Guru investor Seth Klarman of the Baupost Group runs a tight ship. A relatively small percentage of his investments are common stock (sometimes as little as 5% but typically 10-15%). He is among the pickiest of investors and is widely known for earning high returns while holding large amounts of cash. For example, Klarman was content to keep 50-60% of his portfolio in cash throughout most of 2005 and 2006.
The author of "Margin of Safety" also shows discipline by practicing what he preaches. An analysis of his holdings shows that there is a very low likelihood of permanent capital impairment at the prices at which he buys. Indeed, Klarman may do a better job of following Buffett's two investment rules: First, don't lose money. Second, don't break rule number one. Consistent with that philosophy, Klarman returned approximately 5% of the Baupost Group funds to its investors after noting in his November letter to shareholders that “[t]oday, Baupost's opportunity set is smaller than it has been in some years.”
Klarman maintains a penchant scouring the biotech arena and bets big when he knows outcomes are slanted heavily in his favor. Baupost team members have solid applied math (Herin, CFA), statistics (Zilla) and biology (Offenberg) backgrounds. Klarman's team did a stellar job identifying and accumulating shares in Facet (FACT) which was eventually sold for $27/share to Abbott (ABT). Klarman was given the tools to be an activist investor with that pick, and the rest of the biotech field is ripe for repeating that model. With that said, Klarman has moved on to other biotechs.
Here's a list of his bio-tech portfolio. We'll have a run down of more of his positions next week.
Regeneron (REGN): Klarman's latest is a continuing purchase which began accumulating around the third quarter of 2010. Regeneron Pharmaceuticals Inc. is a $2.5B biopharma with already over $400 million in sales. The company has a rich pipeline in various stages and its only marketed product is Arcalyst (for Muckle-Wells and auto-inflammatory syndromes). EU availability is just over the horizon. REGN's other drugs target therapeutic pathways for antibody production to treat macular degeneration and, lung and prostate cancer (Aflibercept) in stage 3 clinicals. REGN's pipeline would be incredibly valuable to any big pharma with impending patent expirations.
Alere (ALR): This company (formerly Inverness Medical) is on the diagnostics end with 67% of revenues coming from medical diagnostics, and 28% from health management, and 5% from consumer products. The company is a pioneer in that it is capitalizing on in-home diagnostics over in-hospital, and leveraging its suite of products to cross-sell them. The company had a breakthrough with ClearBlue (first digital pregnancy test) and has a portable CD4 counter and a finger-check heart monitor on the horizon. Alere also has a revolutionary HIV viral load device requiring only a fingerstick sample. Revenues are likely to double to over $4 billion on the back of new product launches, and this company also remains an acquisition target.
Enzon (ENZN) is a much smaller biotech ($420M market cap) with a royalty stream from its PEGylation platform which is the novel idea of “masking” therapeutic molecules from host cells which may attack them and binding to the host cell to increase absorption and likelihood of a cure. Merck is licensing the system for its interferon drugs to treat Hepatitis C. The company is levering its technology into other therapies for various cancers. The company is also a potential acquisition target.
Theravance (THRX) is a low-revenue biotech that works with Glaxo-Smith Kline (GSK) to produce the next-generation COPD-asthma products. GSK's Advair produces almost $8B in revenues for Glaxo, and THRX's product, Relovair would produce 15% on the first $3B in sales and 5% thereafter with virtually no drug application costs to Theravance upon approval of its LABA and ICS combination drugs. THRX also has a partnership with Astellas for commercialization of MRSA (difficult-to-treat hospital staph infection) drug Vibativ in stage 3 and also pending approval in the EU. 2011 and 2012 milestone payments from both GSK and Astellas appear attainable.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.