Top 7 life sciences public investors

It's better to be lucky than smart, but to be among the best life sciences investors it helps to be both. We've compiled a list of public company investors who have managed to outperform the NASDAQ Biotechnology Index (NBI), mostly driven by their participation in some of the top biotech performers this year.

2014 hasn't been as much of a go-go market as the prior two years for biotech, but the back half of the year has picked up a bit more momentum so far to raise the NBI 21% year to date. In 2013, this biotech index climbed 66%, while in 2012 it was up 32%.

On the whole, the NBI is up 185% in the almost three years since the start of November 2011, when the long biotech rally kicked off with the acquisition of Pharmasset by Gilead Sciences ($GILD)--foreshadowing the fundamental role that HCV continues to play in fueling biotech gains. Just for context, remember that the turn-of-the-century genomics bubble was much steeper--a 350% gain for the NBI in the roughly year-and-a-half from the end of August 1998 to the peak in January 2000.

Despite all the gains, life sciences investors aren't complaining about overblown biotech valuations or looking to shift their money elsewhere. Most investors see a lot of biotech valuations as justified--by some phenomenal revenue and cash growth, as well as by the ongoing introduction of transformative technology that's addressing fundamental market needs. But as always, some of the less deserving biotechs benefit from the successes of the best among their ranks.

"Valuations are not higher than they were last year; earnings have been creeping up," noted Sven Borho of OrbiMed Advisors. "Especially Gilead and Biogen Idec ($BIIB) have really surprised on the upside. Valuations are still trading at a discount to large-cap pharma at 15 or 16 times earnings. In 2000, there were profitable names trading at 120 times earnings."

"Biotech is trading at modest valuations that is very well supported by earnings growth. If biotechs were large-cap pharma, they'd probably have a higher value. Everybody wants to call the top of the biotech bubble for the last few years, but they have been wrong," he added.

Borho noted that the sell side has consistently been underestimating big biotech product launches and R&D productivity, with Gilead's Sovaldi as the prime example. "In December of last year, they estimated $2 billion for Sovaldi--now it's $11 billion; they were wrong by a factor of 5 for the biggest drug launch of the year. They've been wrong on Tecfidera; they keep going up quarter after quarter."

Beyond earnings upside surprises, RA Capital's Peter Kolchinsky sees fundamental technological leaps forward as underwriting the recent biotech rally. "Messenger RNA, protein folding correctors, gene therapy, exon skipping--a few approvals here could justify a combined $100 billion in valuation, which moves the needle on the whole sector and most indices, not unlike the value creation we saw with just Alexion ($ALXN) and Gilead," he said.

One caveat for this list--we have used change in fund value as listed on quarterly SEC fund holding disclosures to evaluate investor performance. This has several limitations, chief among them being that increases in that listed valuation are not necessarily due solely to performance. For example, companies may transition from private holdings to public ones, or funds can add public holdings when fallow cash reserves are put to work. -- Stacy Lawrence (email | Twitter)

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