Access to Islamic Hedge Funds - Incisive Media

fund profile
The investment
team attends
major therapeutic
conferences
and frequently
reviews relevant
scientific literature
and journals to
keep abreast of
developments and
find the companies
most likely to
be the target
of attention on
either the long or
short side of the
portfolio.
Expertise and research
Despite these considerable challenges,
OrbiMed believes it has put
together a winning formula.
Its investment team includes
over 30 professionals exclusively
focused on the healthcare sector. Its
activities cover the whole gamut of
healthcare investments across all
major geographies, sub-sectors and
company stages.
Strategy
According to Neild, the company
pursues a simple (in concept)
strategy. OrbiMed seeks long investments
in companies pursuing novel
therapeutics that will be successfully
commercialised and generate
meaningful revenues.
On the short side OrbiMed seeks
companies pursuing therapies that
will fail in clinical trials or suffer
disappointing commercial launches.
The process is driven by intensive
proprietary research. The company
takes a worldwide perspective to
find the best opportunities globally
and complements the investment
process with a rigorous set of risk
management protocols.
According to Neild, OrbiMed has
an edge over other funds because its
large team gives it the ability to gain
more extensive coverage of scientific
and medical news.
Close contact
The investment team attends major
therapeutic conferences and frequently
reviews relevant scientific
literature and journals to keep
abreast of developments and find
the companies most likely to be the
target of attention on either the long
or short side of the portfolio.
The team has developed wide
networks and relationships with
independent medical consultants. In
addition, it carries out surveys with
physicians to identify trends and
new areas of research.
In a typical year, investment professionals
from OrbiMed will meet
with management team members at
upwards of 90% of the companies
in their sector.
They also work closely with the
private equity team to leverage relationships
with venture capital stage
companies.
OrbiMed has access to agency and
policy maker views on important
drugs, speaking with, for example,
current and former employees of
the US Federal Drug Administration.
To facilitate its global research
efforts, OrbiMed has team members
based in New York, Mumbai and
Shanghai.
Portfolio construction
Portfolio construction is disciplined
and research-intensive. From a list
of 750 public companies (including
500 US), analysts screen out the
middle 350 as neither good enough
to buy nor bad enough to short. An
analyst typically looks at 50 stocks.
From the 400 companies
remaining on the active list, fair
value estimates and valuation
screens are created.
Analysts meet with the management
of each company at least once
a year. From this process another
200 companies are dropped as they
are seen to have no catalyst for an
investment thesis.
The remaining 200 names are
studied intensively. Detailed business
forecasts and research are
undertaken, including frequent
discussion with company management.
Analysts working in conjuction
with the two senior portfolio managers
make a final selection of long
and short best ideas on a global
basis.
Typically the portfolio holds 35
core long and 20 short positions. A
typical mix of positions contains 15
profitable companies, 20 emerging
companies and 20 short positions.
There are daily investment meetings
to discuss the portfolio.
As with any hedge fund, risk
management is a serious issue.
Bottom-up stock selection emphasises
companies where risk factors
and correlations are well understood.
Net market exposure averages
60%–70% but is adjusted dynamically
in response to changing market
conditions.
Diversification
The portfolio is diversified. It is
typically made up of a selection of
the big name pharmaceutical companies,
smaller specialty pharmaceutical
companies, generic drug
makers, medical device manufacturers
and mature and emerging
biotechnology.
Exposures are a mix of North
America, Europe and Asia. Position
sizes are limited for individual
equities. Large-cap companies are
typically sized at 4%–7%, mid and
small caps at 2%–4% and with
short sales at 1%–3%.
more biotechs achieving profitability
Number of profitable biotechs
120
100
80
60
40
20
0
Acquired
Independent
Source: OrbiMed Advisors
Some additional strategies which
are non-correlated to equities complement
the core long/short equity
book, including an options overlay
strategy and a dedicated effort to
acquire pharmaceutical royalty
streams.
Al Safi link
OrbiMed has a long-term strategic
interest in the Middle East. Neild
expects opportunities in pharmaceuticals
and healthcare services
to be attractive to investors in the
region.
He believes the way OrbiMed constructs
its funds will require little
change to make them Shariah compliant.
“The nature of the healthcare
companies we focus on means they
are not leveraged or have a lot of
debt. We would not expect to have to
change the way we run the protfolio
in any meaningful way,” concludes
Neild.
After an initial approach from
Barclays Capital, the due diligence
process has begun on both sides
“We see real opportunities to
work with Barclays in a strategic
partnership. We’ve been to the
region several times and expect
over time to establish a permanent
presence in the Middle East,” Neild
explains. n
• 73 biotechnology and emerging drug discovery companies have reached
profitability through 2007 (including 39 companies acquired)
• Another 32 companies are anticipated to overcome ‘accidents’ to achieve
profitability by 2009
• Profitability —> broadens investor base —> increases valuations and liquidity
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Estimate
32 | Access to Islamic Hedge Funds Supplement | November 2008 www.hedgefundsreview.com