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Hedge funds betting on drugs stocks have made bumper profits this year, as a recent wave of deals by big pharmaceutical companies drives the biggest rally in the biotechnology sector in a decade.
New York-based investment manager Perceptive Advisors has seen its flagship $4.5bn hedge fund soar 75 per cent this year to the end of November, according to people who had seen the numbers. Meanwhile, Caligan Partners, another New York-based hedge fund, which manages more than $1bn, was up 92 per cent, its best year since inception in 2022.
The gains come as the Nasdaq Biotechnology index has soared by about one-third, its strongest year since 2014. It has been helped by a renewed surge in dealmaking as big groups looking for their next blockbuster drug spend billions of dollars on biotech companies at the forefront of innovation.
“Every week or two there is a new multibillion-dollar M&A transaction announced, and that has been going on for six months,” said one hedge fund executive who is active in the sector. “The speed at which they keep happening is kind of amazing.”
Healthcare-focused funds more broadly have been the best performing in the hedge fund industry this year, returning 36 per cent from January 1 to the end of November, with 19 per cent of those gains coming from the past two months alone, according to data from PivotalPath. It has been the best year for the strategy since 2013.
“These are unheard of numbers,” said Jon Caplis, PivotalPath’s founder and chief executive.
Large pharmaceutical companies are facing a particularly large so-called patent cliff where their blockbuster drugs come off patent and lose exclusivity, opening the door to competition from generic drugmakers. Drugs with annual revenue of about $180bn are going off patent in 2027 and 2028, roughly 12 per cent of the global market, according to Evaluate Pharma data, with almost every large company affected.
This has driven a number of big pharmaceutical businesses to hunt for smaller groups with promising treatments, often still in clinical trials, with the US Trump administration appearing to be more permissive of deals than the Federal Trade Commission under former president Joe Biden.
Pfizer won a dramatic takeover battle against Novo Nordisk for weight-loss start-up Metsera in November, clinching a deal worth up to $10bn.
Merck spent $10bn on lung disease-focused biotech Verona Pharma in July, its biggest acquisition in two years, amid concerns it has few alternatives that can match the substantial sales figures of cancer drug Keytruda, which loses its patent in 2028.
Both Perceptive and Caligan held positions in Verona and profited from its deal, with the share price soaring about 130 per cent this year.
Perceptive also benefited from bets on US biotech groups Praxis Precision Medicines and Celcuity, whose share prices have surged roughly 250 per cent and 700 per cent, respectively, this year. In October, Praxis released positive results of a trial for a drug to address shaking caused by nervous system issues, while Celcuity announced a successful trial of its cancer drug.
Perceptive and Caligan declined to comment.
Novartis’s heart medication Entresto lost its patent this summer. It agreed a $12bn deal to buy Avidity Biosciences, a company that specialises in treatments for rare diseases, in October.
“The patent cliffs that are coming are significant and people are expecting the M&A cycle to continue,” said Sean Conroy, an analyst at Shore Capital.
This year’s profits mark a turnaround for some hedge funds after a tough start to 2025.
The share prices of biotech companies were hit earlier this year by fears that the appointment of Robert F Kennedy Jr — a prominent critic of mainstream medicine — as US health secretary could hit drug approvals. The Trump administration also cut government spending on health research to a 10-year low, which — combined with higher borrowing costs than when many had previously raised money — threatened to put some companies out of business.
Perceptive was down for 2025 by April, according to people familiar with its performance. But the wave of M&A that took place in the second half of the year helped drive a recovery.
Additional reporting by Amelia Pollard in New York
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