The first quarter is up, and our data analytics show that the top three gainers for the quarter were all biotechnology or biopharmaceutical companies and included Pharmacyclics, Inc. (NASDAQ:PCYC), Horizon Pharma PLC (NASDAQ:HZNP) and Auspex Pharmaceuticals Inc (NASDAQ:ASPX). After a hiccup in March, the health care industry is up by about 155% during the quarter compared to S&P 500’s gains of 1.5% during the same time period. In this article we will take a look at the hedge funds that benefitted the most from these moves, and who had enough insight to include these companies in their portfolios. However, it must be realized that although a win for the fund managers, quarterly gains form a small part of the overall performance of these investment firms.
We think it is important to analyze hedge fund sentiment regarding different companies for many reasons. For one, over the years, many hedge fund managers earned significant wealth by receiving excessive fees in exchange for generating high returns. In order to generate these returns, hedge fund managers need to be very thorough in their research. However, as a side note we should also mention that more and more hedge funds have been significantly underperforming the market lately, due to their popularity and a significant increase in Assets Under Management (around $3 trillion globally). This doesn’t mean that hedge funds are losing their touch at picking stocks, which is why following their activity can still provide some interesting insights for smaller investors. Through backtesting, the founder of Insider Monkey, Dr. Ian Dogan, determined that an equally-weighted portfolio that consists of the 50 most popular stocks among hedge funds underperformed the market by 7 basis points per month between 1999 and 2012 (read more details about our backtests). This is not surprising, since hedge funds tend to invest mostly in large-cap stocks, because of large amounts of cash in assets that require less risk. These stocks are more efficiently priced, hence generate lower returns. On the other hand, a smaller investor can obtain higher returns by investing in the small-cap picks of hedge funds and benefit from their price inefficiencies. During the last 2.5 years, a portfolio that consists of the 15 most popular small-cap ideas of over 700 funds that we track earned 132% in cumulative returns and beat the S&P 500 ETF (SPY) by some 79 percentage points.
Coming back to our top gainers, Pharmacyclics, Inc. (NASDAQ:PCYC) gained the most with quarterly returns standing at 109.35%. Among over 700 hedge funds that we track, 24 disclosed $1.24 billion worth of stock held towards the end of the fourth quarter as compared to 22 funds with $1.25 billion a quarter earlier. Julian Baker and Felix Baker’s Baker Bros. Advisors held the highest stake among these firms with 9.13 million shares valued at $1.12 million.
AbbVie Inc (NYSE:ABBV) outbid Johnson & Johnson (NYSE:JNJ) and paid $20 billion for Pharmacyclics, Inc. (NASDAQ:PCYC) last month. The focus of the deal is the anticancer drug Imbruvica which targets B-cell malignancies and is being jointly researched by Pharmacyclics and Janssen Biotech, a division of Johnson & Johnson.
The second healthcare stock on our list is Horizon Pharma PLC (NASDAQ:HZNP), which gained about 101.47% during the first three months of 2014. A total of 28 funds had an aggregate investment of $597.56 million in the company versus 23 firms with $330.06 million in the previous quarter. A fund manager who profited the most from this price hike in the company’s shares was James E Flynn of Deerfield Management as Horizon was one of his top stock picks. The firm held some 11.70 million shares valued at $150.8 million at the end of the fourth quarter.
Horizon Pharma PLC (NASDAQ:HZNP) recently announced that it was buying Hyperion Therapeutics Inc (NASDAQ:HPTX) for $1.1 billion. According to a statement by the company’s CEO, Timothy Walbert, he expects Hyperion’s orphan disease drugs RAVICTI and BUPHENYL to add $100 million to the company’s adjusted EBIDTA for 2016. Piper Jaffray has recently upgraded the company from ‘Neutral’ to ‘Overweight’ and set a new price target of $31.
The last company on our list of top gainers for the first quarter, Auspex Pharmaceuticals Inc (NASDAQ:ASPX) appreciated by a hefty 91.06% on the heels of a $3.2 billion all-cash merger deal by the Israel-based pharmaceutical company, Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA). Auspex Pharmaceuticals Inc (NASDAQ:ASPX)’s main drug is SD-809 or Austendo which is designed to lower side effects like depression and anxiety, caused by the use of a similar drug Xenazine, among Huntington’s patients. In February this year the company completed enrollment of 90 patients for phase 2/3 clinical trial to test the efficacy of Austendo in treating movement disorders among psychiatric patients. The disorder is caused by the drugs used to treat illnesses such as schizophrenia.
The popularity of the company among hedge funds rose to 3.1% in the fourth quarter with 23 funds having invested some $280.13 million, from 2.4% in the third quarter which saw 16 funds with $131.09 million invested in Auspex Pharmaceuticals Inc (NASDAQ:ASPX). Deerfield Management bagged another victory as it increased its stake in Auspex Pharmaceuticals Inc (NASDAQ:ASPX) by 18% during the fourth quarter to 2.95 million shares and added 1.5 million shares in February, currently holding some 4.4 million shares.
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