With the rapid pace of M&A happening in the biotechnology sector, Julian Baker and Felix Baker‘s Baker Bros. Advisors is making a habit of hitting home runs in 2015. The fund made over a billion dollars in the first quarter of this year when AbbVie Inc (NYSE:ABBV) acquired the fund’s then-top pick Pharmacyclics Inc (NASDAQ:PCYC) for around $21 billion. Baker Bros. Advisors repeated that over-a-billion-dollar-gain performance in the second quarter when Alexion Pharmaceuticals, Inc. (NASDAQ:ALXN) acquired Synageva Biopharma Corp (NASDAQ:GEVA), another of Baker Bros. Advisors’ top picks, for $8.4 billion. Baker Bros. Advisors owned over 11.66 million shares in Synageva Biopharma Corp (NASDAQ:GEVA) valued at over $1.13 billion as of March 31, 2015. The Synageva Biopharma Corp (NASDAQ:GEVA) acquisition helped Baker Bros. topple all other hedge funds (among those we track) in the second quarter of 2015 when it came to generating returns, according to our metric. According to fund’s latest 13F filing for the period of March 31, it was long in 41 stocks that had a market cap of over $1 billion. These stocks generated a spectacular weighted average return of 34.97% for Baker Bros. Advisors during the secoond quarter, better than any of the other hedge funds (more than 700 in total) that we cover. However, we would like to point out that this return is solely based on the weighted average return of the 41 stocks with a market cap of over $1 billion that Baker Bros. Advisors owned at the end of March, 2015, and is based on the holdings at the time (which may have changed during the quarter). Thus, it excludes positions in most companies with a market cap of under $1 billion, and also excludes the fund’s positions in bonds and options. Hence the actual returns of Baker Bros. Advisors’ equity portfolio can be quite different from the 34.97% returns calculated by us using the above parameters.
Baker Bros. Advisors is just one of more than 700 hedge funds that we have in our database, whose equity portfolios we collate quarterly as part of our small-cap strategy. Even though most smaller investors believe that tracking 13F filings is a fruitless endeavor because they are filed with a delay of a maximum of 45 days after the end of a calendar quarter, the results of our research prove that is not the case. To be on the safe side, we used a delay of 60 days in our backtests that involved the 13F filings of funds between 1999 and 2012 and we still managed to gain an annual alpha in the double digits. Moreover, since the official launch of our strategy in August 2012, our small-cap strategy has obtained returns of more than 135%, beating the S&P 500 Total Return Index by greater than 80 percentage points (read the details here).
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Although Baker Bros. Advisors made significant gains from the Alexion-Synageva deal, with the shares of the latter moving up by more than 140% during the second quarter following the news of the deal, several analysts on the Street raised concern over Alexion Pharmaceuticals, Inc. (NASDAQ:ALXN)’s decision to pay more than double the price of what Synageva Biopharma Corp (NASDAQ:GEVA) was trading at when the deal was announced. Some experts have argued that Alexion Pharmaceuticals, Inc. (NASDAQ:ALXN) might have agreed to such a high price majorly because it wanted to reduce its dependency on the only drug it currently manufactures, ‘Soliris’. When the deal was announced, Synageva Biopharma Corp (NASDAQ:GEVA) was in the process of developing ‘Kanuma’, a medicine for LAL deficiency, which some analysts project can reach sales of around $1.5 billion annually. Regardless, the deal was a great one for Synageva shareholders like Baker Bros., regardless of whether it was an overpay (or precisely because it was an overpay). Apart from Baker Bros. Advisors, Jerome Pfund and Michael Sjostrom‘s Sectoral Asset Management also held a substantial stake in Synageva Biopharma Corp (NASDAQ:GEVA) at the end of the first quarter.