RA Capital’s Top Q2 Performers; Predicts Big Things Ahead for Pharma Stocks

RA Capital Management LLC is a crossover fund manager that invests in public and private healthcare and life science companies developing drugs, medical devices and diagnostics. The Massachusetts-based asset manager was co-founded by Peter Kolchinsky, who received PhD in Virology from Harvard University, in 2001. The investment firm operates as a sophisticated life sciences think-tank that finances private, IPO and follow-on financings for a portfolio of early-stage biotech companies.

In a second-quarter letter to investors, RA Capital Management said that the biotech sector was in a bubble in 2015, “not because valuations were unreasonable, since at any point in time one can point to examples of companies valued too high (even now) or too low (even then), but because generalist investors likely did not know what they were buying.” The following snapshot from RA Capital’s second-quarter letter to investors provides a brief prognosis for the biotech sector:

“(The) biotech sector continues to innovate and build on its accomplishments, addressing humanity’s insatiable need for solutions to its healthcare problems. We draw our optimism from the long-term relevance and value of our sector, from its productivity, growing experience, increasing versatility, and importance to the US economy. Regardless of political rhetoric, we believe that our industry will overcome its image problem and be seen and valued for the engine of good that it is. The pendulum has swung too far and will swing back.”

Although Mr. Kolchinsky’s RA Capital Management was down by 16.4% this year through the end of June, retail investors looking for “pearls” within the biotech space should definitely have a look at the Massachusetts-based firm’s portfolio of investments in publicly traded companies. That said, Insider Monkey decided to compile a list of positive contributors to RA Capital Management’s performance in the second quarter.

Through extensive research, we determined that imitating some of the picks of hedge funds and other institutional investors can help generate market-beating returns over the long run. The key is to focus on the small-cap picks of these investors, since they are usually less followed by the broader market and are less price-efficient. Our backtests that covered the period between 1999 and 2012, showed that following the 15 most popular small-caps among hedge funds can help a retail investor beat the market by an average of 95 basis points per month (see more details here).

Celator Pharmaceuticals Inc. (NASDAQ:CPXX)

– Shares Owned by RA Capital Management (as of June 30): 0

– Value of RA Capital Management’s Holding (as of June 30): 0

– Q2 Return: 173.6%

Celator Pharmaceuticals Inc. (NASDAQ:CPXX) was definitely one of the biggest positive contributors to RA Capital Management’s performance in the second quarter of 2016. In late May, Jazz Pharmaceuticals plc (NASDAQ:JAZZ) agreed to buy the oncology-focused biopharmaceutical company for approximately $1.5 billion, a huge figure for a company that has a promising leukemia drug but no revenue. Under the terms of the agreement, Celator shareholders are set to receive $30.25 per share in cash for each share owned. RA Capital Management sold out its entire stake of 1.41 million shares of Celator during the second quarter, most likely after the announcement of the $1.5 billion-deal. The Massachusetts-based asset manager acquired the 1.41 million-share stake during the first quarter of 2016, so the entire stake was bought for less than $13 a share. In early 2016, Celator shares were trading for less than $2 a share, but positive clinical results from a clinical trial of a leukemia drug released in mid-March drove the value of Celator’s stock much higher. Tom Sandell’s Sandell Asset Management owns 448,293 shares of Celator Pharmaceuticals Inc. (NASDAQ:CPXX) as of June 30.

Ardelyx Inc. (NASDAQ:ARDX)

– Shares Owned by RA Capital Management (as of June 30): 2.30 Million

– Value of RA Capital Management’s Holding (as of June 30): $17.88 Million

– Q2 Return: 12.4%

RA Capital Management LLC added 1.73 million shares of Ardelyx Inc. (NASDAQ:ARDX) to its existing position in the company during the April-to-June period, finishing the second quarter with 2.30 million shares valued at $17.88 million. The clinical-stage biopharmaceutical company focused on the discovery and development of minimally-systemic therapeutic drugs for the treatment of gastrointestinal and cardio-renal diseases has seen the value of its stock plunge by 42% since the beginning of the year. The company’s lead product candidate, called tenapanor, is currently being studies in two pivotal Phase 3 clinical studies in patients suffering with constipation-predominant irritable bowel syndrome, or IBS-C. Fresh estimates show that approximately 4.4 million people in the United States suffer with IBS-C, with roughly 1.00 million being already diagnosed with it. There are an additional 6.6 million IBS-C patients in Europe and 3.4 million in Japan. James E. Flynn’s Deerfield Management reported ownership of 275,000 shares of Ardelyx Inc. (NASDAQ:ARDX) in its latest 13F.

AveXis Inc. (NASDAQ:AVXS)

– Shares Owned by RA Capital Management (as of June 30): 1.34 Million

– Value of RA Capital Management’s Holding (as of June 30): $50.92 Million

– Q2 Return: 39.6%

The crossover fund manager owned 1.34 million shares of AveXis Inc. (NASDAQ:AVXS) at the end of the second quarter, a mere 22,200 shares less than at the end of the first quarter. The position was worth $50.92 million on June 30 and made up 7.1% of RA Capital’s entire portfolio. Peter Kolchinsky’s firm disclosed a new position in AveXis in its 13F for the first three months of the year. In February, the clinical-stage gene therapy company focused on developing treatments for patients suffering from rare and life-threatening neurological genetic diseases completed its initial public offering by issuing and selling 4.75 million shares at a public offering price of $20.00 per share. The value of AveXis shares have more than doubled since the IPO. The company’s initial product candidate is AVXS-101, a gene therapy product candidate currently in a Phase 1 clinical trial for the treatment of spinal muscular atrophy Type 1, the leading genetic cause of infant mortality. Adage Capital Management, founded by Phillip Gross and Robert Atchinson, has nearly 638,000 shares of AveXis Inc. (NASDAQ:AVXS) among its holdings as of June 30.

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Axovant Sciences Ltd (NYSE:AXON)

– Shares Owned by RA Capital Management (as of June 30): 5.00 Million

– Value of RA Capital Management’s Holding (as of June 30): $64.20 Million

– Q2 Return: 11.9%

Axovant Sciences Ltd (NYSE:AXON) was the third-largest holding in RA Capital Management’s set of positions at the end of June, accounting for 8.9% of the asset manager’s overall portfolio. Mr. Kolchinsky and his team did not reshuffle the 5.00 million-share stake in Axovant during the three months that ended June 30, which was valued at $64.20 million on the last day of June. Axovant Sciences is a clinical-stage biopharmaceutical company focused on developing novel therapeutics for the treatment of dementia. The company’s lead product candidate, called intepirdine, is currently being developed for the treatment of mild-to-moderate Alzheimer’s disease and dementia with Lewy bodies, or DLB. As drug companies are testing new methods to persuade more people to participate in clinical trials for promising medicines, Axovant Sciences teamed up with ride-hailing service Lyft Inc. to transport patients to and from clinics to study a prospective Alzheimer’s drug. Ken Griffin’s Citadel Advisors LLC owns approximately 573,000 shares of Axovant Sciences Ltd (NYSE:AXON) as of the end of the second quarter.

Wave Life Sciences Ltd (NASDAQ:WVE)

– Shares Owned by RA Capital Management (as of June 30): 7.09 Million

– Value of RA Capital Management’s Holding (as of June 30): $146.66 Million

– Q2 Return: 49.1%

Wave Life Sciences Ltd (NASDAQ:WVE) was the biggest position in RA Capital’s portfolio at the end of the June quarter. The 7.09 million-share position, untouched during the April-June period, was worth $146.66 million on June 30 and accounted for 20.3% of the asset manager’s overall portfolio. The preclinical biotechnology company uses a proprietary synthetic chemistry drug development platform to design and develop a pipeline of nucleic acid therapeutic candidates. The company’s most advanced therapeutic programs are in Huntington’s disease and Duchenne muscular dystrophy. Wave Life Sciences plans to file investigational new drug applications with the FDA for its lead candidates in late 2016 and mid-2017. There were four hedge funds followed by Insider Monkey invested in Wave Life Sciences at the end of March, amassing 43% of the company’s total number of outstanding shares. The company’s stock has gained 30% since the start of the year. Jim Simons’ Renaissance Technologies LLC was the owner of 35,700 shares of Wave Life Sciences Ltd (NASDAQ:WVE) at the end of June.

Disclosure: None