectively. Since healthcare is one of the sectors that Mariner Investment Group specializes in and stocks from the sector have been beaten down aggressively this year, in this post, we will go through the fund’s top five healthcare stock picks at the end of the first quarter and try to decipher what makes it bullish on them.

We track prominent investors and hedge funds because our research has shown that historically their stock picks delivered superior risk-adjusted returns. This is especially true in the small-cap space. The 15 most popular small-cap stocks among a select group of investors delivered a monthly alpha of 80 basis points between 1999 and 2012 (see the details here).

#5 Baxalta Inc (NYSE:BXLT)

 – Shares held by Mariner Investment Group (as of March 31): 142,000

 – Value of Holding (as of March 31): $5.73 million

Let’s start with Baxalta Inc (NYSE:BXLT), in which Mariner Investment Group increased its stake by 137% during the fourth quarter. Shares of the biopharmaceutical company are currently trading up by over 8% year-to-date with over half of those gains coming in after the company reported its first-quarter numbers on April 28. Baxalta Inc (NYSE:BXLT), was spun off from Baxter International Inc (NYSE:BAX) in July last year and at the beginning of 2016 UK-based drugmaker Shire announced that it would acquire the company in a $32 billion cash-and-stock deal, which valued Baxalta at $47.50 per share. After the Allergan-Pfizer merger was called off in April, Shire reiterated its commitment to acquire Baxalta and said that it expects the deal to get completed in the middle of 2016 as it had previously announced. For its first quarter, Baxalta beat analysts’ estimates of EPS of $0.46 on revenue of $1.47 billion by reporting EPS of $0.47 on revenue of $1.50 billion. Andy Redleaf‘s Whitebox Advisors initiated a stake in Baxalta Inc during the first quarter by purchasing 500,000 shares.

#4 Jazz Pharmaceuticals plc – Ordinary Shares (NASDAQ:JAZZ)

 – Shares held by Mariner Investment Group (as of March 31): 45,000

 – Value of Holding (as of March 31): $5.87 million

Though Mariner Investment Group didn’t increase its stake in Jazz Pharmaceuticals plc – Ordinary Shares (NASDAQ:JAZZ) during the first quarter, it would be patting itself on the back for not selling any shares in the company either. That’s because shares of Jazz Pharmaceuticals plc – Ordinary Shares (NASDAQ:JAZZ) saw an over 15% rally in April and thanks to that are currently trading up by over 4% year-to-date. The rally in the stock started on March  after the FDA approved the company’s drug ‘Defitelio’ for the treatment of patients who develop hepatic veno-occlusive disease (VOD) with additional lung or kidney problems, following hematopoietic stem cell transplantation (HSCT). The company scored another minor victory in mid-April when the U.S. Patent and Trade Office dismissed claims 1-18 of the 34 claims filed by India-based Ranbaxy against the validity of a patent awarded to Jazz Pharmaceuticals ‘s top-selling narcolepsy drug, Xyrem. This was followed by another positive news near the end of the month, when on April 25, analysts at SunTrust Robinson Humphrey upgraded the stock to a ‘Buy’ from ‘Neutral’ and also raised their price target on it to $200 from $164.

#3 BioMarin Pharmaceutical Inc. (NASDAQ:BMRN)

 – Shares held by Mariner Investment Group (as of March 31): 76,672

 – Value of Holding (as of March 31): $6.32 million

Moving on, Mariner Investment Group made use of the over 20% drop in BioMarin Pharmaceutical Inc. (NASDAQ:BMRN)’s stock during the first quarter by boosting its stake in the company by 57%. After dropping over 50% from their peak in July last year, shares of BioMarin Pharmaceutical Inc. (NASDAQ:BMRN) managed to bounce back in February, but have been trading a range ever since. On April 28, the company reported its fiscal 2016 first-quarter results, declaring a per share loss of $0.53 on revenue of $236.70 million versus the Street’s expectation of a per share loss of $0.85 on revenue of $240.21 million. For the same quarter of the previous financial year, BioMarin Pharmaceutical had reported a per share loss of $0.43 on revenue of $201.30 million. Following the earnings release, on April 29, analysts at Credit Suisse reiterated their ‘Buy’ rating and $114 price target on the stock. Hedge funds that reduced their stake in the company during the first quarter included Columbus Circle Investors, which brought its holding down by 17% to 221,658 shares.

#2 Celgene Corporation (NASDAQ:CELG)

 – Shares held by Mariner Investment Group (as of March 31): 66,000

 – Value of Holding (as of March 31): $6.61 million

Despite an over 16% drop in its stock during the first quarter, Celgene Corporation (NASDAQ:CELG) jumped four spots quarter-over-quarter to become Mariner Investment Group’s ninth largest equity holding at the end of March, owing to the fund increasing its stake in the company by 25% during that period. In April, Celgene Corporation (NASDAQ:CELG)’s stock rose considerably going into the company’s earnings, but has given up most of those gains after the company reported its first quarter numbers and currently trades down 16% year-to-date. While analysts had projected the company to report EPS of $1.29 on revenue of $2.59 billion for the quarter, Celgene Corporation posted EPS of $1.32 on revenue of $2.51. Despite the tumble that the stock has seen in the past few months, several analysts feel that Celgene Corporation’s stock is still expensive and given the lack of catalysts that could propel it higher, they expect it to trade in a range going forward. On April 29, analysts at Morgan Stanley reiterated their Hold’ rating and $127 price target on the stock. Russell Lucas‘ Lucas Capital Management trimmed its holding in Celgene Corporation by 4% to 22,334 shares during the January-March period.

#1 Gilead Sciences, Inc. (NASDAQ:GILD)

– Shares held by Mariner Investment Group (as of March 31): 115,300

– Value of Holding (as of March 31): $10.59 million

Gilead Sciences, Inc. (NASDAQ:GILD) remained Mariner Investment Group’s top healthcare pick at the end of March. The fund increasing its stake in the company by 37% during the first quarter, helping it to jump five spots during the quarter and become Mariner Investment Group’s third largest equity holding at the end of that period. Like most healthcare stocks, Gilead Sciences, Inc. also fell heavily at the beginning of 2016, but it managed to recoup those losses and was trading flat for the year up until the company came out with its first quarter numbers. Following the earnings release, share of the company plummeted heavily and are currently trading down by 18% year-to-date. After five consecutive quarters of beating analysts estimate, the Street was again expecting Gilead Sciences to beat the consensus estimate of EPS of $3.13 on revenue of $8.08 billion, however, the company ended up missing EPS estimate by $0.10 and revenue estimate by $0.28 billion. A large part of the difference between the estimate and the actual numbers posted by the company can be attributed to the $200 million hit that Gilead Sciences took during the first quarter after a jury found it guilty of infringing on two patents held by Merck & Co., Inc. (NYSE:MRK) and awarded that amount to the latter. Fortunately for Gilead Sciences, just two days after it posted its results, Bloomberg reported that a Federal judge has re-opened the case amid allegations that a senior scientist who testified against the company had lied under oath. Bernard Selz‘s Selz Capital also increased its stake in the company by 16% to 150,000 shares during the first quarter.

Disclosure: None