Baker Bros. was established in 2000 by Julian and Felix Baker. Private hedge fund Advisors is situated in New York City. The two brothers are still in charge of the fund, which serves two customers with the help of about 25 personnel.
Due to its exceptional results, the fund has expanded quickly over time and now boasts over $25.7 billion in assets under management (AUM). Its funds are almost entirely invested in publicly listed stocks, with a strict focus on the healthcare industry.
The average annualized returns for investors who followed the company's 13F filings during the past three years (from mid-May 2019 to mid-May 2022) would have been -6.7 percent.
The Philosophy and Strategy of Baker Brothers
The Baker brothers, Julian and Felix, have established themselves as Wall Street gurus by consistently generating above-average annualized returns over time. Felix holds a doctorate in immunology from Stanford, whilst Julian has a business background from Harvard.
By concentrating primarily on the biotech sector, they have pooled their particular abilities to produce higher profits. As of May 15th, 2022, assets under administration increased from $250 million in 2003 to $25.7 billion.
The approach of the fund comprises making investment decisions based on basic analysis, often known as "bottom-up investment." Bottom-up investment entails looking at the business fundamentals as opposed to top-down investment, which advocates looking at the broader picture of economic conditions to make investment choices.
The financial health of the company, cash flows, and the quality of its products and services are some of these core measures. This is essential to know when purchasing in the biotech sector because every firm is quite different and requires specialized expertise to comprehend its business plan.
The strategy of the fund is to retain assets for three years on average, although higher conviction investments may be kept for longer. Additionally, Baker Bros. does not want to compromise its reputation as a very successful biotech investor by ever investing in other sectors of the economy. However, there have been a few small industrial investments recorded in the past.
Finally, the portfolio diversification of the fund is not something the two brothers support.
Instead, they highlight that concentrating on particular firms, which they can thoroughly research and comprehend and buy large amounts of their securities, can lead to greater long-term results.
Portfolio of Baker Brothers Investments & Top 4 Public Equity Investments
The fact that Baker Bros.'s portfolio has 109 distinct equities raises doubts about the fund's denial of diversity. The fund's investment strategy is still valid, though, since the top 10 holdings represent 79.1% of the entire amount invested, demonstrating their preference for high-conviction assets. Furthermore, all of the fund's assets are businesses engaged in the healthcare industry.
Incyte Corporation (INCY):
This company is primarily focused on the development, marketing, and discovery of numerous therapies. Its two main offerings are Iclusig, a kinase inhibitor used to treat chronic myeloid leukemia, and JAKAFI, a medication for the treatment of myelofibrosis and polycythemia.
Incyte has been increasing its top and bottom lines for years, unlike many biotech startups that are still in the pre-revenue stage. Over the previous four quarters, income has increased from $169 million in 2010 to $3.11 billion. The stock is now trading at a near-record low forward P/E ratio of 23.6 for the firm.
Since Incyte is a market leader and has effectively monopolized its therapeutic areas, PS is predicted to rise by roughly 30% over the medium term. The value appears to be constricted in that regard. The market is risky, though, and competition is anticipated to increase as the company's patents run out.
The corporation, which has a $16.7 billion market worth, is owned by the fund to a degree of 16.3 percent. In the preceding quarter, the post had a 7 percent increase.
BGNE: BeiGene, Ltd.
BeiGene is a biopharmaceutical company in the early stages of commercialization that is focused on creating and marketing novel immuno-oncology and molecularly targeted medications for the treatment of cancer. With 18.1 percent of the fund's whole portfolio under its ownership, it is the second-largest holding.
Since the firm is situated in Beijing, China, the fund's due diligence procedure must be expanded owing to the laxer Chinese reporting rules, which is somewhat strange given the company's location.
BeiGene has grown into a seamless integration global biotechnology corporation with facilities in China, the United States, Europe, and Australia despite the uncertainties surrounding the organization. The company's reputation is enhanced by its strong pharmaceutical pipeline.
In spite of this, BeiGene generates little revenue in comparison to its $17.0 billion market valuation, showing that investors have a lot of faith in the business's long-term potential. It is hoped that the company's substantial financial reserves would last until the next medicine is commercialized prior to final diluting shareholders.
Even though the fund still holds over 11.4 percent of the firm, Baker Bros maintained its stake in the most recent quarter.
ACADIA Pharmaceuticals Inc. (ACAD):
The primary emphasis of ACADIA Pharmaceuticals is the research and marketing of small molecule medications to address unmet medical needs in illnesses of the central nervous system. The firm has shown exceptional revenue growth, with a 5-year CAGR of 49.8%. But despite rising sales, the bottom line was never profitable. Losses continue.
Acadia reported FDA problems with their marketing authorization for Pimavanzserin in hallucinations and delusions linked to dementia-related psychosis in March 2021. Shares experienced a sharp 45 percent decline, and they haven't recovered since. Despite the company's continuous growth, it doesn't appear that it can live up to previous investor expectations.
Given that Baker Bros. still has around 26% of the company's shares, which it has owned since 2010, this investment has one of the fund's highest levels of confidence.
Even if the fund has subsequently had significant gains, the latest decline has undoubtedly reduced those profits, even though the position was once more maintained constant.
BioMarin Pharmaceutical Inc. (BMRN):
BioMarin Pharmaceutical develops and sells treatments for patients with severe, potentially fatal, uncommon illnesses and medical conditions. Although the company's sales growth seems to have slowed down in recent years, it seems that its development pipeline is still rather strong. Most recently, BioMarine received a favorable CHMP opinion in Europe for ValRox, a medication used to treat hemophilia A.
Since Q2 2012, BioMarine has become a part of Baker Bros' portfolio. The prior quarter saw no change to the position. Baker Bros.' fourth-largest position at the moment is BioMarine, with the fund possessing 4.14 percent of the company's shareholdings.
The Baker brothers have created a hedge fund that is genuinely unique. The company, with its specialized biotech portfolio, has traditionally outperformed the broader market over a number of years despite specializing in a field that is difficult for most investors to comprehend.
Performance over the previous three years has been below average, but given that the fund's primary objective is long-term gains, this might just be a phase. Investors with experience in biotech firms may uncover some hidden jewels among their holdings.
However, the majority of them consist of dangerous pre-revenue businesses that need to only be taken into consideration after thoroughly studying their business strategy. Individual investors should be cautious about just "copying" the holdings of the fund.
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