Investors would have achieved an annualized total return of 26.7% over the past three years (from mid-February 2018 to mid-February 2021) according to the company’s 13F filings. For comparison: the S&P 500 ETF (SPY) achieved an annualized total return of 12.50% over the same period.
You can download an Excel spreadsheet of metrics relevant to Baker Brothers Advisors’ current 13F stock holdings:
Keep reading this article to learn more about Baker Brothers Advisors.
Baker Brothers philosophy and strategy
Brothers Julian and Felix Baker have earned their Guru-like status on Wall Street and have had an exceptional track record of annualized returns over the years. Julian has a business administration background from Harvard while Felix has a Ph.D. in Immunology from Stanford. Together they have combined their individual expertise to achieve superior returns by focusing solely on the biotech industry.
They grew from $ 250 million in 2003 to AUM valued at $ 26.5 billion on February 15, 2021. Their impressive quality is their consistency, which has increased in annual returns of over the past three years Shows 20% and does not imply any signs of slowing down.
The Fund’s strategy includes the use of a fundamentally focused investment method to make its investment decisions, also known as “bottom-up” investing. Unlike top-down investing, which requires looking at the bigger picture of economic factors in order to make investment decisions, bottom-up investing looks at company-specific fundamentals such as a company’s finances, cash flows, and the benefits of its goods and services examined. This is crucial when investing in the biotech industry as each company is very unique and needs niche knowledge to understand their business model.
The philosophy of the Fund is to typically hold its investments for three years, although more conviction will hold its investments longer. Additionally, Baker Bros. does not intend to dilute their status as highly successful biotech investors, as they never intend to allocate assets in other industries. However, some smaller shares in the industrial sector have been reported in the past.
After all, the two brothers do not believe in diversifying the fund portfolio. Instead, they emphasize that focusing on specific companies, which they can thoroughly analyze and understand, and place concentrated positions in their securities, can produce superior returns over the long term.
Baker Brothers Investments portfolio & 3 largest public equity investments
A look at Baker Bros’ portfolio reveals that it holds 102 individual stocks, which challenges the fund’s disbelief in diversification. However, the fund’s investment philosophy continues as the top 10 positions represent 82.7% of total capital invested, confirming their propensity for compelling investments.
Source: 13F filing, author
BeiGene, Ltd. (BGNE):
BeiGene is an early commercial biopharmaceutical company working to develop and commercialize innovative molecular targeted and immuno-oncological drugs for the treatment of cancer. It is by far the fund’s largest holding, taking up almost 1/4 of its total portfolio. This is pretty strange as the company is based in Beijing, China. This means that the fund’s due diligence process needs to be taken to the next level due to the weaker Chinese reporting standards.
Despite the uncertainty surrounding BeiGene, the company has grown into a fully integrated global biotechnology company with offices in China, the US, Europe and Australia and a robust pipeline of pharmaceuticals, which strengthens its reputation. Even so, BeiGene has miniature sales versus its market cap of $ 29.4 billion, indicating that investors are betting heavily on the company’s long-term prospects.
Baker Bros cut its stake 12% last quarter, although the fund still owns around 13% of the company.
Incyte Corporation (INCY):
Incyte Corporation is focused on the discovery, development, and commercialization of various therapeutics. Key products include JAKAFI, a drug used to treat myelofibrosis and polycythemia, and Iclusig, a kinase inhibitor used to treat chronic myeloid leukemia.
Unlike many pre-sales biotech companies, Incyte has grown its income statement for years. Revenue rose in the last four quarters from approximately $ 169 million in 2010 to $ 2.67 billion. The company is projected to generate earnings per share of $ 3.26 for fiscal 2021, indicating a forward P / E ratio of ~ 24.
EPS is expected to grow around 25% over the medium term as Incyte leads the industry and essentially monopolizes its treatment areas. In this regard, the rating seems rather condensed. The industry is fraught with risk, however, and if the company’s patents expire, competition is likely to increase at some point.
The fund holds approximately 14.6% of the company despite its sizeable market capitalization of $ 17 billion.
ACADIA Pharmaceuticals Inc. (ACAD):
ACADIA Pharmaceuticals is focused on the development and commercialization of small molecule drugs that target unmet medical needs in central nervous system disorders. The company has exceptional sales growth with a 3 year CAGR of 52%. The bottom line has never been positive, and losses increased as sales increased. In early March, Acadia announced deficiencies identified by the FDA in relation to its marketing application for pimavanserin for hallucinations and delusions in connection with dementia-related psychosis. As a result, stocks fell a massive 45% with no signs of recovery over the next several weeks.
This is one of the fund’s highest beliefs, as Baker Bros owns roughly 26% of the company’s shares, which they have held since 2010. While the fund has made big gains since then, the recent slump has definitely compressed its unrealized gains, holding the position stable in the QoQ.
The Baker brothers built a really special hedge fund. The company specializes in a sector difficult to understand for most investors and has outperformed the overall market with its concentrated biotech portfolio. Investors familiar with biotech companies are likely to find some hidden gems in their holdings.
At the same time, however, most of them are made up of very risky pre-revenue companies that should only be considered if they have a good understanding of their business model. Retail investors should therefore be careful if they only “copy” the fund’s portfolio.
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