One of the most successful biopharma hedge funds few have heard of is closing to new investors.
The Janus Henderson Biotech Innovation Fund plans to stop accepting outside capital in early 2025, according to at least two investors. Both the firm and the fund declined to comment.
The closure comes after the fund, which now manages more than $2.1 billion, posted another big gain. The fund is up a little more than 42 percent for the year through October, according to a hedge fund database, making it one of the top-performing hedge funds in its category.
Since its January 2020 launch, the fund has generated a double-digit gain each year and has not suffered an annual loss, a feat few biopharma funds have shared during this period. It gained 40.6 percent in 2023, 17.6 percent in 2022, 23.3 percent in 2021, and nearly 147 percent in its inaugural year, according to the database. This works out to a 50 percent-plus annualized return since inception, compared with just a 5 percent return for the Nasdaq Biotech Index.
Janus Henderson Investors is best known for its mutual funds. The firm had about $361 billion in assets under management as of the end of June.
Investors, and the alternative and traditional asset managers that develop products for them, have long seen promise in the life sciences landscape. The biopharma strategy from Janus Henderson was initiated as part of a broader health care strategy implemented 25 years ago. The firm found that a majority of the sector’s outperformance over the years came from the capital invested in biotech stocks, which amounted to about one-third of the total.
Janus Henderson decided to launch a dedicated biotech strategy in early 2020. Janus’s team is headed by Andy Acker, Daniel Lyons, Agustin Mohedas, and Vish Sridharan, who combined have more than 67 years of investing experience. All members of the team have indepth scientific backgrounds and an understanding of the business side of biotech.
In general, the biotech strategy “seeks to capitalize on biotechnology’s rapid growth and innovation” by focusing on companies Janus Henderson believes can “change the practice of medicine,” according to a fund document seen by Institutional Investor.
Like most long-short strategies, the fund holds long positions in companies trading at a substantial discount to their intrinsic value and shorts companies that are overvalued.
Of course, it is not that simple. Janus Henderson scours a universe of 500 to 600 companies to find investments. The team projects earnings and free cash flow for the companies they follow, mindful that it sometimes takes ten years for a company to bring a new product to market.
In client communications, the firm also talks up its 90/90 Rule: Ninety percent of drugs that enter human clinical trials never make it to market, and 90 percent of the time consensus estimates for new drug launches are wrong, underscoring the belief that biotech is the most inefficient sector.
The strategy invests in larger-cap companies as well as smaller and less liquid ones. At any point, it may have a sizable amount of capital in companies that trade less than $10 million per day. According to the company, the team believes innovation usually begins with smaller companies, even though the outcomes are not certain. Janus Henderson has told investors that 65 percent of the industry pipeline is being developed by smaller biotech companies.
The fund also invests up to 30 percent of capital in pre-IPO private/crossover investments. At the same time, the fund sells short companies — typically those with underappreciated clinical, commercial, or financial risk. Shorting played an important role several years ago when biopharma stocks sold off sharply.
In general, though, the fund is long-biased. The public portfolio is typically 60 to 80 percent net long — 80 to 120 percent long and 20 to 40 percent short. It is also well diversified, holding 60 to 80 long positions and 60 to 80 shorts. The biggest positions are about 5 percent each.
Janus Henderson told clients, in a presentation seen by II, that it limits position size so the worst-case scenario impact on the portfolio won’t exceed 200 basis points. For example, when it comes to longs, if the worst case is a 50 percent drop in a stock’s price, the position size is no more than 4 percent. If a short’s worst-case potential outcome is 100 percent, the position size is a maximum of 2 percent.
Currently, the Janus Henderson team is particularly bullish about biopharma. For one, the strategy does well in a declining interest rate environment. More important, the firm expects accelerating innovation in the biotech industry in general.
Janus Henderson noted in a presentation that from 2019 to 2023 the Food and Drug Administration approved 243 drugs, compared with 213 in the earlier five-year period and just 121 from 2004 to 2008.
Sales of blockbuster biotech drugs — defined as those that do more than $1 billion in sales in a single year — are up more than 60 times since 2000. Janus Henderson told clients it seeks medical breakthroughs that address high unmet needs and have the potential to generate those blockbuster sales. The firm pointed that in each of the three years from 2021 to 2023, there were 110 to 120 drugs that generated at least $1 billion in sales. This compares with just two in 2000.
Meanwhile, Janus Henderson and other investors anticipate a boost from mergers and acquisitions in large pharma, which is anticipating a large number of major drugs coming off patent, beginning in 2025. Big pharma gets a significant part of its new-drug pipeline from these smaller companies. Valuations are attractive as the broad biotech index is down, on average, by 1 percent per year over the past three years.
At the same time, the firm believes biotech is the least efficient sector in the market, judging by the large disparity between winners and losers. According to the presentation over the past ten years, the top five biotech stocks have generated a 234 percent average return versus a 79 percent average decline for the bottom five. In pharmaceuticals, the top five gained 119 percent per year on average over the decade, compared with a loss of 63 percent for the five worst.
For comparison, in software, the top five stocks gained 159 percent versus a loss of 49 percent for the worst five. In semiconductors, the top five returned 137 percent compared with a loss of 42 percent for the five biggest losers.
