The $3+ billion Baker Brothers Advisors equity portfolio, managed by brothers Julian and Felix Baker, focuses almost exclusively on life science companies with a small to medium sized market capitalization. Insider Monkey looks at 450 of the world’s most elite hedge fund managers and our research has shown that over time, their picks routinely outperform. For more than a decade in our back tests, our strategy beat the market by 18 percentage points annually; read the stunning details.
Let’s look at the top five picks held by the fabulous Baker Brothers:
At number one is Pharmacyclics, Inc. (NASDAQ:PCYC). Of the 450 hedge funds tracked by InsiderMonkey, Baker Brothers Advisors is the largest holders of the biopharmaceutical company with 11.4 million shares. Pharmacyclics, Inc. (NASDAQ:PCYC)’s flagship cancer treatment drug, Resonate, just enrolled its fifth test patient, triggering a fourth $50 million milestone payment obligation from Jenssen Biotech, part of Johnson & Johnson and a partner in the drug’s development. The stock also benefits from a price/earnings ratio of only 56x versus the industry average of almost twice that. For the 4Q of 2012, revenue soared 1908% while R&D costs were only 35% of revenue.
Second of the top five is Seattle Genetics, Inc. (NASDAQ:SGEN), and again, Baker Bros is the largest holder with 19.3 million shares. Since 2010, Baker Bros has increased their holdings in Seattle Genetics, Inc. (NASDAQ:SGEN) by 10.5%, keeping it within the top five positions during that time. SGEN recently hit a new 52 week high of $37.60 following the news that research in its antibody drug conjugate technology was presented at the 104th annual meeting of the American Association for Cancer Research. But what does this mean for investors? It means that SGEN, with an encouraging product pipeline, innovative technologies and potential revenue growth has excellent potential for profitability. Although earnings for Seattle Genetics, Inc. (NASDAQ:SGEN) are still in the red, revenues more than doubled in the 4Q of 2012 and the percentage of sales devoted to cost of goods sold fell 50%.
Number three is Synageva Biopharma Corp (NASDAQ:GEVA), and once again, Baker is the largest holder among hedge funds we track. Synageva Biopharma Corp (NASDAQ:GEVA) reported better than expected earnings, but the burden of R&D costs (which soared 137%) resulted in a shrinking bottom line and a loss of $0.62 per share from -$0.43 per share for 3Q. As a result, the price/sales ratio for GEVA is 75.2x against the industry average of a much more moderate 7.3x.
Fourth on the list is Genomic Health, Inc. (NASDAQ:GHDX), which develops and commercializes genomic-based clinical laboratory services that analyze the underlying biology of cancer. 4Q earnings fell to $0.06 per share from $0.11 the prior quarter and -$0.08 the same quarter last year. Fortunately, R&D costs were contained which allowed the company’s bottom line to improve to $8.2 million from $7.8 million from last year. On May 8th, the company will present the results from its positive clinical validation study of its biopsy –based OncotypeDX prostate cancer test (Genomic Health, Inc. (NASDAQ:GHDX) Prostate Score, or GPS) to the American Urological Association. The presentation is the latest step in Genomic Health, Inc. (NASDAQ:GHDX)’s efforts to launch GPS by the end of the second quarter of 2013. GPS is pivotal to future growth of Genomic Health, Inc. (NASDAQ:GHDX) as it will help in the development of future tests.
