Baker Brothers' 93 Stock Portfolio: Top 4 Holdings Analyzed - Sure Dividend

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Baker Brothers’ 93 Stock Portfolio: Top 4 Holdings Analyzed


Updated on June 15th, 2021 by Nikolaos Sismanis

Founded in 2000 by Julian Baker and Felix Baker, Baker Bros. Advisors is a private hedge fund based out of New York City. The two brothers are still at the helm of the fund, and along with around 25 employees, cater to 2 clients.

The fund has grown rapidly over the years due to its extraordinary returns and currently boasts approximately $23 billion of assets under management (AUM). Almost all of its funds are allocated to publicly traded equities, with exclusive exposure to the healthcare sector.

Investors following the company’s 13F filings over the last 3 years (from mid-May 2018 through mid-May 2021) would have generated annualized total returns of 19.27%. For comparison, the S&P 500 ETF (SPY) generated annualized total returns of 18.6% over the same time period.

You can download an Excel spreadsheet with metrics that matter of Baker Brothers Advisors’ current 13F equity holdings below:

 

Keep reading this article to learn more about Baker Brothers Advisors.

Table Of Contents

Baker Brothers’ Philosophy and Strategy

Brothers Julian and Felix Baker have earned their guru-like status on Wall St., having delivered an exceptional track record of annualized returns over the years. Julian has a business background from Harvard, while Felix has a Ph.D. in Immunology from Stanford. Together, they have combined their individual expertise to generate superior returns by focusing solely on the biotech industry.

They grew from $250 million in AUM in 2003 into $23 billion worth of AUM as of May 15, 2021. Their impressive quality is their consistency, proven by their close to 20% annualized returns achieved over the past three years, implying no signs of a slowdown.

The fund’s strategy includes utilizing a fundamentally-driven way of investing to come up with its investment decisions, also known as “bottom-up investing”. Unlike top-down investing, which suggests studying the bigger picture of economic factors to make investment decisions, bottom-up investing involves looking at the company-specific fundamentals such as a business’s financials, cash flows, and the merit of its goods and services. This is crucial when investing in the biotech industry, as each company is very unique, requiring niche knowledge to understand its business model.

The fund’s philosophy stands in holding its investments ordinarily for three years, though its higher-conviction investments can be seen held for longer. Additionally, Baker Bros. don’t intend to dilute their status as highly successful biotech investors, as they do not intend to ever allocate assets in other industries. Still, some minor stakes in the industrials sector had been reported in the past.

Finally, the two brothers don’t believe in diversifying the fund’s portfolio. Instead, they emphasize that focusing on specific companies, which they can analyze and understand deeply and place concentrated positions in their securities, can generate superior returns over the long term.

Baker Brothers Investments’ Portfolio & 4 Largest Public-Equity Investments

Upon looking in Baker Bros’ portfolio, one can see that it holds 93 individual stocks, questioning the fund’s disbelief in diversification. However, the fund’s investing philosophy does hold up, as the top 10 holdings account for 81.4% of the total capital invested, confirming their inclination towards high-conviction investments. Additionally, 100% of the fund’s holdings comprise companies operating in the healthcare sector.

Source: 13F filing, Author

BeiGene, Ltd. (BGNE):

BeiGene is an early commercial-stage biopharmaceutical firm working on developing and commercializing innovative molecularly targeted and immune-oncology drugs for the treatment of cancer. It is the fund’s largest holding by far, occupying nearly 1/4 of its total portfolio. This is quite odd since the company is based in Beijing, China, which means that the fund’s due diligence process has to go next level due to the weaker Chinese reporting standards.

Despite the uncertainty surrounding BeiGene, the company has developed into a fully integrated global biotechnology company with operations in China, the United States, Europe, and Australia, and a robust pipeline of pharmaceuticals, strengthening its reputation. Nonetheless, BeiGene produces miniature revenues against its $31.7 billion market cap, indicating that investors are betting heavily on the company’s long-term prospects.

Baker Bros held its position steady last quarter, though the fund still owns nearly 13% of the company.

Incyte Corporation (INCY):

Incyte Corporation focuses on the discovery, development, and commercialization of various therapeutics. Its flagship products include JAKAFI, which is a drug for the treatment of myelofibrosis and polycythemia, and Iclusig, a kinase inhibitor to treat chronic myeloid leukemia.

Unlike many biotech companies, which are pre-revenue, Incyte has been growing its top and bottom line for years. Revenues have expanded from around $169 million in 2010 to $2.7 billion over the past 4 quarters. The company is expected to produce FY2021 EPS of $3.02, suggesting a forward P/E ratio of ~28.5.

EPS over the medium term is then expected to grow by around 30% since Incyte is an industry leader, essentially monopolizing its areas of treatment. In that regard, the valuation seems quite compressed. However, the industry is full of risks, and when the company’s patents expire, competition is likely to rise at some point.

The fund owns around 14.7% of the company, despite its quite substantial market cap of $18.9 billion.

Kodiak Sciences Inc. (KOD)

Kodiak Sciences Inc. is a clinical-stage biopharmaceutical company engaging in researching, developing, and commercializing therapeutics to treat retinal diseases. Its principal product candidate is KSI-301, a vascular endothelial growth factor (VEGF)-a biological agent that is in Phase 1b clinical study to treat wet age-related macular degeneration (AMD).

While the $4 billion market cap company holds around $930 million in cash, which should sustain several quarterly losses before possible commercialization, Kodiak’s current loss annual run rate reaches nearly $200 million based on the $50 million of losses last quarter.

Successful commercialization could lead to rich shareholder returns considering that it is estimated that the global Wet-AMD market will approach $10.4 billion by 2024, meaning that Kodiak could even be undervalued at its current market cap of $4 billion based on the potential annual profits. Still, if the company continues to bleed money for long, a potential cash raise could significantly dilute shareholders, hurting the stock price.

Baker Bros held their position steady during the quarter. The fund currently holds more than 27% of the company’s shares, indicating a high conviction of Kodiak’s future success.

ACADIA Pharmaceuticals Inc. (ACAD):

ACADIA Pharmaceuticals focuses on the development and commercialization of small molecule drugs aimed at unmet medical needs in central nervous system disorders. The company features extraordinary revenue growth, at a 3-year CAGR of 42.46.%. The bottom line has never been positive, with losses widening even as sales are growing.

In March, Acadia had announced deficiencies identified by the FDA about its marketing application for Pimavanserin in hallucinations and delusions associated with dementia-related psychosis. Shares had plunged by a massive 45%, and they have yet to recover since then. While the company maintained its 2021 net sales guidance of between $510 million – $550 million, the business seems incapable of meeting investors’ past expectations.

This is one of the fund’s highest conviction picks, as Baker Bros still owns around 26% of the company’s shares, which have been held since 2010. While the fund has made great gains since, the recent plunge has definitely compressed its unrealized gains, as the position was held stable once again.

Final Thoughts

The Baker brothers have built a truly special hedge fund. Specializing in a sector that is challenging to understand by most investors, the firm has lightly outperformed the overall market with its concentrated biotech portfolio. Investors that are familiar with biotech companies are likely to find some hidden gems amongst their holdings.

Simultaneously, however, most of them comprise very risky pre-revenue firms that should only be considered upon having a great understanding of their business model. Hence, retail investors should be wary of just “copying” the fund’s portfolio.

 

Additional Resources:

Pershing Square: Bill Ackman’s 7 Stock Market-Beating Portfolio

Bridgewater Associates’ 411 Stock Portfolio: Top 10 Holdings Analyzed

Appaloosa Management’s 40 Stock Portfolio: Top 10 Holdings Analyzed

Viking Global’s 75 Stock Portfolio: Top 10 Holdings Analyzed

Lone Pine Capital’s 37 Stock Portfolio: Top 10 Holdings Analyzed

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