New York-based Hedge Fund Baker Bros. Advisors LLC, as of the most recent SEC 13-F Q4 filing, had $3.0 billion in equity assets, almost all invested in the biotech sector, and an increase from the $2.3 billion in 13-F assets held at the end of the prior quarter. About 40% of the fund is in small- and micro-cap equities, another 45% is in mid-caps, and the remaining 15% is in large-caps. Brothers Julian and Felix manage the fund, and they have an outstanding record of finding huge biotech winners over the long-term. Their most recent huge win was Pharmasset Inc. (VRUS) that they bought in 2007 in the mid-single-digits, and that was acquired last November by Gilead Sciences Inc. (GILD) for $137.
Brother Julian studied at Harvard and has a business background, and Brother Felix holds a PhD in Immunology from Stanford University. Typically, the fund buys into companies at the lows, basing their decision on a fundamental analysis of the opportunity. With their big winners, as in the case of Viropharma Inc. (VPHM), they build their positions over a long time, often ending with large 10% plus stakes in the target company. The fund holds investments for an average of three years, with most of their winners being held for well over twice that average time frame. Both brothers maintain a very low profile, and almost never give interviews, and hence are below the radar screens of most investors.
We analyzed Baker Bros. Q4 13-F to determine its highest conviction bets (see Table), selecting the largest buys and sells in size, where the buy/sell is also a significant proportion of its prior quarter position in that company. Based on that analysis, the following are its highest conviction bullish bets in Q4 (see Table):
Viropharma Inc. : VPHM develops products for the treatment of diseases impacting patients with few if any treatment options, including drugs for hereditary angioedema, clostridium difficle infection, and seizures in children and adolescents. Baker Bros. added $332 million, its largest buy in Q4, to its $34 million prior quarter position. Other major institutional investors that added significantly to their VPHM position in Q4 include healthcare-focused Visium Asset Management, that added 0.35 million shares (or $11 million) to its 0.15 million share prior quarter position, and Fidelity Investments, that added 0.68 million shares (or $20 million) to its 1.17 million share prior quarter position.
VPHM shares are currently in a strong upward trend, trading at ten-year highs after almost doubling in the last six months. In its latest Q4 report, released last Tuesday (January 28th), its earnings handily beat analyst estimates, while revenues and forward FY revenue guidance was in-line. Currently, its shares trade at a current 15 P/E and 2.6 P/B compared to averages of 13.3 and 3.0 for its peers in the medical drugs group, while earnings are projected to drop precipitously from $2.07 in 2011 to $1.67 in 2012, and then rebound to $1.89 in 2013. We believe that current valuations are too rich, and the stock is most likely to consolidate here as it approaches its long-term high from 2001.
Incyte Corporation (INCY): INCY develops small molecule drugs for hematologic and oncology indications, and inflammatory and autoimmune diseases. Baker Bros. added $242 million, its third largest buy in Q4, to its $18 million prior quarter position. Other major institutional investors that added to their INCY position in Q4 include the world's largest healthcare investment firm Orbimed Advisors adding 0.87 million shares (or $15 million) to its 4.40 million share prior quarter position, and biotech-focused BB Biotech AG adding 0.40 million shares (or $7 million) to its 4.67 million share prior quarter position.
Last November, the company received FDA approval for Jafaki, the first drug approved to treat patients with bone marrow disease myelofibrosis, a rare condition that affects fewer than 200,000 people in the U.S., and for which the drug received an orphan designation. Although sales from the drug have seen a strong ramp with $2.0 million in Q4 revenue from Jafaki in just over a month in sales, well above street consensus of less than $1 million, the company is expected to bleed losses going forward up to at least FY 2013 as it focuses on moving forward the other clinical stage drugs in its pipeline. Meanwhile, overall revenue is projected to rise from $94 million in 2011 to $209 million in 2012 and then onto $301 million in 2013.
Ariad Pharmaceuticals Inc. (ARIA): ARIA is engaged in the development of drugs that treat aggressive and advanced-stage cancer by regulating cell signaling with small molecules. It is also developing small-molecule drugs that block signal transduction pathways in cells responsible for osteoporosis and immune and inflammatory diseases. Baker Bros. added $58 million in Q4 to its $18 million prior quarter position. Other major institutional investors that added to their positions in Q4 include biotech-focused BB Biotech AG, that added a new $40 million position, and SAC Capital Advisors, that added 2.37 million shares (or $34 million) to its 0.18 million share prior quarter position. ARIA shares are trading near eleven-year highs after being up approximately 100% from the lows in October of last year, bolstered by recent broker upgrades based on the potential of its ponatinib treatment and other drugs in its pipeline.
Besides ARIA, some other cancer drugs that Baker Bros. held in its portfolio in Q4 included a $17 million unchanged position in Threshold Pharmaceuticals Inc. (THLD), a biotech company focused on the discovery and development of therapeutics based on tumor hypoxia, a powerful scientific platform that offers broad potential to treat most solid tumors, based on the realization that tumors thrive in areas with low levels of oxygen, or hypoxic regions; a $29 million unchanged position in BioCryst Pharmaceuticals Inc. (BCRX), a biotech company developing small-molecule drugs for the treatment of infectious diseases, cancer, and inflammatory diseases; and a $15 million position in YM Biosciences (YMI), a developer of products for the treatment of cancer and cancer-related conditions.
Other high conviction biotech buys by Baker Bros. in Q4 include (see Table):
- Gilead Sciences Inc. , a developer of therapeutics to treat viral, fungal, respiratory and cardiovascular diseases, in which it added a new $132 million position;
- Spectrum Pharmaceuticals (SPPI), a developer of innovative therapies with a focus in the areas of hematology and oncology, in which it added a new $12 million position; and
- Biomarin Pharmaceuticals (BMRN), a developer of enzyme replacement therapies and oral solutions to treat debilitating, life-threatening, chronic genetic disorders and other diseases and conditions, in which it added $5 million in Q4 to its $12 million prior quarter position.
The following are Baker Bros. high conviction bearish picks based on their Q4 selling activity (see Table):
- Dendreon Corp. (DNDN), a developer of targeted therapeutics to treat cancer using active immunotherapies, monoclonal antibodies and small molecules, in which it cut $20 million from its $27 million prior quarter position;
- Halozyme Therapeutics (HALO), a developer of recombinant human enzymes for the infertility, drug delivery, endocrinology, oncology, and dermatology markets, in which it cut $12 million from its $31 million prior quarter position; and
- Idenix Pharmaceuticals (IDIX), engaged in the discovery and development of drugs for the treatment of human viral and other infectious diseases, including a focus on hepatitis C virus, hepatitis B virus (HBV), human immunodeficiency virus (HIV) type-1, and acquired immune deficiency syndrome (AIDS), in which it cut out its entire $6 million prior quarter position.
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Credit: Historical fundamentals including operating metrics and stock ownership information were derived using SEC filings data, I-Metrix® by Edgar Online®, Zacks Investment Research, Thomson Reuters and Briefing.com. The information and data is believed to be accurate, but no guarantees or representations are made.
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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.