Palo Alto’s Top Picks for This Year Following Impressive 2015 Returns

William Leland Edwards‘ Palo Alto Investors has about $2.22 billion worth of regulatory assets under its management. According to our calculations, which take into account the fund’s top equity holdings in companies with a market cap over $1.0 billion, the healthcare-focused fund registered a loss of about 10% in the fourth quarter, but that didn’t stop it from returning 27.6% for the full year 2015, based on its 23 long positions, which is impressive given the recent downturn in the healthcare sector. Let’s see what the fund is betting on this year.

We track prominent investors and hedge funds because our research has shown that historically their stock picks delivered superior risk-adjusted returns. Our research showed that imitating 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 Clovis Oncology Inc (NASDAQ:CLVS)

– Shares Owned by Palo Alto (as of December 31): 3.55 Million

– Value of Holding (as of December 31): $124.17 Million

During the fourth quarter, Palo Alto upped its stake in the $813 million biopharmaceutical company by 14%. So far this year, Clovis Oncology Inc (NASDAQ:CLVS)’s stock has cratered by nearly 47%. However, in its recently-announced fourth quarter financial results, the company managed to beat the EPS estimates by $0.21 and delivered a loss of $2.23 per share. Investors lost confidence in the company in November when the US Food and Drug Administration delayed its review of Rociletinib, which gave AstraZeneca’s competing lung cancer drug a chance to reach pharmacy shelves earlier. However, Rociletinib is also being assessed in the EU with a decision expected in the middle of this year and the company has another promising candidate in late-stage trials, Rucaparib, for the treatment of ovarian cancer. Jeremy Green‘s Redmile Group also believes that Clovis Oncology, Inc (NASDAQ:CLVS) might be oversold and hence increased its holding in the company by 88% to 1.80 million shares during the last three months of 2015.

#4 BioMarin Pharmaceutical Inc. (NASDAQ:BMRN)

– Shares Owned by Palo Alto (as of December 31): 1.34 Million

– Value of Holding (as of December 31): $140.05 Million

After reducing its stake in BioMarin Pharmaceutical Inc. (NASDAQ:BMRN) by 19% during the October-December period Palo Alto’s BioMarin holding amassed 7.79% of its equity portfolio. The stock is down by nearly 22% for this year and by 23% over the last 12 months. In its financial results for the fourth quarter, BioMarin delivered EPS of $0.39 which was significantly lower than analysts’ expectations of $0.99. However, quarterly revenues of $227.9 million were $3.52 million higher than the estimates. BioMarin faced a setback when the FDA rejected Kyndrisa, the company’s drug for the treatment of Duchenne Muscular Dystrophy (DMD). Paul Orlin and Alex Porter‘s Amici Capital slashed its stake in BioMarin Pharmaceutical Inc. (NASDAQ:BMRN) by 35% on the quarter to 889,400 shares held at the end of last year.

#3 United Therapeutics Corporation (NASDAQ:UTHR)

– Shares Owned by Palo Alto (as of December 31): 1.52 Million

– Value of Holding (as of December 31): $237.84 Million

Palo Alto slightly trimmed its stake in the Silver Spring-based biotechnology firm by selling 5,600 shares during the fourth quarter. United Therapeutics Corporation (NASDAQ:UTHR)’s stock is down by more than 21% over the last 52 weeks, but it has recently been upgraded by Standpoint Research to ‘Buy’ from ‘Hold’ and given a price target of $148, which provides an upside of 22% to the current levels. The company has also settled a dispute with Teva Pharmaceuticals regarding United’s pulmonary hypertension drug Remodulin, of which Teva can now manufacture a generic version. Moreover, the company also managed to beat both the top and bottom line estimates for its fourth quarter financial results. Cliff Asness‘ AQR Capital Management raised its position in United Therapeutics Corporation (NASDAQ:UTHR) by 38% to 1.79 million shares during the last three months of 2015.

#2 Anacor Pharmaceuticals Inc (NASDAQ:ANAC)

– Shares Owned by Palo Alto (as of December 31): 2.19 Million

– Value of Holding (as of December 31): $247.09 Million

The fund cut its holding in Anacor Pharmaceuticals Inc (NASDAQ:ANAC) by 15% during the fourth quarter and shares are down by 43% so far this year amid the company missing both the top- and bottom-line estimates for the last quarter. However, Anacor Pharmaceuticals’ stock surged by more than 250% in 2015 on the back of the possibility of its eczema drug crisaborole receiving regulatory approval. Julian Baker and Felix Baker‘s Baker Bros. Advisors is the largest stockholder of  Anacor Pharmaceuticals Inc (NASDAQ:ANAC) within our database holding about 4.20 million shares valued at $474.31 million.

#1 ABIOMED, Inc. (NASDAQ:ABMD)

– Shares Owned by Palo Alto (as of December 31): 2.19 Million

– Value of Holding (as of December 31): $247.09 Million

During the fourth quarter, Palo Alto inched up its exposure to ABIOMED by 2%. Over the last 52 weeks, shares of the provider of temporary percutaneous mechanical circulatory support devices have climbed by more than 31%. Revenue for the company’s third fiscal quarter, ended December 31, came in 38% higher on the year and the guidance for the fiscal 2016 has also been raised to $326 million from a range of $305 million to $315 million. Another shareholder of the company is Drew Cupps’ Cupps Capital Management, which holds about 277,800 shares of ABIOMED, Inc. (NASDAQ:ABMD), according to its latest 13F filing.

Disclosure: None