Top Stock Picks of Multi-Billion Dollar, Healthcare-Focused Fund Palo Alto Investors

Palo Alto Investors, founded by Wall Street veteran William Leland Edwards in 1989, is one of the biggest healthcare investment shops in the United States, with over $2 billion in assets under management. The California-based investment firm mainly invests in micro-cap and small-cap equities, as these stocks are not as closely scrutinized by sell-side research firms. Palo Alto Investors reckons that the healthcare sector is misunderstood and undervalued by the market, and has great potential for appreciation in the future. This statement justifies the 98% exposure to the healthcare sector that its U.S-focused equity portfolio has. It appears that the turbulent third quarter propelled Palo Alto to lift its exposure to the healthcare sector and U.S equities in general, as the healthcare-focused firm initiated four new positions and added to 17 existing ones, while selling out of only two positions and reducing its holdings in seven stocks during the three-month period. Without further ado, let’s lay out the list of top stock picks owned by William Edwards’ investment firm at the end of the third quarter.

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#5 BioMarin Pharmaceutical Inc. (NASDAQ:BMRN)

-Shares Owned by Palo Alto Investors (as of September 30): 1.67 Million

-Value of Holding (as of September 30): $175.52 Million

Palo Alto Investors raised its position in BioMarin Pharmaceutical Inc. (NASDAQ:BMRN) by a mere 6,400 shares during the third quarter, with the position accounting for 8.44% of the fund’s equity portfolio as of September 30. The company develops innovative biopharmaceuticals for the treatment of serious diseases and medical conditions, and currently has five approved products and several clinical and pre-clinical product candidates. Earlier this year, the company announced the acceptance of a New Drug Application (NDA) for Kyndrisa, which is designed to treat a fatal disease called Duchenne Muscular Dystrophy. However, a recent FDA advisory panel diminished the odds that the FDA will approve the drug, mainly owing to worries about the drug’s safety. Meanwhile, the stock is up by 7% for the year. Baker Bros. Advisors, founded by Julian Baker and Felix Baker, reported owning 4.08 million shares of BioMarin Pharmaceutical Inc. (NASDAQ:BMRN) via the latest round of 13Fs.

#4 United Therapeutics Corporation (NASDAQ:UTHR)

-Shares Owned by Palo Alto Investors (as of September 30): 1.52 Million

-Value of Holding (as of September 30): $200.04 Million

The California-based investment firm upped its stake in United Therapeutics Corporation (NASDAQ:UTHR) by 84,326 shares during the turbulent third quarter. The biotechnology company focuses on the development of products for the treatment of chronic cardiovascular and infectious diseases and cancer, and has seen its shares advance by 17% in the fourth quarter. The company’s portfolio of five commercial products generated revenue of $386.22 million for the third quarter, which was up by $56.3 million quarter-over-quarter. Its net income came to $9.24 per share, compared with a net loss of $0.53 per share a year earlier. Cliff Asness’ AQR Capital Management owns 1.30 million shares of United Therapeutics Corporation (NASDAQ:UTHR) as of September 30.

#3 ABIOMED Inc. (NASDAQ:ABMD)

-Shares Owned by Palo Alto Investors (as of September 30): 2.83 Million

-Value of Holding (as of September 30): $262.23 Million

William Edwards’ investment firm owned 2.83 million shares of ABIOMED Inc. (NASDAQ:ABMD) on September 30, which denoted an increase of 84,700 shares quarter-over-quarter. The shares of the provider of mechanical circulatory support devices have gained 113% this year even though they slumped significantly following the release of the company’s fiscal year 2016 second-quarter earnings at the end of October. The company delivered earnings per share of $0.17 on revenue of $76.4 million, beating expectations of EPS of $0.16 on revenue of $74.59 million. The market reacted surprisingly negatively to the stronger-than-expected earnings report, which appears to have triggered an exit point for most investors. Revenue from the company’s family of Impella products accounted for almost 94% of the third-quarter revenue figure. Renaissance Technologies cut its position in ABIOMED Inc. (NASDAQ:ABMD) by 20% during the September quarter, remaining with nearly 364,000 shares.

#2 Clovis Oncology Inc. (NASDAQ:CLVS)

-Shares Owned by Palo Alto Investors (as of September 30): 3.11 Million

-Value of Holding (as of September 30): $285.89 Million

Palo Alto significantly increased its exposure to Clovis Oncology Inc. (NASDAQ:CLVS) during the latest quarter, as the California-based firm lifted its stake in the company by 707,691 shares. In July 2015, the biopharmaceutical company focused on developing anti-cancer agents submitted an NDA and a Marketing Authorization Application for rociletinib, but the company recently announced a delay in the approval process for this drug candidate after meeting with the FDA. The agency asked Clovis to provide additional clinical data for use in the efficacy analysis, which sent the company’s shares plummeting by more than 70%. Meanwhile, the stock is down by 44% for the year, greatly affecting Palo Alto Investors’ performance. The additional information asked for by the FDA may lead to the delay of the drug’s approval, which was anticipated to be communicated by March 30, 2016. In a freshly-filed 13G, Zach Schreiber’s PointState Capital L.P. reported owning 2.95 million shares of Clovis Oncology Inc. (NASDAQ:CLVS), accounting for 7.7% of the company’s common stock (read more details).

#1 Anacor Pharmaceuticals Inc. (NASDAQ:ANAC)

-Shares Owned by Palo Alto Investors (as of September 30): 2.58 Million

-Value of Holding (as of September 30): $303.59 Million

Anacor Pharmaceuticals Inc. (NASDAQ:ANAC) represents William Edwards’ top stock pick at the end of the third quarter, even though his investment firm greatly cut its position in the company. Palo Alto reduced its stake in Anacor by 523,873 shares during the July-to-September period, ending the quarter with 2.58 million shares. The biopharmaceutical company has had a great year in terms of stock performance, with its shares advancing by a whopping 250% in 2015. The company’s drug KERYDIN, for the treatment of onychomycosis of the toenails was approved by the FDA in July 2014, and is distributed and commercialized in the U.S by the dermatology division of Sandoz. Anacor reported $19.1 million of gross profit sharing revenue in the third quarter. Israel Englander’s Millennium Management was bullish on Anacor Pharmaceuticals Inc. (NASDAQ:ANAC) by the end of the latest quarter, holding 1.19 million shares.

Disclosure: None