Stumbling Biotech Stocks Spell Doom for Baker Bros. Advisors

While several hedge funds have suffered enormous losses this year due to their investments in biotech stocks, the performance of the leading biotech-focused hedge fund Baker Bros. Advisors in 2016 has been disappointing in particular. Founded by brothers Julian Baker and Felix Baker in 2000, Baker Bros. Advisors was the best performing fund during the second quarter of 2015 among the 800 funds we track. However, this year the fund find itself in the company of the worst performing funds on the Street. Analysis done by Insider Monkey of Baker Bros. Advisors’ 13F holdings in companies worth at least $1 billion show that the 36 long positions held by the fund delivered a weighted average loss of 25.4% during the first quarter. Considering the dismal performance of the fund, in this post, we are going to focus on its five largest equity holding while entering 2016 and analyze their individual performances so far this year.

We track prominent investors and hedge funds because our research has shown that historically their stock picks delivered superior risk-adjusted returns. This is especially true in the small-cap space. The 15 most popular small-cap stocks among a select group of investors delivered a monthly alpha of 80 basis points between 1999 and 2012 (see the details here).

#5 ACADIA Pharmaceuticals Inc. (NASDAQ:ACAD)

– Shares Owned by Baker Bros. Advisors (as of December 31): 20.48 million

– Value of Holding (as of December 31): $730.16 million

Baker Bros. Advisors didn’t make any changes in its stake in ACADIA Pharmaceuticals Inc. (NASDAQ:ACAD) during the fourth quarter and remained the largest shareholder of the company among funds covered by us at the end of 2015. However, billionaire Ken Griffin’s Citadel Investment Group, which trailed Baker Bros. Advisors as the largest shareholder of ACADIA Pharmaceuticals Inc. (NASDAQ:ACAD), reduced its stake in the company by 9% to 1.12 million shares during the same period. Shares of ACADIA Pharmaceuticals Inc. were trading down more than 40% year-to-date till quite recently, but a series of positive news at the end of March helped them in ending the first quarter down by 22%. On March 29, an FDA advisory panel voted in the favor of the company’s drug ‘Nuplazid’ for the treatment of Parkinson’s disease psychosis (PDP) and recently the FDA approved the drug. According to some analysts, Nuplazid can capture as much as 70% market share of PDP drugs and can have peak sales of $7.5 billion by the end of 2018.

#4 AbbVie Inc (NYSE:ABBV)

– Shares Owned by Baker Bros. Advisors (as of December 31): 14.37 million

– Value of Holding (as of December 31): $851.48 million

AbbVie Inc (NYSE:ABBV) is among the few biopharmaceutical companies whose stock hasn’t seen a significant correction this year. Though it ended the first quarter with a marginal loss of 2.5%, it has recouped that loss this month and currently trades 5% in the green for 2016. With an annual dividend yield of 3.81%, AbbVie Inc (NYSE:ABBV) is also one of the best dividend stocks in the biotech space. Despite all these positives AbbVie Inc’s stock currently trades at a low forward P/E of 10.18, which analysts feel is mainly because more than 60% of the sales of the company come from a single drug, ‘Humira’. However, AbbVie has been trying to change that by investing heavily in R&D for the past few quarters. On April 11, the FDA approved AbbVie Inc’s new  drug ‘Venclexta’ for the treatment of patients with chronic lymphocytic leukemia (CLL) who suffer from 17p deletion and have been treated with at least one prior line of therapy. Alex Denner‘s Sarissa Capital Management also didn’t make any changes in its stake in AbbVie Inc during the fourth quarter, it continued to own 1.58 million shares of the company at the end of December.

#3 Alexion Pharmaceuticals, Inc. (NASDAQ:ALXN)

– Shares Owned by Baker Bros. Advisors (as of December 31): 6.54 million

– Value of Holding (as of December 31): $1.25 billion

Baker Bros. Advisors also left its stake in Alexion Pharmaceuticals, Inc. (NASDAQ:ALXN) unchanged during the fourth quarter. Notable investors that reduced their stakes in Alexion Pharmaceuticals, Inc. (NASDAQ:ALXN) during the same period included billionaire David E. Shaw‘s firm, D.E. Shaw, which brought its holding down by 27% to 358,241 shares. Shares of Alexion Pharmaceuticals are currently trading down 26% year-to-date. On March 28, the Japanese Ministry of Health, Labor and Welfare approved the company’s drug ‘Kanuma’ for the treatment of patients with lysosomal acid lipase deficiency (LAL-D). Alexion Pharmaceuticals posted EPS of $1.11 on revenue of $701.00 for the first quarter, missing the consensus estimates of EPS of $1.13 on revenue of $710.98 million.

#2 Seattle Genetics, Inc. (NASDAQ:SGEN)

– Shares Owned by Baker Bros. Advisors (as of December 31): 37.3 million

– Value of Holding (as of December 31): $1.67 billion

Amid a 16.4% rise in Seattle Genetics, Inc. (NASDAQ:SGEN)’s stock during the fourth quarter, Baker Bros. Advisors increased its stake in the company by 4%. Funds that initiated a stake in Seattle Genetics, Inc. (NASDAQ:SGEN), during the same period, included Ken Greenberg and David Kim‘s Ghost Tree Capital, which purchased 225,000 shares of the company. Baker Bros. Advisors submitted a 13D filing in March, which revealed that the fund owned 43.35 million shares or 29.5% of Seattle Genetics’ outstanding stock. Seattle Genetics had declined 40% of its market capitalization this year by mid-February, and even though it has managed to recover some of those losses, it is still 25% in the red year-to-date. Despite the turmoil in the biotech space, some analysts have a positive outlook on Seattle Genetics due to the company’s promising drug pipeline and its strategic partnership with Japan-based Takeda Pharmaceuticals. On March 2, analysts at SunTrust initiated a coverage on the stock with a ‘Neutral’ rating and $34 price target.

#1 Incyte Corporation (NASDAQ:INCY)

– Shares Owned by Baker Bros. Advisors (as of December 31): 19.48 million

– Value of Holding (as of December 31): $2.11 billion

After increasing its stake in Incyte Corporation (NASDAQ:INCY) by 1% and 32% during the second and third quarter respectively, Baker Bros. Advisors again increased its stake in the company by 1% during the fourth quarter. Apart from owning 10.4% of the company’s shares, the fund also owned almost $600 million in Incyte’s bonds at the end of December. However, Baker Bros. Advisors top stock pick going into 2016 has turned out to be the worst performer among its five largest holdings so far this year. Shares of Incyte Corporation (NASDAQ:INCY) are trading down 33% year-to-date. Investors tracked by us that sold their entire stake in the company during the fourth quarter included billionaire Jim Simons‘ Renaissance Technologies. For its fiscal 2016 first quarter, analysts are expecting EPS of $0.29 on revenue of $266.38 million, compared to a per share loss of $0.11 on revenue of $159.28 million it reported for the same quarter last year.

Disclosure: None