New York-based Hedge Fund Baker Bros. Advisors LLC, as of the most recent SEC 13-F Q1 filing, had $3.7 billion in equity assets, almost all invested in the biotech sector, and an increase from the $3.0 billion in Q4 and $2.3 billion in Q3 of 2011. About 60% of the fund is in small- and micro-cap equities, and almost the entire remainder of 40% is in mid-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. that they bought in 2007 in the mid-single-digits, and that was acquired last November by Gilead Sciences Inc. (NASDAQ: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. 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. Q1 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 Q1 2012, with the stock in a multi-year uptrend surging to new highs (see Table):
Ariad Pharmaceuticals Inc. (NASDAQ: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 $26 million in Q1 to its $99 million prior quarter position. Other leading institutions with large bullish bets on ARIA in Q1 include mega fund T Rowe Price Associates, with $288 billion in 13-F assets, adding a (almost) new 3.5 million share position, and billionaire star fund manager Stephen Cohen's hedge fund SAC Capital Advisors adding 2.8 million shares to its 2.5 million share prior quarter position.
ARIA reported its Q1 (March) last week, on Wednesday, posting a higher loss than analyst estimates (35c v/s 23c). Its shares have been surging, up about 40% YTD and up about 20-fold from the lows in 2008-09 to twelve-year highs. While much of the surge is on account of investor enthusiasm about the potential of its ponatinib treatment for chronic myeloid leukemia and Philadelphia chromosome positive (Ph+) acute myeloid leukemia, with the company planning for a marketing approval submission in the U.S. and Europe for Q3 of 2012, investors are also enthusiastic about some of the earlier stage candidates in its pipeline, most notably AP26113 for lung cancer and other tumors.
Medivation Inc. (NASDAQ:MDVN): MDVN develops novel small molecule drugs for the treatment of prostate cancer, Alzheimer's disease and Huntington's disease. Baker Bros. added $17 million in Q1 to its $40 million prior quarter position. Another leading institution making a large bullish bet on MDVN in Q1 included mutual fund powerhouse Fidelity Investments adding 3.8 million shares to its 1.3 million share prior quarter position.
MDVN reported its Q1 (March) last Tuesday, missing revenue and earnings estimates. Its shares have been among the biotech group's best performers lately, up to over five-fold in the rally that began last November, and up about 75% YTD. The shares have risen on the back of positive results on its late-stage prostate cancer drug MDV3100 that reported in February of having met all efficacy endpoints in its phase 3 AFFIRM trial; the shares are also up based on the possibility of a take-out by partner Astellas Pharma (ALMPF.PK). Also, the stock was recently added by Citigroup to its "Top Picks Live" list, with the target raised to $129 from $80.
Pharmacyclics Inc. (NASDAQ:PCYC): PCYC is a development stage biotech company that is focused on discovering and developing innovative small-molecule drugs for the treatment of cancer and immune mediated diseases. Baker Bros. added $38 million in Q1 to its $230 million prior quarter position. Another leading institution making a large bullish bet on PCYC in Q1 included Denver, CO-based mutual fund powerhouse Janus Capital Management, with $86.0 billion in 13-F assets, that added a new 1.2 million share position in the company.
PCYC shares have been among the strongest performers in the biotech sector, up to over four-fold in the past year, and now trading at ten-year highs. Even so, analysts are still optimistic about the prospects for the company, with a mean target of $30, and all of the six analysts that cover the company rate it buy/strong buy.
The following are additional biotech stocks that Baker Bros. is bullish about, accumulating shares in them in Q1 2012 (see Table):
- Synageva BioPharma Corp. (NASDAQ:GEVA), that is a clinical-stage biotech developing treatments for patients with rare diseases and an unmet medical need, in which it added a new $280 million position in Q1, its largest buying during the quarter;
- XOMA Ltd. (NASDAQ:XOMA), that XOMA develops antibodies and recombinant proteins to treat infections, immunological and inflammatory diseases and cancer, in which it added $37 million in Q1 to its $1 million prior quarter position;
- Spectrum Pharmaceuticals (NASDAQ:SPPI), that develops innovative therapies with a focus in the areas of hematology and oncology, in which it added $5 million in Q1 to its $11 million prior quarter position;
- Array Biopharma Inc. (NASDAQ:ARRY), a development stage biotech company focused on the discovery, development and commercialization of small molecule drugs that regulate target proteins to treat cancer and inflammatory diseases in North America, Europe and the Asia Pacific, in which it added a new $4 million position in Q1;
- Exelixis Inc. (NASDAQ:EXEL), that develops small-molecule therapies for the treatment of cancer, in which it added $4 million in Q1 to its $6 million prior quarter position;
- AVEO Pharmaceuticals Inc. (NASDAQ:AVEO), a clinical-stage oncology-focused biotech company, in which it added a new $3 million position in Q1; and
- Sequenom Inc. (NASDAQ:SQNM), that operates in the field of industrial genomics, providing products, services, diagnostic testing, applications, and genetic analysis products that translate the results of genomic science into solutions for biomedical research, translational research, molecular medicine applications, and agricultural and livestock research, in which it added a new $3 million position in Q1.
The following are Baker Bros' bearish picks in the biotech sector, based on its Q1 selling activity (see Table):
- Gilead Sciences Inc. , a developer of therapeutics to treat viral, fungal, respiratory and cardiovascular diseases, in which it cut $105 million in Q1 from its $145 million prior quarter position;
- Threshold Pharmaceuticals Inc. (NASDAQ:THLD), a biotech company focused on the discovery and development of therapeutics based on tumor hypoxia, in which it cut $8 million in Q1 from its $24 million prior quarter position; and
- Dendreon Corp. (NASDAQ:DNDN), a developer of targeted therapeutics to treat cancer using active immunotherapies, monoclonal antibodies and small molecules, in which it cut $2 million in Q1 from its $6 million prior quarter position.
Credit: Fundamental data in this article and company descriptions are based on SEC filings, Zacks Investment Research, Yahoo, Thomson Reuters and Briefing.com. The information and data is believed to be accurate, but no guarantees or representations are made.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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