The collective stock selections of the brightest minds in healthcare investing.
Investors of all levels are drawn to healthcare companies by the potential for some of the most asymmetric risk/returns in the market. Most are never able to consistently capture those returns. The most savvy in this realm of investing tend to be healthcare-focused hedge funds. Their sophistication is substantial; 76% of the healthcare specialists included in the portfolio have an MD or STEM PhD on their investment team. The collective stock selection of these healthcare specialists highlights some of the most promising areas of medicine. For this piece, we constructed a portfolio with the public holdings of over 50 healthcare specialists. We examine long-term thematic areas such as Oncology, highlight more recent developments such as the rapid growth of genomics research, and discuss how intertwined the two fields have become.
All fund data referenced in this research is sourced exclusively from public regulatory filings. This database omits short equity positions, non-equity securities, and most non-US securities. Simulated performance is based on public holdings linked with market pricing data.
The largest five specialists manage as much capital as the forty-five other funds combined. Due to this, we equally weight the managers and rebalance quarterly. We’ve only included healthcare stocks and positions above 1% of each fund’s public portfolio here in order to focus on meaningful positions.
According to the Global Industry Classification Standard (GICS), Biotech accounts for 20% of the S&P 1500 healthcare Health Care Index.
The increasing Biotech weight coincides with the large profitability growth from biotech companies beginning in 2012. The industry finally became profitable in 2009 after years of operating at a loss.
Healthcare specialists are heavily overweight Biotech, with 56% of their capital allocated. Biotech and Pharma combined reaches 75% of the portfolio.
Healthcare Areas of Focus
Moving a level deeper (Figure: “Healthcare Focus Areas”), we tagged each of the 476 biotech and pharma companies owned in the portfolio since 2011 with a Healthcare focus area. Our tagging represents the exposure to ‘pure-play’ companies. Big pharma and diversified biotech companies (ex. AstraZeneca and Merck) were tagged as diverse due to their multiple research areas and revenue sources. Areas less than 2% of the portfolio were grouped together, such as Ophthalmology, Nephrology, and Dermatology. Non-biotech/pharma companies include insurers, suppliers, and equipment providers.
Among single-focus areas, Oncology is clearly dominant at 24% of the portfolio, followed by Neurology (7%), Genomics (6%), and Rare Disease (5%).
Isolating the portfolio’s top 50 positions, weights in Oncology and Neurology are even larger, confirming conviction in these areas.
By looking at the portfolio’s full history, we see that exposure to oncology-focused companies is now at an all-time high.
In the figure below, we break Oncology down by solution approach. Last year we wrote about the growing exposure to companies researching and developing immuno-oncology (IO) solutions, and the trend has continued. Today, half of the capital allocated to Oncology is invested in companies involved in immuno-oncology.
Immuno-oncology aims to activate the body’s own immune cells to recognize and destroy cancer cells, as opposed to chemotherapy drugs, which target both cancer and healthy cells directly.
“This is a fundamental change in the way that we think about cancer therapy,” says Dr. Jedd Wolchok, Chief of Melanoma and Immunotherapeutic Services at Memorial Sloan Kettering. (NYT)
The largest IO position in the portfolio, Immunomedics, is having an eventful year on leadership and partnership fronts. Recently appointed CEO Michael Pehl and CCO Brendan Delaney were direct hires from Celgene, the portfolio’s second largest IO position. They served as president and vice president, respectively, for Celgene’s well-known hematology and oncology franchise. New CTO Dr. Morris Rosenberg was brought on early this year from the fourth largest IO position, Seattle Genetics. This summer was active with partnerships; Immunomedics announced cancer collaborations with Clovis Oncology in June and AstraZeneca in July.
Looking at the chemotherapy side, here are the top positions:
Chemotherapy is moving toward a more precise, personalized form of cancer treatment. Traditional chemotherapy is non-specific and targets rapidly dividing cells, both cancerous and healthy cells. New treatments that (a) incorporate genomic testing and (b) target a specific process within a cancer cell are more effective and have less systemic side effects. Chemotherapy treatments informed by genomics testing are now possible, as the speed has increased, and the cost of sequencing has fallen rapidly.
Loxo, the largest position in the portfolio, is exploring genomic testing and “developing treatments for people with cancers that are caused by a single inappropriate DNA change, known as an oncogenic driver.” Mirati uses genomic tumor profiling combined with kinase inhibitors to target the genetic changes in the tumor cells that cause uncontrolled growth.
Cancer is not the only area where this precise, genomics-based approach to treatment is being applied. Genomics is proliferating across many areas of medicine.…
The Year of Genomics
The rise of genomics in the Healthcare space is perfectly exemplified by Medicare & Medicaid’s determination that gene sequencing will now be covered. “CMS finalized a National Coverage Determination that covers diagnostic laboratory tests using Next Generation Sequencing (NGS) for patients with advanced cancer” (CMS.gov).
Genomics is the fastest growing focus area in the portfolio, especially in the last 18 months.
Genomics companies are moving in directions including gene therapy, RNA interference (RNAi), and gene editing. The goal of gene therapy is to introduce new or correct genes into cells with abnormal genes. New genes are delivered through vectors, such as a virus, to “infect the cell” with the new genes. Gene therapy companies in the portfolio are using AAV or lentivirus. Rocket Pharma (RCKT), Regenxbio (RGNX), and Solid Biosciences (SLDB) are a few of the companies researching gene therapies.
RNAi is an emerging approach. RNA is necessary for protein formation in the body’s cells. If a cell is making too much, too little, or flawed protein, this will be evident in the RNA. RNAi is a way of “interfering” with the RNA reaching its destination and thus preventing flawed protein from being made. Companies such as Sarepta Therapeutics (SRPT), Alnylam Pharma (ALNY), and Dicerna Pharma (DRNA) are developing RNAi solutions. Sarepta was the portfolio’s largest position increase between the Q1 and Q2 public filings rounds.
The top genomics companies in the portfolio have had stratospheric returns over the last year, even relative to the ARK Genomic Revolution ETF (ARKG).
At the cutting edge of gene-editing research is a technique called CRISPR, which was labeled by the MIT Technology Review as the “Biggest Biotech Discovery of the Century” (MIT). The portfolio holds two aptly named CRISPR companies: Editas Medicine (EDIT) and Crispr Therapeutics AG (CRSP).
Healthcare specialists continue to heavily overweight Biotechnology. Oncology is the top Healthcare focus area by far, with 25% of the portfolio invested in oncology-focused companies. Immuno-oncology companies now have an equal weighting compared to traditional chemotherapy companies. Substantial cost declines in genomic sequencing have made it possible for top chemotherapy companies to take a genomic approach to designing drug treatments. While Oncology is the largest singular focus area, Genomics is the fastest growing focus area in the portfolio. The different genomic approaches to treatments—gene therapy, RNAi, and CRISPR—are some of the most exciting and cutting-edge solutions in biotechnology.Published on September 27, 2018