“Baker Brothers Biotech Baby Blue-Chip”

by Travis Johnson, Stock Gumshoe | March 4, 2008 9:06 pm

This one comes in a teaser ad for the Rising Tide Letter[1] from Lynn Carpenter[2], which I’ve never looked at before. Aside from some fabulous alliteration, it offers a biotech stock that’s been picked by some high-profile biotech investors … a pick that Lynn apparently believes is a blue chip in the making.

Trying the newsletter will cost you $99 a year … finding out the name of this baby blue chip biotech will, of course, cost you zilch. Just a few moments of your time as you patiently await the findings of the mighty Gumshoe.

What do we learn from the clues?

That there are a couple biotech investors — brothers, no less — who are famous in biotech circles, in an “under the radar” kind of way.

And the sale language is laid on pretty thick, as usual:

“America’s Super Wealthy Just Poured Nearly Two-Thirds of a Billion Dollars Into This Soon-to-Be Blue Chip Company … Because they know the stock is poised to soar in the coming months … and could easily run 1,000% in the years ahead.”

Conjures up fabulous images, no? How easy it would be to join those super wealthy, lounge with them on their chaises as the yacht idles in the harbor?

But I digress.

The tease says that you can now (thanks to the market meltdown) buy this stock for 20% less than these in-the-know billionaires and cognoscenti paid just months ago. Take that, yachters!

Who has been buying shares?

“Among them are the The Bill and Melinda Gates Foundation, JPMorganChase, Ned Johnson (the multi-billionaire head of Fidelity[3] Investments) and John Granahan (famed portfolio manager), to name just a few of the legends on board already.”

But the most important shareholders are apparently the Baker brothers — a long list of biotech success stories is given to provide their bona fides, and the one “stinker” they’ve bought recently is written off because they “both sit on its board, so it’s likely a winner waiting to happen.”

That’s quite a faith-based statement, but we don’t care about that “one stinker” in this instance, so we’ll go on to see if we get some specific clues for the “baby blue chip”:

“On September 30, 2007, they [The Bakers, in case you haven’t been paying attention] bought 4,712,589 shares of this genius-led biotech.”

And actually, as we know from any perusal of SEC filings, that’s enough to find the name of the company. But there is a bit more about their actual business.

“What distinguishes this company is that it has what many consider the best pipeline in biotech.”

They have six therapies in the pipeline, apparently, and are a leader in “THE hottest area in biotech-genetic research today … monoclonal-antibody technology.”

Monoclonal antibodies are, of course, behind wonder drugs like Avastin and Herceptin (both of those happen to come from PDL Biopharma antibodies), and they have been a big part of cancer research into new therapies for quite some time. This one (or this technique or this platform, something like that) is apparently showing some promise of being better than the current therapies, even the blockbusters, because there’s some hope that it will spare more of the healthy cells.

In the words of the ad, “Because this biotech’s promising monoclonal-antibody drugs look as if they can successfully carry a targeted payload of toxin directly to tumor cells… and nowhere else.”

So … what company is Lynn teasing us with here?

The thinkolator tells us (and some folks over at the forum agree[4]) that this is …

Seattle Genetics (SGEN)[5]

All of the institutional owners teased are still holding shares, as of the last filing — including the Baker brothers, through their Baker Brothers Life Sciences Capital and Baker Brothers Biotech Capital funds … any list of major holders will include the Granahan fund, the Gates foundation, etc.

The Baker brothers run money for institutions, so you probably can’t buy into their funds, but they are very widely followed in health care investing circles — you’ll probably see them featured by all the insider trading sites and tracking systems, and since they manage significant amounts of money you’ll see lots and lots of SEC filings from them updating us on all of their investments.

And the price has indeed come down a bit since many of those institutional buys were made last fall — but not dramatically. You can get shares around $9 if you’re interested.

Should you be? Well, I’ll be the last person to advise you about biotech investing. I’m no scientist, and I certainly can’t tell you whose monoclonal antibodies are better than everyone else’s.

If you check out their pipeline (virtually all biotechs share their pipeline on their website, SGEN’s is here[6]), you’ll see that they have three compounds in clinical trials, for six different diseases. There are three other compounds in preclinical trials — but be careful about assigning value to those. Common estimates are that perhaps 10% of phase 1 compounds make it all the way to approval, and getting to phase II might make the chances 50%, but the odds of preclinical compounds making it through have to be awfully thin … so if all else is equal this is like many other biotechs — it has a puncher’s chance of landing a blockbuster, but the odds are not definitively one way or the other. Clearly, what makes Carpenter think all else is not equal are the institutional investors.

The difficulty with all of these kinds of companies, of course, is in assigning value — if a phase II compound is going to require hundreds of millions in investment to get through clinical trials, and will not be on the market for five years (if approved), what is it worth? Certainly we’re not talking about a company that has earnings, or that is likely to have earnings in the near future (unless they sell or partner some very promising drugs). I know enough not to speculate on this one in a quick Gumshoe writeup, but not much more.

I certainly appreciate that they have more than one compound in the clinic, which is surprisingly rare among small biotech companies (this one’s market cap is about $600 million), and I would generally agree with Ms. Carpenter that if you don’t know much about the science, it can’t hurt to go with cancer drugs and to go with companies in which insiders and knowledgeable biotech investors show an interest. I prefer bigger and deeper pipelines, of course (that’s like saying you’d like to be taller, more attractive, and a better dancer, and you wish you had stuck with those piano lessons) … and this one appears to me (simply based on size and the diseases targeted — I don’t know if the drugs are any good) to be promising but not dramatically so.

Any chemists, biotech junkies, or Seattle Genetics shareholders out there? Let us know what you think. Me? I’m interested, but it’s going to take me some more time and learning to understand this one well enough to consider investing.

full disclosure: I own call options[7] on PDL Biopharma (definitely not bragging about that one today), but do not have an interest in any other company mentioned here.

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