RA Capital Management, like most hedge funds, doesn’t make much noise publicly about its investment activities outside of its regulatory filings. But the word among insiders in the biotech industry is that the Boston hedge fund is piling up more wins than losses with its portfolio of life sciences stocks.
As of late last month, RA Capital had about $240 million under management, and its lead portfolio manager Peter Kolchinsky revealed to me that the fund was still up for the year despite taking a hit in October from the financial meltdown. And he noted that he had already set a strategy to, among other things, take advantage of abnormally low prices on certain biotech stocks.
For one, Kolchinsky says he likes the growth potential of shares in San Diego-based Sequenom, and regulatory filings show that RA Capital has been buying up large blocks of Sequenom stock lately. Sequenom is developing a well-chronicled molecular diagnostic to for prenatal screening of Down’s syndrome. (Luke wrote about how Sequenom wants to become the Google of molecular diagnostics last month.)
Kolchinsky himself appears to be the first successful gamble of RA Capital. He traveled a unique path to become a hedge fund manager, earning a Ph.D. in virology from Harvard University, where he co-founded the Harvard Biotech Club for students in order to interact with industry executives.
While attending an investors’ conference as a Harvard student, Kolchinsky introduced himself to Rich Aldrich, a co-founder and then-chief business officer of Cambridge, MA-based drug developer Vertex Pharmaceuticals (NASDAQ:VRTX). Kolchinsky had read about Aldrich in The Billion-Dollar Molecule, a popular book in the biotech arena about the launch and growth of Vertex.
After finishing his Ph.D. in 2001, Kolchinsky wanted to work in the deal-making side of the biotech industry. He says he contacted Aldrich to see whether there was an opportunity to work for him in the business-development group at Vertex. Aldrich told Kolchinsky he had recently left Vertex, was thinking about starting an investment and/or consulting firm, and he was looking for someone with a technical background to complement his business expertise. Kolchinsky got the job and became partner No. 1 of RA Capital.
To get the fund rolling, Aldrich seeded it with $4 million and gave his new portfolio manager his charge. “(Aldrich) posed this problem to me: You spend your days figuring out how we’re going to make money in biotech,” Kolchinsky says. “I’d never studied financial statements, I didn’t take any accounting classes or business classes or anything like that. Rich said, ‘Don’t worry about that, most of these companies you just have to ask them how much cash do you have? How fast are you burning it? And what are you going to do before you run out of money?’ He was right.”
Kolchinsky began investing the money in what he deemed to be undervalued biotech stocks, brought down by the genomics bubble that popped when investors lost confidence in the ability of genomics companies to ever turn a profit. Kolchinsky ended his first year of investing Aldrich’s $4 million just north of break-even while the S&P was down 22 percent and health care stocks had plunged by 46 percent.
When the market recovered in 2003, the fund’s nascent portfolio took off, according to Kolchinsky, and by the end of the year the initial $4 million that Aldrich invested was worth about $13 million. In 2005, RA Capital began to take on additional investment from wealthy individuals, family funds, and institutional funds. The average annual yield of the fund has been about 35 percent—without a single year of net losses. And Kolchinsky has built a team of analysts, a trader, and other operations staff as the fund has grown.
Though RA Capital now faces a challenging economy that has humbled many hedge funds, its performance to date has grabbed the attention of the biotech industry elite. Christoph Westphal, the CEO of Cambridge, MA-based biotech firm Sirtris—where Aldrich served on the board of directors prior to its acquisition by drug giant GlaxoSmithKline (NYSE:GSK)—says: “The team at RA Capital are some of the smartest folks I have met on the buy-side and their investment track record to date is extraordinary.”