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

blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

50 Crazy Facts About Japan You Won’t Believe

Top 10 Least Expensive Hybrid Cars to Save the Planet With

The 10 Biggest ‘Gate’ Controversies in History

The 10 States with the Highest Nursing Shortages Leaving Their Hospitals Depleted

The 10 Best Value Investment Blogs that Every Investor Must Read

The 6 Cheapest Boarding Schools in Europe 2015

The 5 Most Expensive Cars To Insure in the World

The 10 Most Common Genetically Modified Foods

10 Self-Made Billionaires Who Came From Nothing

The 10 Most Expensive Cities to Live in North America

The 13 Most Expensive Headphones in the World to Represent

The Top 20 Wealthiest Soccer Teams in 2014

4 BuzzWorthy Cannabis Stocks And Some Smoking Derivative Plays

The 10 Healthiest Fast Food Chains in America to Dine At

The 5 Most Expensive Cat Food Brands You Can Spoil Your Kitty With

The 6 Best eCommerce Platforms for Small Businesses

The 10 Worst Mistakes an Entrepreneur Can Make

The 5 Most OP Characters in League of Legends to Carry Games and Crush Foes With

The 5 Best Foods to Eat Before Running that Will Help You Pound the Pavement

10 Glaring Plot Holes in The Walking Dead that a Zombie-Filled Bus Could Drive Through

The 5 Biggest Celebrity Stoners Who Love Their Reefer

The 10 Most Overrated Movies Of All Time by Out-of-Touch Critics

Top 6 Least Expensive Cruise Destinations For 2015 that Will Take You to Paradise

10 States with Lowest Substance Abuse Rates in America

The 14 Most Watched TV Finales Ever

The 10 Best Selling Role Playing Games of All Time for PC

10 Most Influential Papers In Economics

Top 8 Biggest Charities in the US

10 Worst Celebrity Career Moves Ever

Top 10 Best Paid Tennis Stars in the World

10 Cities with High Demand for Nurses

6 of the Worst Greeting Card Messages Ever Crafted

How to Make Money in ArcheAge and Build Your Empire

10 Foods To Eat To Lower Cholesterol Levels

The 10 Most Hated Television Characters of All Time

The 30 Worst Halloween Costume Ideas Ever Brought to Horrible Life

10 Vocational Skills in Demand Today with Jobs Waiting to be Filled

10 Best Places to Visit in Central and South America

The 10 Greatest Empires in History Which Nearly Conquered the World

The 6 Cheapest Boarding Schools In America 2015

5 Clear Reasons LoL is Better than DotA, Continues to Rule MOBAs

The Only 9 Teams with a Chance to Win the Super Bowl

The 15 Most Common Phobias in America that Induce Fits of Panic

Top 6 Least Expensive Tourist Destinations in 2014

Jim Goetz, Peter Fenton, Jim Breyer: Top 6 Venture Investors for 2014

Top 15 Billionaires in 2014

5 Pitfalls To Avoid When Buying a Franchise

Top 20 Medical Schools in the US – 2014 Rankings

4 Business Strategies that Turned Jamie Oliver into the World’s Richest Chef

6 Qualities That Make You A Good Team Player

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 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!