Baker Brothers Make $1.4 Billion in Two Weeks on Biotech

(Bloomberg) -- Even in the volatile world of biotech, Baker Bros. Advisors has notched some extraordinary returns in the past two weeks.

On October 21, Seattle Genetics Inc. added $2.1 billion to its market capitalization after a study showed one of its therapies slowed the spread of breast cancer, including for patients whose disease had metastasized to the brain. Then on Friday in Hong Kong, BeiGene Ltd. gained 32% after Amgen Inc. said it would take a $2.7 billion minority stake in the Chinese-American drug developer.

For the Baker Bros. -- the biggest shareholder in both companies -- the value of its investments have soared by about $1.4 billion. Its stake in Seattle Genetics is up $1 billion since news of the study broke while the firm's BeiGene holding is up more than $400 million in early trading Friday.

For Julian and Felix, the discreet brothers behind the eponymous hedge fund firm, outsized returns have become almost routine, making a fortune for their investors, including Yale University's endowment and the Tisch family.

Fabulously Wealthy

It has also made the siblings fabulously wealthy, with a combined fortune of at least $3.8 billion, according to the Bloomberg Billionaires Index.

The duo has built a $17 billion investment firm -- a giant by biotech standards -- yet remain little known outside the pharmaceutical world. They've become power players by taking board seats on promising biotechnology companies and combining deep pockets with a remarkably long investing horizon.

The money manager first invested in Seattle Genetics more than 15 years ago when the company was barely breaking even and had no drugs on the market. Felix became lead director in 2005 and over time Baker Bros. added to its stake. The position is now worth more than $5 billion, their largest public holding.

Their position in BeiGene is now worth $2.1 billion and was its third-largest public holding as of June 30. Baker Bros.'s Ronny Krishana sits on the board.

Those who've rubbed elbows with the firm say it focuses as much on the science as the money.

Well Prepared

“You come out of your first meeting with them, you go ‘wow' and you're drenched in sweat,” said Edwin Moses, the former chief executive officer of Ablynx NV, which received an investment from Baker Bros. in 2017. “Not every investor is so well-prepared.”

Despite the firm's success, information about its founders and performance is hard to come by. Baker Bros. has no website and the brothers assiduously avoid the press. The brothers didn't respond to repeated phone messages for comment on their net worth and strategy.

Rare details have emerged, such as when Felix bought one of the largest mansions in Manhattan for $45 million. The New York Post reported in 2017 that the West Village property, previously home to a children's charity, would undergo a massive renovation into a single-family residence.

What's known is that brothers Julian, 53, and Felix, 50, grew up in Chicago's Hyde Park neighborhood. Their father taught history at the University of Chicago and their mother sociology at DePaul University, according to a college questionnaire from their mother. Julian studied at Harvard University and then worked in the private-equity arm of Credit Suisse First Boston. Felix attended Stanford University, completed two years of medical school and got a Ph.D in immunology.

In 1994, the siblings started managing health-care investments for the Tisch family, which had turned theater chain Loews into a conglomerate. The Bakers created a standalone business in 2000 and by 2006, they oversaw about $1 billion, a large but not unwieldy sum for a biotech-investment firm.

The brothers maintained close ties to the Tisch clan. Until 2017, Baker Bros. offices were in the same 667 Madison Avenue skyscraper that's home to Loews Corp., the Tisch holding company.

Lean Operation

The Bakers, now based in the Meatpacking district, run a lean operation. The firm's 40 employees -- 16 of them investment professionals -- oversaw $17.3 billion at the start of 2018, according to a regulatory filing. That's just five more investing staff than it employed in 2012, when it managed less than a fifth of that sum.

Filings from Yale provide snapshots of how they've performed.

Yale's charitable foundation had $274 million invested in 667 LP, a Baker Bros. vehicle, in 2009, IRS filings show. That ballooned to $1.08 billion by 2016, the most recent filing year on record, a combination of new money and profits of $393 million.

The Bakers' success has been built on sweeping advances in the science of genetics, a meteoric rise in biotech stocks and a period of frenzied dealmaking as large biopharmaceutical companies have snapped up smaller innovators.

Since the end of 2006, the Nasdaq Biotechnology Index has returned 345%, while the Nasdaq and S&P 500 indices have returned 298% and 181%, respectively.

Recently the sector has struggled. The biotech index has dropped 6.9% since March 1, compared with a 8.3% gain in the S&P 500. That's partly due to increased scrutiny over drug pricing, but also the rising popularity of Senator Elizabeth Warren in the Democratic presidential primaries, who's taken a combative approach to the pharmaceutical industry.

The brothers rely on talented executives and scientists, often discovered at companies they invest in. These people frequently end up on boards of other companies where Baker Bros. is a stakeholder. When the executives launch businesses, the Bakers have often backed them in their new endeavors.

Board Members

Of the Baker Bros. top 20 disclosed public company investments eight have at least one board member who works for Baker Bros. Chief executives for seven of those twenty companies also serve as board members on other large Baker investments.

Eve Slater, the first woman assistant secretary for the U.S. Department of Health and Human Services, has served on the boards of Idera Pharmaceuticals Inc. and AnorMED Inc., alongside representatives for Baker Bros. She described them as “very scientifically driven” and “active” board members, who steered AnorMED through a difficult period.

Others have been more critical of their influence.

Great Point Partners, a Connecticut hedge fund that owned shares of BioCryst Pharmaceuticals Inc., wrote a letter to the drugmakers' board in February 2018 opposing a proposed merger with Idera.

Great Point co-founder David Kroin argued that the deal appeared to favor Idera's largest shareholder, who was also a significant investor in BioCryst, to the detriment of other BioCryst investors. He didn't name Baker Bros., but the firm was the biggest Idera shareholder at the time and also held a smaller stake in BioCryst.

Kroin lambasted the tie-up and “the inherent benefit to [BioCryst's] largest shareholder at the expense of everyone else,” and argued the deal could even give the shareholder “effective voting control.” Investment firm RA Capital Management echoed these concerns, also not naming Baker Bros. BioCryst investors ultimately rejected the deal.

For CEOs like Ablynx's Moses, Baker Bros.' financial influence and expertise was a valuable asset. Moses said the firm used its sway to drum up engagement from Wall Street banks, who provided favorable terms for the company's 2017 public offering. He even said that the investment firm pledged to stand by him if he decided to reject a takeover offer from French drugmaker Sanofi. Sanofi ultimately bought Ablynx in a deal worth $4.8 billion.

“If I do another biotech venture, having them as an investor would be something to be proud of,” Moses said.

As a result of the acquisition, Baker Bros. banked more than 100 million euros .

--With assistance from Cristin Flanagan, Tom Maloney, Tom Metcalf, Michael McDonald and Drew Armstrong.

To contact the reporter on this story: Simone Foxman in New York at sfoxman4@bloomberg.net

To contact the editors responsible for this story: Pierre Paulden at ppaulden@bloomberg.net, Vincent Bielski

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