The biotech group is among the largest in the market in terms of the number of companies, which number well over 300. Within the group, large-caps generally have well established commercialized product portfolios that generate revenues, and in most cases generate profitability, and are considered by many to be lower risk than their mid-cap and small-cap peers. Both due to the size of the sector, investor interest and the differing characteristics of the constituent companies, we have broken the sector by capitalization, and in this article we discuss the investing activities of the world's largest funds in large-cap biotech stocks (other articles discussing the investing activities of mega funds in micro-cap biotech, small-cap biotech and mid-cap biotech stocks were covered in prior articles).
These mega fund managers, such as Fidelity Investments, Goldman Sachs, BlackRock Inc., Vanguard Group, and 22 others, manage between $100 billion and over $1 trillion each, and together control about 40% of the assets invested in the U.S. equity markets. Together, these mega fund managers are bullish on the biotech group, adding a net $4.2 billion in Q1 to their $117.4 billion prior quarter position in the group. Furthermore, overall they are over-weight in the group by a factor of 1.2; that is, taken together, the 25 mega funds have invested 2.0% of their assets in the group, slightly more than the 1.7% weighting of the biotech group in the overall market (for more general information on these mega funds, please look at the end of the article).
The following are large-cap biotech companies that these mega fund managers are most bullish about (see Table):
Gilead Sciences Inc. (GILD): Gilead is a developer of therapeutics to treat viral, fungal, respiratory and cardiovascular diseases. Mega funds together added a net 31.15 million shares in Q1 to their 380.25 million share prior quarter position in the company, and taken together mega funds held $20.98 billion or 54.3% of the outstanding shares.
The top buyer was Los Angeles-based Capital World Investors, with over $294 billion in 13-F assets, that purchased 16.33 million shares. Other large mega fund purchasers included Los Angeles-based Capital Research Global Investors (15.16 million shares), with over $240 billion in 13-F assets, and T Rowe Price Associates (10.86 million shares), with $520 billion in assets under management. Overall, institutional investors loaded up on GILD in Q1, adding 10.4 million shares to their 649.0 million share prior quarter position.
In its latest Q1 (March), GILD beat revenues but missed analyst earnings estimates (91c v/s 94c). This follows a miss in the prior Q4 (December 2011), in which the company reported 97c earnings, versus analyst estimates of $1.05. However, shares are up about 25% YTD, driven mostly by its cheap valuation, projected growth, and positive developments around its hepatitis C and HIV drug pipelines. Its shares currently trade at 11-12 forward P/E and 5.3 P/B, a steep discount to the averages of 22.2 and 11.3 for its peers in the biotech group, while earnings are projected to grow briskly from $3.80 in 2012 to $4.40 in 2013.
We believe that the stock is attractive here, and particularly on a pullback, giving investors the opportunity to buy into a lower-risk large-cap biotech company trading at an attractive discount to its peers, and with attractive growth prospects related to developments in its HIV, cancer and hepatitis C pipelines. Besides mega funds, it would seem that Wall Street analysts agree on this as well, as of the 29 analysts that cover the company, 23 rate it buy/strong buy and the remaining six at hold, putting a mean price target of $59, above current prices in the $51 range.
Other large-cap biotech companies that mega fund managers are bullish about include (see Table):
- Amgen Inc. (AMGN), that develops therapeutics based on cellular and molecular biology to treat anemia, cancer, and inflammatory diseases, in which mega funds together added a net 5.96 million shares to their 330.31 million share prior quarter position in the company;
- Alexion Pharmaceuticals (ALXN), that is a commercial-stage biotech focused on serving patients with severe and ultra-rare disorders, in which mega funds together added a net 4.37 million shares to their 102.27 million share prior quarter position in the company; and
- Biomarin Pharmaceuticals (BMRN), which is a developer of enzyme replacement therapies and oral solutions to treat debilitating, life-threatening, chronic genetic disorders and other diseases and conditions, in which mega funds together added a net 1.60 million shares to their 59.01 million share prior quarter position in the company.
The following are large-cap biotech companies that mega funds are bearish about (see Table):
- Biogen Idec Inc. (BIIB), that is engaged in the research, development and commercialization of therapies for the treatment of multiple sclerosis (MS), cancer and auto-inflammatory diseases, in which mega funds together cut a net 1.31 million shares from their 122.48 million share prior quarter position in the company;
- Celgene Corp. (CELG), that develops therapies to treat cancer and immune-inflammatory related diseases by regulating cells, genes and proteins, in which mega funds together cut a net 2.52 million shares from their 187.10 million share prior quarter position in the company;
- Regeneron Pharmaceutical (REGN), a developer of medicines for the treatment of serious medical conditions, with two products, ARCALYST and EYLEA, on the market, and additional in development to treat inflammatory conditions, allergic and immune conditions, in which mega funds together cut a net 1.21 million shares from their 49.73 million share prior quarter position in the company; and
- Vertex Pharmaceuticals (VRTX), that engages in the discovery, development and commercialization of small molecule drugs for the treatment of hepatitis C, cystic fibrosis, epilepsy and other life-threatening diseases, in which mega funds together cut a net 2.22 million shares from their 107.61 million share prior quarter position in the company.
General Methodology and Background Information: The latest available institutional 13-F filings of the largest 25 mega hedge fund and mutual fund managers were analyzed to determine their capital allocation among different industry groupings, and to determine their favorite picks and pans in each group. These mega fund managers number less than one percent of all funds and yet they control almost half of the U.S. equity discretionary fund assets. The argument is that mega institutional investors have the resources and the access to information, knowledge and expertise to conduct extensive due diligence in informing their investment decisions. When mega Institutional Investors invest and maybe even converge on a specific investment idea, the idea deserves consideration for further investigation. The savvy investor may then leverage this information either as a starting point to conduct his own due diligence.
This article is part of a series on institutional holdings in various industry groups and sectors, and other articles in the series for this and prior quarters can be accessed from our author page.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Disclaimer: Material presented here is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion. Further, these are our 'opinions' and we may be wrong. We may have positions in securities mentioned in this article. You should take this into consideration before acting on any advice given in this article. If this makes you uncomfortable, then do not listen to our thoughts and opinions. The contents of this article do not take into consideration your individual investment objectives so consult with your own financial adviser before making an investment decision. Investing includes certain risks including loss of principal.