Perhaps no industry is as prone to eye-popping pops and drops as biotechnology. The basket can trade wildly on the latest whims and whispers surrounding clinical trials and timelines. Yet, despite the risk, some of the planet's savviest investors are buying shares in these stocks. For example, Carl Icahn bought Allergan plc (NYSE:AGN) and George Soros bought the iShares Nasdaq Biotechnology ETF (NASDAQ:IBB). Those are just two of a slate of investments that billionaires have been making in the industry recently. Should you follow their lead and buy biotech too?
In this clip from The Motley Fool's Industry Focus: Healthcare podcast, healthcare analyst Kristine Harjes is joined by contributor Todd Campbell to discuss these and other billionaire buys, and what investors ought to know before following in their footsteps.
A full transcript follows the video.
This podcast was recorded on Jun. 1, 2016.
Kristine Harjes: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. It is Wednesday, June 1, 2016. On this show, we're looking at where billionaires are laying down their money in the healthcare sector. I'm Kristine Harjes, and I'm happy to welcome Motley Fool healthcare contributor Todd Campbell back to the show, calling in, as usual, from Skype. Hey, Todd!
Todd Campbell: Hi, how are you?
Harjes: Pretty good. Before we get the show started, did you know that it's Global Running Day?
Campbell: I did not.
Harjes: I figured it was kind of relevant to the healthcare episode. Also, earlier today, I saw an interesting Washington Post article that running is the perfect time to listen to podcasts. Kind of interesting, right?
Campbell: Yes! I like the way you did that, perfect.
Harjes: It's all very relevant. The theory goes, in case you're curious, when you're running, it puts you in a state of mind where you can better think creatively and solve problems. You've got dopamine and serotonin in your bloodstream, it's readying you for creative thinking. And it's all that kind of stuff that is supposedly really good for listening to podcasts.
Campbell: And you know what? If you don't like to run, I bet if you just like to go out for a brisk walk, it'd probably have the same effect.
Harjes: Yeah, if you can survive this June heat and get out there. Today's episode, the meat of the content -- we won't just talk about running and podcasting the whole time -- we were inspired by an announcement made yesterday by the famous billionaire investor Carl Icahn. We will dive into this news. We're also going to talk a little bit about whether or not it's wise to follow in the footsteps of these billionaire investors. And then, we'll highlight some other interesting recent billionaire healthcare buys. But first, Icahn's big announcement.
Campbell: Icahn is a Goliath. He's one of the best-known activist investors. He's very vocal, he has a Twitter presence, he has a blog presence, he's always on TV talking about the investments and the changes he's trying to see happen at those companies he invests in.
He has just announced that he's taken what he describes as a "large" position in Allergan.
Harjes: And that's what I'm seeing in the headlines everywhere: "large position." We don't know exactly how big it is, we just know it's large, whatever that means. I'm not really sure if he means large for him, or large compared to you and me. But whatever it is, he's into the stock, has initiated a position in it, and he praised the CEO quite extensively, saying he has every confidence in Brent Saunders's ability to enhance value.
Campbell: Yeah, that was essentially the entire press release. It was one big, long paragraph where he basically was a cheerleader for Allergan's CEO. He went back to reference how much success he'd had when he was running Forest Labs, another stock that Icahn had owned a lot of and had profited handsomely from, when that company got bought by what has since morphed and become Allergan. That's how Saunders has become CEO of this company.
It seems like Icahn's double-dipping a little bit. He had a lot of success with this guy at Forest, now he's going to try to have a lot of success with him at Allergan.
Harjes: Yeah, you mentioned how short the press release is. I think the thing that pops up on the website, that you have to sign off on and say "Oh, yeah, I understand that this is all opinion," I think that was longer than the actual statement itself from Icahn. Which is kind of interesting, coming from a guy who usually has a really elaborate strategy behind his buys. He is an activist investor. He wants to get in there and shake things up. He has a mission. And that doesn't really seem to be the case here.
Campbell: It's a little odd in that respect. One of Icahn's most high-profile bets up until recently was in Apple. He was always agitating for Apple tor return more money to investors. You're right, he goes in with a game plan. He wants Allergan, ostensibly, to increase shareholder value. The question will be, what is his plan that he'll recommend to Saunders to do that? Will it be breaking it up? Will it be returning more money to investors? Dividends? Buybacks? What will he actually try to advocate for? He's an activist, so he's got to activate something.
Harjes: Yeah. My suspicion is that, even though he's remaining pretty quiet on it for now, Allergan is trying to sell its generics unit to Teva Pharmaceuticals (NYSE:TEVA) for $40.5 billion. There's some doubt about whether or not this will go through. But I bet, if it goes through and Allergan gets all this money, which is mostly coming in cash, Icahn's going to have something to say about what he wants done with it.
Campbell: Absolutely. And maybe that's why he's biding time, he's taking this step. My opinion would be he feels very confident the FTC will sign off on this deal going through. The expectation was that this deal would happen sometime in June. If so, then the estimate pegs Allergan walking away with about $36 billion in cash and stock after fees are paid out. That's a lot of money. The company has $42 billion in debt; $36 billion coming in, theoretically, in cash, some of that money could go to debt, and then a special dividend, or some way of rewarding investors like that, could be on the docket. We'll have to wait and see.
Harjes: The stock hasn't really moved that much because of this news. In fact, it's down roughly 24% year to date. Do you think Carl Icahn buying in is a sign to everyday investors that they might want to take a closer look?
Campbell: A lot of these investors, these billionaires, have made their money by taking a contrarian stance. A lot of times, that's when opportunities emerge, when everybody has panicked away from a stock and knocked it down to a value where people can then step in and say, "I can buy a lot of shares of this for fairly cheap money." In Allergan's case, after Pfizer (NYSE:PFE) and Allergan got rid of their proposed $160 billion merger, shares got whacked, and we got down to about $200 per share from a peak of $325 last fall. That was spitting distance to the company's book value. So it's certainly possible that you have Icahn looking at this and saying, "This is a pretty low-risk," in his opinion, "way of getting exposure to the space."
And he's not alone, either. There are other contrarian investors who have also taken stakes recently in Allergan. John Paulson, who's a billionaire investor, has a stake in the company. Dan Loeb, who manages Third Point, which is another very successful hedge fund, he's taken a stake as well. There's big money that's betting on some sort of a positive outcome.
Harjes: John Paulson is also in Teva, isn't he?
Campbell: Yeah. I think if you look at his holdings, and I encourage all investors, there are a lot of different websites that display this information, one of the ones you can go to is Nasdaq's website, and you can find out all these big funds, these billionaires, what they own and what they've been buying and selling in their 13F reports. If you look at Paulson's, he has a lot of healthcare. I think more than 40% of his portfolio right now is in healthcare. That's a lot of money. He has $10 billion to $12 billion under management in stocks alone.
Harjes: That is seriously overweight in healthcare. I thought my portfolio was overweight, just because I'm so biased toward this industry. But that's even worse than me.
Campbell: Yeah, he's the ultimate contrarian. He got famous by betting against the housing market. I think he made $12 billion betting against the housing market back before the Great Recession.
Harjes: Is he part of the Big Short story?
Campbell: I don't know if he was highlighted in that, but he did very well. (laughs)
Harjes: Yeah. So, you mentioned 13Fs. I wanted to touch back on that, because there's a really interesting timing question related to them. They come out four times a year, and they talk about the past quarter. If you're trying to follow in the footsteps of these billionaire investors -- and we can talk after this about whether or not that's a good idea to begin with -- you can't exactly time it with them. You have to wait until you get this filing. And even then, it doesn't say, "He got in in January, or in March, or in and out and back in again." It's kind of just a loose, general look at what they're interested in.
Campbell: Right, and you really have to know what the style of that billionaire investor is. They run the gamut. You have everything from Warren Buffett, whose holding period is ... we'll call it infinite. Then, you have George Soros, who embraces something that he calls "the theory of reflexivity," which gets him in and out of stocks relatively quickly. Things he owns one quarter could very well not be owned in the next quarter. So yeah, you always have to look at these reports with a grain of salt and recognize that what's in them now may not be what they actually own today, the day you're looking at it.
Harjes: Yeah, and you won't find out until the next 13F comes out.
Campbell: Right. And that could be, depending on when they sold it, what? Three, four ... because there's a lag in when they file, it could be four months from when they actually exited the position.
Harjes: Exactly. So, a guy like Soros would be particularly difficult to follow, because he's not doing the Buffett, or, dare I say, The Motley Fool style of buying and holding. He is trying to time the market a little bit, and put his finger on the pulse and figure out what's trending, what's not. This is really, really hard to do, and impossible to mimic just from looking at 13Fs.
Campbell: Very few people have had the success that Soros has had in embracing that kind of a rapid-fire approach. I think, you and I have talked in the past about these kind of things. The Fool's mission here is to educate. Education is so important. Education means researching and understanding your ideas before you click the "buy" or the "sell" button. If you're following in the footsteps of billionaire investors, that doesn't change. You still need to make sure that you understand. You need to understand what their style is, what their rationale could be. You need to understand the company. In healthcare, you have to know the product, the pipeline, the profitability. All those things are still so critical. Don't just follow blindly in the footsteps.
Harjes: But, as you've mentioned to me in the past, it is a really good way to generate potential investing ideas. Maybe companies that you hadn't heard of before, or had fallen off your radar. With that in mind, let's take another look at Soros. This past 13F revealed a purchase in the last quarter of Gilead Sciences and Novavax (NASDAQ:NVAX), and also the IBB, which is a healthcare biotech ETF.
Campbell: We've been following Soros a lot. There's some great content available on Fool.com where you can look at it and see what he's doing quarter to quarter. I think if you look at a history lesson and follow that activity, you see that Soros is not afraid of owning biotechnology stocks and taking on that risk. More recently, though, he's been paring some of his exposure to individual biotech companies back. He's been less likely to go out and own some of these things. Yet he's still very intrigued by the industry overall. And who can blame him? Biotechnology stocks offer some of the most enticing potential returns. Biotech, as an industry, has absolutely been clobbered in the last six months.
If you look at his purchase of the IBB, which is the Nasdaq Biotechnology index ETF, as a way of him saying, "I can get exposure to 190 stocks...."
Harjes: Wait. What I don't understand here is, this is a guy who is a specialist investor who knows biotech, has been investing in biotech forever, and is basically admitting defeat, is what it seems like to me. It's like he saying, "No, I don't want to have all these smaller biopharma positions, let me just buy the broader index," which, for a lot of people, that makes sense -- get the exposure without the risk. But that doesn't seem like Soros to me.
Campbell: It's not very Soros-like, is it? Normally, he'll go out and make specific bets. In this case, it's almost like he said, "You know what? Everything got so beat up that I'm just going to buy everything."
Harjes: Yeah, it's like a white flag or something. But, I will point out, he did have one smaller buy in the biotech world, and that was Novavax.
Campbell: Right, which is really interesting, because this is a company that's working on a vaccine for a respiratory virus that's really common in infants and the elderly. Phase 3 data for this vaccine could be available before the end of the year. The company just got fast-track status for that vaccine. If those trial results are good, theoretically, this vaccine could hit the market next year.
Harjes: Yeah. That seems fairly promising. It's at least an intriguing company name to keep looking into.
So, we talked about Soros and Icahn. What other billionaires were you watching in this most recent round of 13Fs?
Campbell: There were some very interesting things. I mean, there's so many ideas. Investors have to recognize that there's so many people out there who have been very successful and are very widely followed, and a lot of them will take the opposite sides of the train. You'll have some people going out and buying these stocks, and other people going out and selling them. Take that into consideration as you're doing the research.
But one of the things that I thought was interesting is, you have a guy named Jeff Smith, who runs another activist firm called Starboard. Starboard has taken a big stake, almost 10%, in a company called Depomed that I happen to be long. Depomed markets a drug that competes with oxycodone. In Smith's opinion, the board has not done everything they can do to unlock the value in this company.
One person who seems to agree with him is Steven Cohen. Steven Cohen is probably best known as the founder of S.A.C. Capital. He now runs his own private family money under something called Point72 Asset Management. He also bought 1.9 million shares in Depomed during the first quarter. I found that really interesting.
Then, there was another person out there who I like to follow, Israel Englander, who runs Millennium Management. He was out there in the first quarter buying a company called Flexion (NASDAQ:FLXN) that's working on an osteoarthritis drug for knee pain that's very intriguing, and could theoretically be up for FDA approval in the next six months to a year.
Again, we have to research all of these ideas. You can't just follow these billionaires blindly into them. But if you use these 13F reports as an idea-generation machine, it can make a lot of sense.
Harjes: I would say, for me, Flexion is exactly what you were just saying, the kind of company that I maybe have heard of in passing, didn't really know terribly well, but I saw the name pop up with the billionaire buys. I looked into it, and this does seem like a really intriguing stock. I have not completed my research yet, so I'm not a shareholder or even close to becoming one. But it seems like they're doing a really important thing in a really, really large market.
Campbell: Yeah, millions of people suffer from osteoarthritis pain in the knee. Millions of doses are given every year of corticosteroids. And unfortunately, those corticosteroids, the benefit of them wears off relatively quickly, within a few weeks. So if they can develop a better mousetrap, theoretically, they could displace corticosteroid use in millions of patients. That, obviously, would make this a blockbuster drug. But you don't want to get the cart too far in front of the horse. They still have to get the FDA to give it the go-ahead first.
Harjes: Absolutely. At this point, just an intriguing idea. And as we've reiterated on this show, that's what all these companies are at this point -- intriguing ideas. Hopefully we've given you guys, our listeners, a couple of interesting names to look into, read a little bit more about. For today, that'll just about do it for all our billionaire talk.
What I want to know at this point is, are any of you listening to this while running on Global Running Day? If you are, let us know. Our email address is IndustryFocus@Fool.com, and our Twitter handle is @MFIndustryFocus. We love to hear from listeners! I'll even share what I listen to when I run if you ask nicely. That's a wrap for us. For Todd Campbell, I'm Kristine Harjes. Thanks for listening and Fool on!
As always, people on the program may have interests in the stocks that they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear.
Editor's note: Todd Campbell is not, in fact, a shareholder of Depomed, though he is strongly considering buying shares.
Kristine Harjes owns shares of Apple and Gilead Sciences. Todd Campbell owns shares of Apple, Gilead Sciences, and Twitter. The Motley Fool owns shares of and recommends Apple, Gilead Sciences, and Twitter. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. The Motley Fool recommends Teva Pharmaceutical Industries. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.