Palo Alto Investors' 5 Largest Healthcare Holdings

Founder of Palo Alto Investors William Edwards invests largely in the healthcare sector and small cap stocks that have a market capitalization lower than $3 billion. In the second quarter, Palo Alto Investors' largest six long positions returned an average of 26.2% according to

. The healthcare sector can be difficult to invest in because there are many small cap companies with high growth potential, and it is in an investor's best interest to obtain investment ideas from popular hedge fund holdings. Here are the five largest healthcare holdings by Palo Alto Investors:

is a biotechnical company that develops and commercializes therapeutic products for serious diseases Worldwide. ViroPharma has a market capitalization of $1.59 billion. As of March 31, Palo Alto Investors holds 3,886,776 shares of Viropharma, which makes up about 12.8% of its portfolio. The hedge funds position on ViroPharma is worth $116,875,000. Shares of ViroPharma decreased in April after three other pharmaceutical companies began selling low cost versions of ViroPharma's drug Vancocin. The drug brought in half of the company's revenue in 2011, which accounted for $288.9 million in revenue. Since early May though, ViroPharma is up about 18.5%. On June 4, ViroPharma announced that it was initiating clinical testing on a drug called Maribavir for treatment of CMV infection.

Cyberonics develops, designs, markets, and sells implantable medical devices. Cyberonics is a small cap company with a market capitalization of $1.2 billion. As of the end of March, Palo Alto Investors owns 2,765,518 shares of Cyberonics, which makes up about 11.5% of the companies portfolio. Its position in Cyberonics is worth $105,449,000. Cyberonics is a high growth healthcare company that has a P/E ratio of 23.85. Since July of last year, Cyberonics is trading up about 55%. On June 6, the company reported record quarterly results. The company had record revenues of $219 million, up 15% from last period's revenue of $190 million.

develops and markets various products for the treatment of dermatological and aesthetic diseases in the United States and Canada. William Edwards' hedge fund holds 1,549,600 shares of Medicis, which makes up about 6.4% of its portfolio. Medicis has been able to expand its business by becoming less dependent on its acne drug called Solodyn and developing more non-acne products. Also, on June 6, Medicis declared a quarterly-end cash dividend of $0.10 per outstanding shares of its common stock. Medicis has been paying dividends since 2003 and has a P/E of 20.77, lower than the industries average P/E of 33.40. This may suggest that Medicis is a more stable healthcare company with slower growth.

Auxilium Pharmaceuticals develops and markets pharmaceutical products in the United States primarily. As of March 31, Palo Alto Investors holds 3,003,962 shares of Auxilium Pharmaceuticals. This position has a value of $55,784,000 and makes up about 6.1% of the hedge funds portfolio. On July 9, the company announced that its drug XIAFLEX was approved in Canada. The drug is still going through clinical trial for the treatment of Peyronies disease in the United States. In May, the company also revised its guidance for 2012, increasing its revenue and cutting its net loss. Auxilium has a year-over-year quarterly revenue growth of 0.26, compared to the industries growth of 0.06.

Questcor pharmaceuticals provides prescription drugs for the treatment of multiple sclerosis, nephrotic syndrome, and infantile spasms indications. Palo Alto Investments holds 1,304,849 shares of Questcor that is worth $49.088,000. This makes up about 5.4% of the company's holdings. Questcor's drug Acthar makes up for all of its profit, but has proven to be in heavy demand. In the first quarter of 2012, Questcor shipped 4,111 vials of Acthar, compared to 2,010 vials in the same period last year. Although Acthar is Questcor's only drug, the FDA approved it for 19 different indications. Year-to-date, Questcor is up about 10.5%. The company is set to report earnings on July 24.