Biotechnology is a very interesting industry to invest in, but also very complex. If you are looking for stocks that are most likely to see their value surge, then your best bet would be to start with biotech companies. The industry focuses on development of novel therapies and drugs that can treat various conditions, therefore if a company succeeds in releasing a marketable product or shows strong results in clinical trials, its stock will skyrocket. However, you should also keep in mind that most biotech companies have no profits and their revenues are often immaterial. There’s also a very high chance that the company you want to invest in will burn through all of its cash without having anything meaningful to show for it.
Conducting a traditional analysis of a company’s fundamentals is unlikely to yield any meaningful results, although they should not be overlooked, particularly if you are examining a small company that is more likely to run out of cash. However, you must pay more attention at what products the company is working on, the results of trials, estimates of the probability that the product will be approved by the FDA or other regulators. In addition, it won’t hurt to look at the disease that the drug or therapy aims to treat, how many people are suffering from it and what is the market potential of the product.
Therefore, analyzing a biotech stock can be a daunting task that requires a lot of research and a thorough understanding of the industry and the development process of a drug. To save you some time, we have selected a bunch of biotech stocks that the top biotech-focused hedge funds have invested in. The collective hedge fund sentiment towards a stock is an important metric that should be taken into account when looking for best companies to invest in. As our research has shown, stocks that smart money investors are collectively bullish on usually outperform their peers and the broader market.
Based on this research, Insider Monkey has developed an investment strategy that uses the hedge fund sentiment from the best-performing hedge funds and determines the best stocks to invest in. Since it was launched in May 2014, our strategy has returned over 74%, beating the S&P 500 ETF (SPY) by more than 20 percentage points. The stock picks from our strategy are shared in our premium quarterly newsletters that you can access free of charge for 14 days.
To identify the biotech stocks to invest in based on the sentiment of industry-focused hedge funds, we took into account five funds: OrbiMed Advisors, Julian Baker and Felix Baker’s Baker Bros Advisors, Christopher Medlock James‘s Partner Fund Management, James E. Flynn‘s Deerfield Management, and Peter Kolchinsky‘s RA Capital Management. These funds have equity portfolios in the billions of dollars and all of them invest solely in the healthcare sector, with the exception of Partner Fund, which has more than 70% allocated to the sector. The stocks that we selected have four of these funds holding long positions.
With this in mind, let’s proceed to the next page, where we will take a closer look at five stocks that top biotech-focused funds are bullish on.
In Clementia Pharmaceuticals Inc (NASDAQ:CMTA), OrbiMed holds the largest stake, which contains 10.43 million shares. Other funds long the stock include Baker Bros. (250,000 shares), Partner Fund (311,755 shares), and RA Capital (584,400 shares). Clementia Pharmaceuticals Inc (NASDAQ:CMTA) specializes in developing treatments for people with ultra-rare bone disorders. The company is currently conducting enrollment for Phase 3 Trial in evaluating palovarotene for the treatment of patients with Fibrodysplasia Ossificans Progressiva, disease that causes fibrous tissue to be ossified when damaged. In April, Clementia Pharmaceuticals Inc (NASDAQ:CMTA) also started a Phase 2 trial assessing palovarotene in pediatric patients with multiple osteochondromas (benign bone tumors). The completion of the trial is estimated in January 2021. Palovarotene, Clementia Pharmaceuticals Inc (NASDAQ:CMTA)’s lead candidate, is a retinoic acid receptor γ agonist that blocks the abnormal growth of bone in soft tissue and it has received orphan drug designation from the FDA and EMA.
Ascendis Pharma A/S (NASDAQ:ASND) saw OrbiMed, Baker Bros., Deerfield, and RA Capital holding stock at the end of last year. Among these funds, RA Capital disclosed the largest position that contained 5.58 million shares, followed by OrbiMed with a 4.37 million-share position, Baker Bros. with 2.62 million shares, and Deerfield, which owns 789,000 shares. Ascendis Pharma A/S (NASDAQ:ASND) is working on three rare disease endocrinology programs that use its TransCon technology, which aims to extend the duration of a drug’s action in the body and improve its benefit. The company expects to see full-line data from its ongoing phase 1 trial of TransCon PTH (for hypoparathyroidism), top-line from planned phase 1 trial of TransCon CNP (for the treatment of achondroplasia, the most common form of dwarfism). In addition, Ascendis Pharma A/S (NASDAQ:ASND) anticipated to present top-line data from its phase 3 heiGHt Trial for TransCon Growth Hormone.
Partner Fund is one of the top shareholders of Aerie Pharmaceuticals Inc (NASDAQ:AERI), holding a stake of 2.61 million shares. It is followed by OrbiMed with a position containing 1.33 million shares, Deerfield Management with 484,100 shares and Baker Bros with 299,360 shares. However, it’s important to point out that Deerfield also reported ownership of 5.04 million shares underlying convertible notes. Aerie Pharmaceuticals Inc (NASDAQ:AERI) focuses on the development and marketing of therapies for the treatment of eye diseases. In December 2017, the FDA approved Aerie Pharmaceuticals Inc (NASDAQ:AERI)’s first product Rhopressa for the reduction of elevated intraocular pressure and at the end of April, the company launched the product for sale. For the fourth quarter, Aerie Pharmaceuticals (NASDAQ:AERI) reported a net loss of $1.38 per share, versus expectations of a loss of $1.27 and it had cash and equivalents of almost $250 million.
Then there is argenx NV – ADR (NASDAQ:ARGX), a clinical-stage biotech company focused on developing antibody-based therapies. In argenx NV – ADR (NASDAQ:ARGX), Baker Bros. Advisors disclosed ownership of 961,750 shares, followed by OrbiMed, Deerfield, and RA Capital with stakes containing 500,000 shares, 365,960 shares, and 75,820 shares, respectively. In March, argenx NV – ADR (NASDAQ:ARGX) received orphan drug status in the EU for ARGX-113 for the treatment of myasthenia gravis. The orphan drug status offers argenx NV – ADR (NASDAQ:ARGX) 10-year exclusivity in the EU if the drug is approved. The ARGX-113 also received FDA orphan drug designation, which gives a seven-year period of market exclusivity.
In bluebird bio Inc (NASDAQ:BLUE), OrbiMed reported a 384,050-share stake, while Baker Bros., Partner Fund, and Deerfield disclosed holding 200,000 shares, 139,790 shares, and 80,000 shares, respectively. Bluebird bio Inc (NASDAQ:BLUE) develops gene therapies for severe genetic and rare diseases. In March, bluebird bio Inc (NASDAQ:BLUE) teamed up with Celgene (NASDAQ:CELG) to co-develop CAR T bb2121, a drug that is currently in Phase 3 development for the treatment of multiple myeloma. The companies will equally share costs and profits in the US and bluebird bio Inc (NASDAQ:BLUE) stands to receive milestone payments and royalties from sales outside the US. In addition, bluebird bio Inc (NASDAQ:BLUE) has a number of other products under various phases of development.