This Healthcare Fund Just Had A Huge Q3: Here’s How

The mainstream media likes taking shots at hedge funds because they are easy targets. These investment vehicles are usually run by very wealthy individuals, who often make loads of money even when their portfolios underperform. This is especially true in recent years, as hedge funds’ performance has been underwhelming. However, there’s a reason people entrust their money to these fund managers and that is because many of them have a history of outperformance, of using their immense resources to find undervalued and/or misunderstood stocks and profiting from them. It is inevitable that there will be stretches of underperformance, but in the long-term, these investment vehicles have proven their merit.

Such is the case with James A. Silverman‘s Opaleye Management, whose June 30 long positions in eight stocks with a market cap of at least $1 billion delivered monstrous third-quarter weighted average returns of 38.3%. As the fund held many large positions in micro-cap stocks which were not included in our returns calculations, it should be noted that the fund’s actual returns could be quite different than our estimates.

In this article we’ll take a look at four of the healthcare-focused fund’s top picks in $1 billion+ stocks, which helped propel it to those huge returns.

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Let’s start with Ariad Pharmaceuticals, Inc. (NASDAQ:ARIA), a popular $1.73 billion market cap company which has robust average daily trading volume of over 8 million shares. Opaleye held a $9.24 million position in the stock on June 30, its third-most valuable position at the time. Ariad’s shares skyrocketed by 85% during the third quarter, making it one of the top performers in the fund’s portfolio. However, a health sector downturn in October has resulted in a sizable chunk of those gains having been given up. Ariad Pharmaceuticals, Inc. (NASDAQ:ARIA) announced the FDA’s acceptance of its New Drug Application for brigatinib earlier this week.

At Q2’s end, a total of 27 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 4% from the first quarter of 2016. Alex Denner’s Sarissa Capital Management held the largest position in Ariad Pharmaceuticals, Inc. (NASDAQ:ARIA), worth close to $95 million, comprising 27% of its 13F portfolio. The second largest stake was held by Consonance Capital Management, managed by Mitchell Blutt, which held a $65.4 million position.

Opaleye Management owned 330,000 shares of FibroGen Inc (NASDAQ:FGEN) on June 30, with the position being its fourth-most valuable. Shares of the company gained 26% during the third quarter, but have also trended down during the fourth quarter. FibroGen Inc (NASDAQ:FGEN) announced this week that it has completed the enrollment for its roxadustat clinical trials in China. The trial will test the treatment’s efficacy at combating anemia in patients with chronic kidney disease.

So we know Opaleye Managemen is a fan of FibroGen Inc (NASDAQ:FGEN), but let’s check out what its peers think of the company. As of June 30, 7.30% of Fibrogen’s shares were held by 17 funds that we follow, making them overweight the stock. That compares to 15 funds long the stock a quarter earlier. Phil Gross and Robert Atchinson’s Adage Capital Management held the biggest position in the equity among those funds, amounting to 2.74% of its float. Oleg Nodelman’s EcoR1 Capital owned 1.26% of the float, while Lei Zhang’s Hillhouse Capital owned 0.39% of the outstanding shares.

We’ll check out two other top picks of Opaleye Management on the next page.

Next up is Agios Pharmaceuticals Inc (NASDAQ:AGIO), which ranked as Opaleye’s 14th-most valuable holding on June 30, with a value of $3.56 million. Agios used a September surge to return 25% during the quarter, but has drifted down slightly in Q4. Agios reported its financial results for the third quarter today, so let’s pore over its numbers to see how it fared during the quarter. Revenue came in at $8.99 million, which represented a 64% increase from the same quarter of the company’s previous fiscal year. In terms of its bottom-line results, they fared worse than a year earlier, with Agios Pharmaceuticals Inc (NASDAQ:AGIO) reporting an EPS loss of $1.63, compared to a loss of $1.07 a year earlier.

According to Insider Monkey’s hedge fund database, Balyasny Asset Management, managed by Dmitry Balyasny, holds the biggest position in Agios Pharmaceuticals Inc (NASDAQ:AGIO). Balyasny Asset Management has a $13.6 million position in the stock. The second most bullish fund manager is Baker Bros. Advisors, managed by Julian Baker and Felix Baker, which holds an $8.7 million position. Some other hedge funds and institutional investors that are bullish include Eli Casdin’s Casdin Capital and Israel Englander’s Millennium Management.

Lastly is Horizon Pharma PLC (NASDAQ:HZNP), which is a popular stock among the healthcare funds in our database. Overall,  27 of the hedge funds tracked by Insider Monkey held long positions in this stock, though this was a decline of 23% from one quarter earlier. James E. Flynn’s Deerfield Management had the most valuable position in Horizon Pharma Inc (NASDAQ:HZNP), worth close to $226.3 million, accounting for 8.9% of its total 13F portfolio. Coming in second was Broadfin Capital, led by Kevin Kotler, holding a $113 million position; 11% of its 13F portfolio was allocated to the stock. Remaining peers that held long positions encompassed Mark Kingdon’s Kingdon Capital, Rob Citrone’s Discovery Capital Management, and Carl Goldsmith and Scott Klein’s Beach Point Capital Management.

Opaleye’s position in the stock amounted to 200,000 shares on June 30, and represented a new position opened during the second quarter. Horizon Pharma PLC (NASDAQ:HZNP) shares gained 7.7% during the third quarter but slid in October after the company lowered its adjusted EBITDA guidance and non-GAAP net sales for its full fiscal year. The company is now calling for adjusted EBITDA of $450 million to $460 million and non-GAAP net sales at the low-end of its previous guidance of $1.025 billion to $1.050 billion.

Disclosure: None