We recently compiled a list of the 10 Largest Biotech Hedge Funds and Their Top Stock Picks. In this article, we are going to take a look at where Apellis Pharmaceuticals, Inc. (NASDAQ:APLS) stands against the other biotech stocks.
The ability to successfully make money through investment requires deep thinking and analysis. Even then, it’s not a sure shot, and oftentimes, investors end up losing money regardless of how sound their decisions might have appeared on the surface. This is why most business schools teach portfolio diversification, to ensure that an investor’s risk is managed by allocating money across different stock categories.
One of the riskiest categories in which anyone can invest their money is the biotechnology industry. While the broader pharmaceutical sector enjoys some stability in the form of large pharma companies being able to stay cash flow positive through selling approved drugs, the biotechnology industry removes this stability by focusing only on future treatments. These treatments might or might not see the light of day, and developing them is expensive, so if they fail to yield any benefits, the shares drop.
Since their business is dependent on their treatment development, the risk associated with investing in biotechnology stock reduces the further down the development pipeline a firm is. Drugs that are in late stage clinical trials are more likely to secure regulatory clearance, and drugs that have secured approval are more likely to make money for companies in the market. Looking at these trends, the next question to ask is, what effect do clinical trials have on the stock returns of biotechnology stocks?
On this front, research from Harvard University provides some insight. It analyzed the research and development activities of large biopharmaceutical firms which earned at least 50% of their revenues (greater than $5 billion) from branded products. Then, data was gathered for FDA unapproved positive or negative outcomes from clinical trials. These data points were analyzed to check for the simple effect of positive or negative trial news on the stock returns of the companies. The results of the research confirmed that stock prices react accordingly to positive or negative news, but interestingly, it also revealed that the reactions were asymmetric.
For instance, the median cumulative annual returns (CAR) for t0, t+1, and t+2 (the day of the announcement and the two following days) saw the negative returns generate by negative news outpace the returns for the positive news by approximately 1.25 percentage points, 1.35 percentage points, and 0.50 percentage points, respectively. The researchers use these findings to “confirm and extend previous scholarship on the significant market reactions to clinical trial results for biotechnology companies with few compounds in development.” As for the asymmetry, they speculate that the “negative events may have a ‘reputational’ effect” on management’s ability to conduct trials and add that ” one could argue that as the results of clinical trials are anticipated events, market participants have already factored risk-adjusted expectations about their outcomes into the stock price.”
So, this makes it clear that biotechnology stocks are among the riskiest investments in the market, and even well capitalized firms are very vulnerable to bad news. Adding to this, raising funds for research often requires issuing more stock, which ends up diluting value for existing shareholders. For early stage and small biotechnology companies, this dilution is inevitable. Data from Deloitte shows that the average cost to develop a drug from R&D to launch sits at $2.3 billion while the average peak sales sat at $362 million in 2023. This suggests that, on average, it should take a little under eight years for a firm to completely recover the money that it has invested in a drug. This picture is further complicated by the fact that the average ROI for R&D investment sat at 4.1% in 2023, and R&D intensity for these firms is 35 percentage points higher than the average intensity of all other firms.
Combining all these data points shows that biotechnology companies might very well be ‘investment graveyards’ for inexperienced investors. The investment horizon for these stocks stretches for years, which means that only the most disciplined investors who are capable of not only conducting in depth research but also having nerves of steel to hold the shares, make it out on the other side with more money in their pockets than they put in. The nerves of steel are particularly important when we analyze the two decade performance of a biotechnology index and compare it with the performance of broader global stocks.
While biotech stocks do lead the world stocks, the difference between the returns varies from ~125 percentage points to a whopping ~420 percentage points within a time span of less than two years. These uncertainties also appear to be priced into the biotechnology stocks themselves, as data shows that 15% of these stocks trade below their net cash value – a figure that grows to 25% during times of economic peril.
To find out which biotechnology stocks might be worth investing in, one approach to take is to see what hedge funds are doing. These funds spend considerable resources analyzing biotechnology stocks, which means that they might be able to separate the wheat from the chaff as they say.
Our Methodology
To make our list of the ten biggest stocks of the 10 largest biotechnology hedge funds we scanned through the Q2 2024 SEC filings of OrbiMed Advisors, Deerfield Management, Magnetar Capital, Farallon Capital, RA Capital, Survetta Capital, Glenview Capital, Cormorant Asset Management, EcoR1 Capital, and Redmile Group and picked out their ten biggest biotechnology stakes.
For these stocks, we also mentioned the number of hedge fund investors. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A biomedical scientist in a lab coat conducting research on biopharmaceutical compounds.
Number of Hedge Fund Investors in Q2 2024: 38
ECOR1 Capital’s Q2 2024 Investment Stake: $445 million
Apellis Pharmaceuticals, Inc. (NASDAQ:APLS) is a commercial stage biotechnology company that develops treatments for immune system disorders, eye diseases, and other ailments. It is a well diversified firm, with drugs in development and on the market. Apellis Pharmaceuticals, Inc. (NASDAQ:APLS)’s two primary revenue generating treatments EMPAVELI and SYFOVRE are primarily targeted towards people with eye diseases. The firm is also trying to expand its market for EMPAVELI, by trying to target the drug for people with serious kidney diseases. On this front, Apellis Pharmaceuticals, Inc. (NASDAQ:APLS) completed a Phase 3 trial of EMPAVELI in August and demonstrated positive results. The firm now plans to submit an FDA application for the drug, which could lead to much needed tailwinds to Apellis Pharmaceuticals, Inc. (NASDAQ:APLS)’s stock, which is down by 36% year to date.
While EMPAVELI represents Apellis Pharmaceuticals, Inc. (NASDAQ:APLS)’s future potential, its bread and butter right now is SYFVORE. Here is how management described this drug during the Q1 2024 earnings call:
“SYFOVRE is key to delivering this long-term value and the growth in Q1 underscores the strong demand we continue to see from both physicians and patients. Through March, eye care professionals administers 250,000 SYFOVRE injections and in the first 12 months of launch, SYFOVRE generated over $400 million in sales, substantially exceeding both our and Wall Street’s expectations. This is extraordinary performance for any new product launch. SYFOVRE’s leadership in the market is driven by three important factors. First, treatment with SYFOVRE results in increasing effects over time with up to 42% slowing of GA progression in year three of GALE, building on the meaningful effect demonstrated in DERBY and OAKS. Second, SYFOVRE has a well-documented safety profile based on extensive experience both clinically and in the real world.
And third, SYFOVRE offers flexible dosing as described in our label, which means that patients can benefit from SYFOVRE’s impressive clinical profile in as few as six doses per year. As the market leader, we are only getting started. Our performance to date reaffirms our belief that SYFOVRE has the potential to become a multi-billion dollar product in the U.S. alone. We are also working to bring SYFOVRE to patients worldwide. We recently announced that the European Medicines Agency reset the review of the SYFOVRE application back to day 180 of our initial assessment, which is the last phase of that procedure. This decision follows a judgment made by the Court of Justice in the EU regarding the competing interests of experts. The decision for SYFOVRE is strictly procedural and not related to the SYFOVRE application.”
Overall APLS ranks 5th on our list of hedge funds’ top biotech stock picks. While we acknowledge the potential of APLS as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than APLS but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
