Little Known Life Science Hedge Fund Dethroning Ackman’s Pershing Square
By Mark Terry
Biotech investing is a volatile business. But this year has seen a little-known hedge fund that has a focus on biotech and the life sciences beat out a couple of the heavy-hitters, David Einhorn and Bill Ackman.
CNBC notes, “The common thread among some of the best hedge fun performers is in-depth sector expertise.”
Joseph Edelman’s Perceptive Life Sciences fund grew 43.1 percent last year, according to CNBC’s sources. It has $2.8 billion in assets and that growth is in stark contrast to the S&P 500’s 19 percent growth last year.
“Our largest investment focus is on developmental-stage biotech companies, which requires both a strong scientific focus and knowledge base, as well as significant investment experience and a realistic appraisal of the chances of success,” Edelman told CNBC. “We look at whether the mechanism of action of the drug makes sense for the disease being treated, as well as existing clinical and pre-clinical data. We believe that our knowledge, experience and investment process allows us to identify the most promising opportunities and size our positions appropriately.”
Specialization appears to be the name of the game these days, with more generalist hedge funds struggling. One example is Einhorn’s Greenlight Capital, which had a 1.6 percent return in 2017 according to an investment letter. Einhorn argues that his fund’s underperformance is just a phase and is affected by computerized trading.
Einhorn wrote in a note to clients, “Despite it being a good year in the market, it was a challenging environment for our investment style. We have a value orientation and we take comfort from the margin of safety afforded by the low valuations of our long investments … while we certainly don’t believe value investing is dead, it is clearly out of favor at the moment.”
William Ackman’s Pershing Square hedge fund has never completely recovered from the Valeant Pharmaceuticals crises and insider trading accusations from 2014 through 2016. Recently Pershing Square and Valeant settled an insider trading lawsuit with Allergan and paid $290 million.
In 2014, Ackman acquired a multi-billion-dollar stake, about 10 percent, in Allergan. Part of Ackman’s goal was to force Allergan into being bought by Valeant. Valeant was the Pac-Man of the biopharma world, gobbling up more than 108 other companies between 2008 and 2014.
A month after buying the stake, Valeant and Pershing announced their joint bid for Allergan, which drove the stock up 15 percent. This resulted in Pershing Square gaining around $1 billion overnight. Allergan responded with a lawsuit and the U.S. Securities and Exchange Commission (SEC) jumped in to investigate possible insider trading.
Pershing and Valeant persisted, but no deal ever occurred and eventually Pershing Square sold off much of its stake in Allergan and invested over $3 billion into Valeant.
That was a bad investment, because insider trading was only part of Valeant’s problems. David Pyott, who was then Allergan’s chief executive officer, had described Valeant as a “house of cards” that was driven by drug price increases and bad accounting. That turned out to be a bit of an understatement.
In the fall of 2015, investigative reporter Roddy Boyd of the Southern Investigative Reporting Foundation uncovered the engine of Valeant’s heady growth, a specialty pharmaceutical channel called Philidor that pushed the company’s drugs on insurers and benefits managers. Philidor’s leaders have since been charged criminally.
The former chief executive officer of Valeant, J. Michael Pearson is gone, Joe Papa took over, and is attempting to rid the company of scandals and its $30 billion debt. Despite paying off the insider trading scandal, which was going to a jury trial this year, Ackman insists still that there was no merit to the insider trading accusations. Pershing Square paid $193.75 million.
Earlier this month, Forbes wrote, “For Pershing Square investors, including Ackman, the settlement will be costly. The hedge fund with over $9 billion in assets will see its performance dip by a further 1.32 percent as funds are used to pay down the $193.75 million claim. That likely means Pershing Square will close the year down over 3 percent, cementing a third straight year of dramatic underperformance in a raging bull market.”
So the best advice for Edelman might be: be careful who you invest in.