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Kevin Kotler’s Healthcare Fund Broadfin Capital Just Had A Disastrous Q1

Though 2016 hasn’t been great for the overall hedge fund industry so far, it is turning out to be an especially terrible year for biotech-focused hedge funds. After witnessing a multi-year rally, the biopharmaceutical sector began a steep decline in the second-half of 2015 which it has yet to recover from. The severe decline that the sector has witnessed can be gauged from the returns of the S&P Pharmaceuticals Select Industry Index, which is currently trading down by over 20% this year. Among the hedge funds which have been hit the worst by this downfall is Kevin Kotler‘s Broadfin Capital. Our analysis of Broadfin Capital’s 13F holdings in companies worth at least $1 billion shows that the seven qualifying long positions held by the fund at the end of 2015 delivered a weighted average loss of 32.1% in the first quarter. Considering the magnitude of the losses suffered by the fund’s stock picks, in this article we are going to focus on its top five equity holdings going into 2016 and analyze how they have contributes to the fund’s poor performance in Q1.

We track prominent investors and 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. 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).

Kevin Kotler
Kevin Kotler
Broadfin Capital

#5 Retrophin Inc (NASDAQ:RTRX)

 – Shares Owned by Broadfin Capital (as of December 31): 2.96 million

 – Value of Holding (as of December 31): $57.1 million

Amid a near 40% decline in Retrophin Inc (NASDAQ:RTRX)’s stock during the second-half of 2015, Broadfin Capital displayed its conviction in it by increasing its stake by 21% in the third quarter and a further 14% in the fourth quarter. Sadly, its conviction hasn’t paid off yet this year, as Retrophin Inc (NASDAQ:RTRX) has lost over one-fourth of its market capitalization so far in 2016. Among the funds which made the right decision by reducing their stake in the company substantially during the fourth quarter was John Overdeck and David Siegel‘s Two Sigma Advisors, which cut its holding by 42% to 114,715 shares. For the fourth quarter, Retrophin Inc (NASDAQ:RTRX) managed to beat analysts’ expectation of a loss per share of $0.22 on revenue of $29.40 million by declaring EPS of $0.07 on revenue of $30.40 million. On March 9, analysts at Leerink Swann reiterated their ‘Outperform’ rating and $27 price target on the stock, which represents a potential upside of 88% from its current price.

#4 Heron Therapeutics Inc (NASDAQ:HRTX)

 – Shares Owned by Broadfin Capital (as of December 31): 2.23 million

 – Value of Holding (as of December 31): $59.6 million

Though Broadfin Capital had reduced its stake in Heron Therapeutics Inc (NASDAQ:HRTX) by 23% during the third quarter, it turned more bullish on the company during the fourth quarter, upping its stake in the stock by 20%. Notable investors in Heron Therapeutics Inc (NASDAQ:HRTX) at the end of 2015 included billionaire Ken Griffin‘s Citadel Investment Group, which initiated its stake in the fourth quarter, purchasing 328,985 shares of the company. Though shares of Heron Therapeutics Inc have declined by almost 30% year-to-date, analysts think that they could experience a big up move if the FDA approves its preventive drug for chemotherapy-induced nausea and vomiting (CINV), SUSTOL, this month. SUSTOL has been rejected twice by the FDA, in 2010 and 2013. However, Heron Therapeutics Inc addressed the concerns raised by the FDA in the complete response letter of 2013 and resubmitted the New Drug Application for SUSTOL last July.

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On the next page we examine three more battered stocks that dragged Broadfin Capital down during the first quarter.

#3 Nevro Corp (NYSE:NVRO)

 – Shares Owned by Broadfin Capital (as of December 31): 1.2 million

 – Value of Holding (as of December 31): $81.11 million

Nevro Corp (NYSE:NVRO) is the only company in this list in which Broadfin Capital reduced its stake during the fourth quarter, by 26%. Despite that, the fund was the largest shareholder of the company in our system at the end of December. Billionaire Israel Englander’s Millenium Management was one of the funds which initiated a stake in Nevro Corp (NYSE:NVRO) during the fourth quarter, purchasing 311,037 shares. Nevro Corp (NYSE:NVRO)’s stock ended the first quarter with a loss of 16.6%, but the 9.32% gains it has enjoyed in the last three trading sessions have brought its year-to-date loss down to 8%. Even though the sales of the company’s Senza implantable SCS (spinal cord stimulation) system have been quite good since its launch last June, analysts are concerned that the influx of new players in the SCS system space will significantly impact the company’s top-line. On March 29, analysts at Northland Securities initiated coverage on the stock with a ‘Market Perform’ rating and $48 price target, which represents potential downside of 22% from the stock’s current price.

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#2 Valeant Pharmaceuticals Intl Inc (NYSE:VRX)

 – Shares Owned by Broadfin Capital (as of December 31): 900,000

 – Value of Holding (as of December 31): $91.48 million

If there is one stock that has burned the most number of hedge funds this year, it has to be Valeant Pharmaceuticals Intl Inc (NYSE:VRX). Despite the greater than 50% decline in the stock during the second-half of 2015, Valeant Pharmaceuticals Intl Inc (NYSE:VRX) remained one of the most popular companies among hedge funds going into 2016, with 83 out of the 785 actively reporting hedge funds in our system owning a stake in the company at the end of December. Unfortunately, Broadfin Capital was among the funds which initiated a stake in the company during the fourth quarter, likely anticipating that a floor had been reached. That was anything but the case however, as Valeant Pharmaceuticals Intl Inc (NYSE:VRX) lost more than two-thirds of its market capitalization in the first quarter, with much of that decline coming after the company reported its fourth quarter financial results on March 14. Most analysts are advising investors to stay away from the stock at the moment, until a clearer picture of its financial status emerges. Another hedge fund which initiated a stake in Valeant during the fourth quarter was Ahmet Okumus‘ Okumus Fund Management, which purchased 1.87 million shares.

#1 Horizon Pharma PLC (NASDAQ:HZNP)

 – Shares Owned by Broadfin Capital (as of December 31): 8.13 million

 – Value of Holding (as of December 31): $176.2 million

Horizon Pharma PLC (NASDAQ:HZNP) has been Broadfin Capital’s largest equity holding since the end of 2014. During the fourth quarter, the fund increased its stake in the company by 22%. Like other pharmaceutical stocks, Horizon Pharma PLC (NASDAQ:HZNP)’s stock also suffered a large decline during the first quarter, of 23.5%. However, analysts are generally quite bullish on the company in relation to its peers. The reasons for their bullishness stem from the company’s strong drug pipeline and the low valuation its stock currently trades at, consisting of a forward P/E ratio of 6.18. Furthermore, they also think that the company is in a decent financial position for future M&A deals. The 11 leading analysts on the Street who cover the stock currently have an average rating of ‘Overweight’ and an average price target of $34.91 on it, which represents a nearly two-fold increase from where it currently trades. Stephen Mandel‘s Lone Pine Capital held 15.6 million Horizon Pharma shares on December 31, making it the largest shareholder of the company in our database.

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Disclosure: None