Carbylan Therapeutics Inc (CBYL): Broadfin’s Latest Move and Market Smashing Q1 Returns Inside

To say Kevin Kotler’s Broadfin Capital had exceptional Q1 returns from its 11 long positions in companies valued at $1 billion or more would be a gross understatement. The weighted average returns of said positions was a massive 60.3% during the first quarter, easily outpacing all other hedge funds in our database. In fact only one of the more than 650 other funds we track that filed a 13F for the quarter was even within 15 percentage points of Broadfin, that being Nathan Fischel’s DAFNA Capital Management, which had returns of 51.4% from its 11 qualifying long positions using the same metric.

Kevin Kotler

Broadfin’s actual returns may be quite different from our estimated returns, given the fact that it invests in numerous companies with market caps that fall below the $1 billion threshold. In fact, Broadfin had 72 long positions in its equity portfolio at the end of 2014, and as mentioned, just 11 of those were in billion dollar companies. That makes it a relative rarity among the funds we track, which for the most part are majority invested in larger companies (and for which our returns metric is much more accurate as a result).

Broadfin’s latest move is just another example of the emphasis it puts on micro-cap companies, as it revealed in a recent filing a new 5.2% passive position in Carbylan Therapeutics Inc (NASDAQ:CBYL), a $139 million clinical stage pharmaceutical company. The position consists of 1.25 million shares and makes Broadfin the first investor to file a position on Carbylan Therapeutics Inc (NASDAQ:CBYL) since its IPO a few days ago. Carbylan announced on Tuesday that it had closed its IPO of 14.95 million shares, at a price of $5.00 per share. Carbylan Therapeutics Inc (NASDAQ:CBYL) is focused on developing novel treatment methods that address unmet clinical needs. The company’s leading drug candidate is Hydros-TA, a proprietary treatment for the treatment of join pain that cross-links a combination of a low dose corticosteroid and a hyaluronic acid viscosupplement.

Let’s run through some of Broadfin’s top healthcare picks now, which helped it achieve those massive Q1 returns. Its top pick was Horizon Pharma PLC (NASDAQ:HZNP), in which it held 8.92 million shares. Horizon Pharma PLC (NASDAQ:HZNP) is also involved in the treatment of pain, as well as medicines for athritis and inflammatory diseases. Broadfin had 9.99% exposure to Horizon and that paid big dividends as the stock returned a monumental 101.47% during the first quarter, making it one of the huge gainers of Q1. Shares are now up 130.47% year-to-date, and 166.25% over the past six months. James Flynn’s Deerfield Management also had a large position and good exposure to Horizon Pharma PLC (NASDAQ:HZNP), of over 5%, which helped contribute to that fund’s own solid returns of 29.8% during the first quarter.

In Flamel Technologies S.A. (ADR) (NASDAQ:FLML), Broadfin had a position of 5.15 million shares valued at $88.27 million, its second-largest position. The $629 million pharmaceutical company’s returns did not factor into our returns estimate for Broadfin, with Flamel Technologies S.A. (ADR) (NASDAQ:FLML) returning a solid 5% on the quarter. The France-based company was also a top pick of Flynn’s Deerfield Management, which like Broadfin, is a healthcare-focused fund. The two funds were again the two largest owners of the stock in our database. Overall fund ownership of Flamel Technologies S.A. (ADR) (NASDAQ:FLML) increased to 27 at the end of 2014, from just 18 a quarter previously.

Flynn’s Deerfield did not have a position in Progenics Pharmaceuticals, Inc. (NASDAQ:PGNX), which was Broadfin’s third-largest position. That position was valued at $67.67 million at the end of 2014, and consisted of 8.95 million shares. Progenics Pharmaceuticals, Inc. (NASDAQ:PGNX) is another small pharmaceutical company that did not factor into our returns for Broadfin, and it did not have a good quarter, dipping by 20.9%. Broadfin had the greatest exposure to the stock among funds in our database with billionaire Julian Robertson coming in second.

Those losses were made up for with Broadfin’s fifth-largest position, in Aegerion Pharmaceuticals, Inc. (NASDAQ:AEGR), which was up by 24.9% during the first quarter, though it remains down by more than 40% over the past calendar year. The biggest hit came on October 31 after shares crashed by more than 33% following an earnings report which featured greater than anticipated losses and a lowered outlook for full year 2014. More recently, shares surged by 8% in early February after Sarissa Capital revealed an activist position in Aegerion Pharmaceuticals, Inc. (NASDAQ:AEGR), which eventually led to an agreement between the two parties that will see an independent director added to Aegerion Pharmaceuticals, Inc. (NASDAQ:AEGR)’s board. In addition to Broadfin and Sarissa, billionaires Steve Cohen and Israel Englander also have large positions in Aegerion.

Following the activity of hedge funds like Broadfin can provide many great insights for smaller investors. For one thing, hedge funds looking to invest a lot of money in a company conduct thorough research into the stock, which is usually a costly process that the average investor simply doesn’t have the resources to undertake. We have also discovered through conducting an empirical analysis of hedge funds’ equity portfolios between 1999 and 2012 that funds’ small-cap picks are particularly valuable. The studies showed that imitating a portfolio of the 15 most popular small-cap picks among hedge funds can beat the market by nearly 1.0 percentage point per month on average. Since launching our strategy based on these findings it returned 33.3% in 2012, 53.2% in 2013, and 28.2% in 2014. By comparison, the average return of equity hedge funds amounted to just 4.8%, 11.1%, and 1.4% during those three years, while the S&P 500 ETF (SPY) gained 16%, 32.3%, and 13.5%.

Disclosure: None