Successful investors no doubt get lucky once in a while.

But any good investor will tell you that relying on lady luck to grace you with her presence is about as prudent a move as hiring Tom Cruise to act as spokesman for your new line of antidepressants.

Good investors are constantly learning, changing and, most of all, working hard.

That's doubly true in the biotech space -- a sector, it seems, with as many variables as there are companies.

Sam Isaly, managing partner and founder of asset management firm OrbiMed and longtime portfolio manager of the

(ETHSX) - Get Report

Eaton Vance Worldwide Health Science fund, has been at it for nearly 40 years, since starting his career as a pharmaceuticals analyst with Chase Manhattan Bank.

He, for years, has manned the helm of the Eaton Vance fund, as well as managed a hedge fund and three venture capital funds (all dedicated to health care) under the OrbiMed banner.

Isaly invests primarily in the biotech sector because "we focus on new things."

Even when Big Pharma was most attractive to the New York-based manager, he says, "investment success always depended on new products."

Isaly breaks the sector into two categories -- discovery and distribution.

While some large pharmaceutical companies like

Pfizer

(PFE) - Get Report

still engage in discovery, Isaly says "the bulk of their value is as a distribution company."

The discovery companies are the most attractive to Isaly, whose mutual fund sports an impressive 12.6% annualized return over the past 10 years, beating the

S&P 500

by 370 basis points.

The fund's top holdings consist of profitable large-cap names including

Genentech

(DNA)

,

Amgen

(AMGN) - Get Report

,

Genzyme

(GENZ)

and

MedImmune

(MEDI)

.

Those four names alone make up 21% of the entire portfolio as of June 30.

The mutual fund is designed to be more conservative than the hedge fund, so it sports fewer early-stage companies.

Nevertheless, Isaly expects strong growth from his roster of biotech giants.

"The outlook for those companies that are now profitable is strong for the next decade," he says. "At the moment, they're growing 20% per year, and we expect that to extend for a while."

But it's not just the household names that make their way into OrbiMed's list of holdings:

Gen-Probe

(GPRO) - Get Report

accounts for 7% of the portfolio and

Vertex Pharmaceuticals

(VRTX) - Get Report

for 4%.

The Voodoo They Do

Isaly and his team of 10 analysts (five of whom are scientists) go through a laborious process of tracking every compound that is currently in human trials.

They consult with industry and Washington contacts, and come up with an estimated value for each of those compounds.

Next, the analysts create a projection for what the company has to spend to get to cash-flow positive and add that to the market cap.

They then consider if the company will likely have to partner with a larger firm or raise money, and make a decision on whether the current value is attractive. Buy and sell decisions are often determined by events such as clinical trials.

For example, in May of last year, Vertex released positive phase Ib data on its hepatitis C protease inhibitor VX-950.

In the trial, the drug was found to greatly reduce the amount of virus in patients. That was enough for Isaly to pull the trigger and buy the stock in the midteens.

Today, Vertex is above $32 after hitting a high of $44.49 in March. "We were immediately inclined to believe it's effective," he reminisces. The safety issue, however, was not in the bag due to the lack of data. Now, Isaly is more confident of the safety profile as well.

But the life of a biotech fund manager is not all popping champagne corks; the occasional implosion happens even to the best of them.

OrbiMed owns

Adolor

(ADLR)

, which got cut in half recently after failing clinical trials.

Blowups will happen, Isaly acknowledges, "but we do our best to avoid them."

That said, Isaly distributes the risk in his portfolios accordingly and doesn't heavily weigh his sheets with risky names.

He also isn't giving up on Adolor, which reported two out of three studies for intestinal obstruction treatment Entereg did not meet primary endpoints.

But Isaly reminds investors that a trial failure does not necessarily mean doom for a new drug.

Adolor isn't the first biotech stock to give him trouble. "We've had other problem children in our life," he readily admits. "We do think Adolor will get it together and eventually succeed."

Trend-Watching

The dominant themes in biotech these days are cancer and diabetes therapies. But Isaly doesn't quite see it that way.

"Cancer is overblown," Isaly professes. "There are too many candidates out there. There are not enough ill people for all of these candidates. It will be highly competitive if everything works."

Diabetes, on the other hand, is an area he finds intriguing.

Isaly believes DPP4 inhibitors are game-changing technologies. He particularly likes

Merck's

(MRK) - Get Report

Januvia and

Novartis'

(NVS) - Get Report

Galvus, which are taken orally. He expects both to be multibillion dollar products.

Amylin Pharmaceuticals'

(AMLN)

Byetta and Symlin are both injected and, therefore, less attractive than other treatments, according to the fund manager.

While Isaly and his team have a plethora of resources at their disposal, he says the individual investor can still succeed in the space -- but it's not easy.

"They have to be luckier than we are," Isaly says.

According to the most recent filings, OrbiMed owns more than 100 stocks, including all names in this story, with the exception of Merck.

In keeping with TSC's editorial policy, Lichtenfeld doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships.

Marc Lichtenfeld was previously an analyst at Avalon Research Group and The Weiss Group and a trader at Carlin Equities. He holds NASD 86, 87, 7 and 63 licenses. His prior journalism experience includes being a reporter/anchor for On24 in San Francisco and a managing editor of InvestorsObserver, a personal finance Web site. He is a graduate of the State University of New York at Albany. He appreciates your feedback;

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