Sam Isaly’s Orbimed Advisors is a large health care fund investing in companies at various stages from venture capital to the public markets. The fund tends to focus on pharmaceutical and medical device companies as opposed to hospitals and insurers- products, one might say, as opposed to services. This is a strong contrast to most funds’ thesis on healthcare; in fact, only two of Orbimed’s ten largest 13F holdings made our list of the most popular healthcare stocks among hedge funds and one of those- Express Scripts- is a rare services company in Isaly’s portfolio.
The nature of healthcare investments requires Orbimed to take on significant regulatory risks and make sure they are up to date on major announcements and other events which can have an enormous impact on an individual stock’s price. Of course, the fund also has to ensure that its analysts understand the regulatory environment as well as the science behind a company’s product line. Isaly himself has been covering healthcare for over 40 years, roughly half of which has come as an investment manager and half of which came as an analyst for companies such as Chase Manhattan , Merrill Lynch, and Legg Mason.
Orbimed’s grand strategy is to run a portfolio that is more or less balanced between large healthcare companies and smaller-cap companies where the investment team believes that future growth is not being reflected in the current price. When we look at its most recent portfolio, we see a fairly small number of positions worth over $100 million and then a fairly broad range of healthcare stocks. In addition, while there were some large increases or decreases many of Orbimed’s top picks remained the same and we’d assume that most of them are still close to the top of the portfolio. Read on for a brief look at the fund’s five largest holdings or see the full list of stocks it reported owning.
Isaly and his team owned 8.9 million shares of Pfizer Inc. (NYSE:PFE), making the drug manufacturer its top stock pick. Pfizer’s trailing P/E is 20, though Wall Street analysts expect earnings to be much better this year and so the stock trades at only 11 times consensus earnings for 2013. Revenue and earnings did decline at double-digit rates in the third quarter of 2012 versus a year earlier. Pfizer was also Fisher Asset Management’s favorite stock; that fund is managed by billionaire Ken Fisher (check out Fisher’s stock picks).
Orbimed reported a position of 4.6 million shares in Merck & Co., Inc. (NYSE:MRK), a 33% increase from three months earlier. Point State Capital, which is managed by Sean Cullinan and other former portfolio managers at billionaire Stanley Druckenmiller’s Duquesne Capital, was also a heavy buyer of Merck. Research more stocks Point State was buying. Merck, similarly to Pfizer, carries trailing and forward P/E multiples of 19 and 12 respectively. Its financial performance has been steady.
Gilead Sciences, Inc. (NASDAQ:GILD), a $59 billion market cap biotech company, was another of Isaly’s picks. Revenue was up 14% in Gilead’s most recent quarterly report compared to the third quarter of 2011, though net income actually decreased 9%. The stock is up 74% in the last year, bringing the valuation to 24 times trailing earnings. Billionaire Steve Cohen’s SAC Capital Advisors increased its stake in Gilead to a total of 3.1 million shares (find Cohen’s favorite stocks).
Orbimed also liked Abbott Laboratories (NYSE:ABT), with 2.5 million shares in its portfolio after moderate buying activity in Q3. Analyst consensus for 2013 implies a P/E multiple of 17; revenue was about flat in the third quarter of 2012 versus a year earlier. Southeastern Asset Management, managed by Mason Hawkins, was another major holder of the stock.
The fund trimmed its stake in Onyx Pharmaceuticals, Inc. (NASDAQ:ONXX) by 8% but the $5.6 billion market cap biotech company remained one of Orbimed’s top five picks. Adage Capital Management, run by Phil Gross and Robert Atchinson, moved heavily into Onyx (see more stocks Adage likes). Onyx is actually expected to be unprofitable for both 2012 and 2013, but is up 88% in the last year.