Why is This Biotech Company Baker Bros.’ Top Stock Pick?

Baker Bros. Advisors, managed by – you guessed it – Julian and Felix Baker, had quite the second quarter this year. As seen on our list of best performing hedge funds, Baker Bros. Advisors was the second most successful hedge fund over this time period, at least in terms of total returns. The fund’s 13F portfolio, which is reported to the SEC, returned a whopping 15.8% between March 31st and June 30th, and is currently valued to be worth a little over $4.2 billion. With a focus on biotechnology companies, it is understandable how the New York-based hedge fund was able to generate such significant value for its investors over such a little period of time, but it’s also possible for individuals to have this kind of success. Without further ado, here is the top stock pick in Baker Bros.’ 13F portfolio.

Pharmacyclics, Inc. (NASDAQ:PCYC)

Pharmacyclics, Inc. (NASDAQ:PCYC)

Accounting for a 14.7% stake in the hedge fund, Pharmacyclics has returned 325.9% since the start of 2012, and with a market capitalization above $4 billion, this isn’t your typical small-fry biotech stock. The company develops drugs that can be used to treat a variety of ailments including cardiovascular disease and certain cancers. Pharmacyclics’s ace in the hole, however, is its work with texaphyrin-based technology, which is molecular in nature, and can be manipulated by x-ray light to remove cancerous tissue in a patient’s body.

The company also has a solid amount of products in its drug pipeline that have yet to be approved by the FDA, but have enormous potential. The most important is Ibrutinib, a collaborative effort with Janssen Pharmaceuticals, which is a subsidiary of Johnson & Johnson (NYSE:JNJ). The drug is a BTK inhibitor that can be used to treat a variety of cancers, including chronic lymphocytic leukemia, multiple myeloma, mantle cell lymphoma, and diffuse large B-cell lymphoma.

Last year, Ibrutinib was moderately successful in its phase II trials for the treatment of chronic lymphocytic leukemia (CLL), with 7 out of every 10 patients reporting a positive response to the drug. More importantly, Pharmacyclics also announced in August that Ibrutinib was moving in the right direction with regards to its usage to treat mantle cell lymphoma (MCL). The company added its fifth patient to its trial group, automatically prompting a $50 million payment from Johnson & Johnson’s Janssen Pharmaceuticals.

As of this writing, however, Pharmacyclics still has exactly zero FDA-approved products, and its stock price is being propped up by the potential of Ibrutinib’s successful completion of phase III trials. From a valuation standpoint, the company’s shares look to be overbought nearly anyway you look at it. Pharmacyclics has a Price-to-Earnings ratio of 446.1X, far above peers like Cell Therapeutics Inc. (NASDAQ:CTIC), Merck & Co., Inc. (NYSE:MRK), and Valeant Pharmaceuticals Int. (NYSE:VRX). Even when growth is factored into the equation – EPS has grown by 129.2% over the past 12 months – the stock still looks to be overvalued, as it trades at a ridiculous PEG ratio of over 2,000, compared to others in the industry: Merck (4.4), Valeant Pharmaceuticals (16.7), and Cell Therapeutics (n/a). The latter is not expected to generate any significant earnings over the next five years.

While these metrics are measurements of how investors are valuing Pharmacyclics based on its past and foreseeable earnings, they do not take into account the entirety of profit windfalls that could occur from an FDA approval of Ibrutinib in both its CLL and MCL forms.

It appears that many in the hedge fund industry are buying Pharmacyclics based on Ibrutinib’s potential alone, as 15 hedge funds held shares of the company at the end of the second quarter. The most notable bulls were Cliff Asness, Richard Driehaus, and D.E. Shaw. A few fund managers, including Israel Englander and George Soros, closed out their positions in the stock during this time as well, likely because Pharmacyclics’s hypothetical profits were trading at levels much too expensive for their tastes. For a complete look at the hedge fund industry’s sentiment toward this stock, continue reading here

Biotech Insider Alert - $6 Stock To Hit $40

$200 Million Dollar Healthcare Hedge Fund's #1 Best Idea Right Now

The best healthcare hedge fund out there right now is one of the largest shareholders in this biotech stock. The fund returned more than 20% in each of the last 2 years with a virtually fully hedged portfolio, and it's sending out a BUY signal on this biotech stock. Get your FREE REPORT today (retail value of $300)

This is a FREE report from Insider Monkey. Credit Card is NOT required.
Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

The Greatest Directors in the World

Largest Animals in the World

World’s Most Expensive Desserts

Best Selling Comic Books of All Time

A-list Actors who Sabotaged Their Career

Rappers With a College Degree

The Best Jazz Albums of all Time

The Most Influential Jazz Musicians

The World’s Most Famous Photographers

The Best Oscar-Winning Songs

Most Influential Choreographers Ever

Most Expensive Department Stores in the World

The Most Expensive Stolen Paintings in the World

The World’s Most Expensive Teas

Top Oscar Record Holders

The Most Expensive Flowers in the World

Countries With a Booming Film Industry

Most Expensive Cupcakes in the World

Uncommon European Escapes

The Most Stolen Artists in History

Best Travel Destinations in Australia

World’s Most Expensive Musical Instruments

World’s Most Famous Animals

Most Expensive Cakes in the World

Most Expensive Kosher Champagne in the World

Most Expensive Kosher Wine in the World

The Most Surprisingly Dark Fairy Tales

Most Popular Travel Destinations in Asia

The 10 Most Expensive Dresses Ever Worn to the Oscars

World’s Most Visited Art Museums

Best Countries for Photographers to Work in

Best Paid Jobs in the Film Industry

The Most Renowned Recovered Paintings Ever

Child Stars That Turned out Just Fine

Books That Were Banned in the Past Century

World’s Richest Dancers

Best Remedies against Bad Breath

Foods That Improve Your Skin Texture

Best-Selling Children’s Books of all Time

Foods That Boost Your Libido

Best-Selling Books of all Time

The Most Expensive Academy Awards Jewelry in History

Most Expensive Japanese Restaurant In New York City

The Best B-Boy Movies

Most Awesome Hip Hop Documentaries

Foods That Stain Your Teeth

Richest Doctors in the World

The Best Movie Sountracks Ever

The Highest Grossing Musicals on Broadway

The Most Successful Reality TV Stars

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 129% in 2.5 years!! Wondering How?

Download a complete edition of our newsletter for free!