Top Biotech Picks of Best-Performing Hedge Fund of 2015

Bloomberg recently came out with its list of best performing hedge funds of 2015 and the fund that managed to beat all its rivals and emerge at the top of the list was biotech-focused hedge fund Perceptive Advisors. The New York-based fund was founded by Joseph Edelman in 1999. Since its inception, the fund has had several years when it has delivered spectacular returns for its investors. According to Bloomberg, Perceptive Advisors’ flagship fund, Perceptive Life Sciences, gained 51.8% in 2015. Insider Monkey’s analysis of Perceptive Advisors’s 13F holdings in companies with a market capitalization of at least $1 billion revealed that the 44 long positions held by the fund during 2015 delivered a weighted average return of 46.5%. In a recent interview with Bloomberg, Mr. Edelman revealed that the fund mainly invests in small and mid-cap biotech companies because of their phenomenal risk-reward ratio. Moreover, he added that his focus is on ‘removing bias from decision-making’ i.e. if his future expectations for a stock justify buying it at its current price, he doesn’t take into account its prior price movement or the price at which he first bought it. According to Mr. Edelman, to successfully invest  in the biotech space one needs to be objective and fickle minded because ‘new information can come in fairly frequently through data’. In this article, we are going to take a closer look at Edelman’s top five stock picks revealed in Perceptive’s latest 13F filing.

We track prominent 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. Our backtests 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 Retrophin Inc (NASDAQ:RTRX)

– Shares Owned by Perceptive Advisors (as of December 31): 2.58 million

– Value of Holding (as of December 31): $49.76 million

Retrophin Inc (NASDAQ:RTRX) has lost more than half of its market capitalization since August and is trading down by over 24% year-to-date. Following these declines, the stock is now trading at a low trailing price-to-earnings multiple of only 5.33. During the fourth quarter, Perceptive Advisors reduced its stake in the company by 3%. On February 25, Retrophin Inc (NASDAQ:RTRX) reported its fourth-quarter results, declaring EPS of $0.07 on revenue of $30.40 million versus analysts’ projection of a per share loss of $0.22 on revenue of $29.40 million. Paul Orlin and Alex Porter‘s Amici Capital also reduced its stake in the company by 14% to 942,130 shares during the fourth quarter.

#4 TESARO Inc (NASDAQ:TSRO)

– Shares Owned by Perceptive Advisors (as of December 31): 968,659

– Value of Holding (as of December 31): $50.68 million

Amid a nearly 25% rise of the stock, the fund inched down its position in TESARO Inc (NASDAQ:TSRO) by 2% during the fourth quarter. However, so far this year TESARO Inc (NASDAQ:TSRO)’s stock has declined by 30%. The company reported its fourth quarter results on February 25, and while the Street had expected a  loss of $1.63 per share on revenue of $3.45 million, the company posted a loss of $1.89 per share and revenue of $0.23 million. On the same day, the company also announced that it has entered a private placement with institutional investors to sell 4.4 million units of its common stock at $35.19 per share for proceeds worth $155 million. Samuel Isaly‘s Orbimed Advisors increased its stake in the company by 2% to 1.76 million shares during the last three months of 2015.

#3 Sarepta Therapeutics Inc (NASDAQ:SRPT)

– Shares Owned by Perceptive Advisors (as of December 31): 2.24 million

– Value of Holding (as of December 31): $86.45 million

Perceptive Advisors reduced its stake in Sarepta Therapeutics Inc (NASDAQ:SRPT) by 20% during the fourth quarter. Shares of the company have slid by more than 60% so far this year, mainly after the U.S. Food and Drug Administration (FDA) declined BioMarin Pharmaceutical Inc. (NASDAQ:BMRN)’s new drug application for its Duchenne muscular dystrophy (DMD) drug. Since Sarepta Therapeutics Inc (NASDAQ:SRPT) is developing its own DMD drug, ‘Eteplirsen’, investors feared that the FDA might reject it as well. Eteplirsen was reviewed by the FDA on January 22 and although the agency was expected to give its decision on February 26, it announced that it would require more time to review the drug and extended the date to May 26. On February 23, noted biotech analysts Adam Feuerstein published an article suggesting that there is ‘hope’ for Sarepta Therapeutics to receive a favorable ruling for ‘Eteplirsen’ from the FDA. In his interview with Bloomberg, Mr. Edelman said:

“Sarepta is a very controversial name where very few people believe it will be approved this year. There’s good reason for some skepticism, but we think it will be approved. Right now, that stock price reflects an almost overwhelming expectation that it won’t be approved.”

#2 Neurocrine Biosciences, Inc. (NASDAQ:NBIX)

– Shares Owned by Perceptive Advisors (as of December 31): 2.5 million

– Value of Holding (as of December 31): $141.21 million

Amid a 42% rise registered by Neurocrine Biosciences, Inc. (NASDAQ:NBIX)’s stock during the fourth quarter, Perceptive Advisors reduced its stake in the company by 16%. Shares of Neurocrine Biosciences, Inc. (NASDAQ:NBIX) have lost 34% so far this year. For the fourth quarter, the company reported a loss of $0.34 per share, compared to a loss of $0.26 posted for the same quarter of the previous year. For the full year, the company delivered a loss of $1.05 per share, versus a loss of $0.81 registered in 2014. Following the earnings release, analysts at Cowen and Company reiterated their ‘Buy’ rating and $65 price target on the stock. Donald Chiboucis‘ Columbus Circle Investors increased its stake in Neucrine by 39% to 640,417 shares during the October-December period.

#1 Amicus Therapeutics, Inc. (NASDAQ:FOLD)

– Shares Owned by Perceptive Advisors (as of December 31): 15.24 million

– Value of Holding (as of December 31): $147.82 million

Though its stock plummeted by 44% and Perceptive Advisors increased its stake by only 6% during the fourth quarter, Amicus Therapeutics, Inc. (NASDAQ:FOLD) remained the fund’s largest equity holding going into 2016. Shares of Amicus Therapeutics, Inc. (NASDAQ:FOLD) are trading nearly 34% in the red year-to-date. The company came out with its fourth quarter financial numbers on February 26, declaring a per share loss of $1.21 per share, whereas analysts had projected a loss of $0.31. On February 23, analysts at JPMorgan Chase & Co. reiterated their ‘Buy’ rating on the stock, but lowered the price target to $15 from $18, which now represents a potential upside of around 130% from the stock’s current levels. Alan Frazier‘s Frazier Healthcare Partners was among the hedge funds that initiated a stake in Amicus Therapeutics during the fourth quarter and it owns nearly 3 million shares of the company as of December 31.

Disclosure: None