Follow 2 geniuses into drug stocks

By Michael Brush

In times like these, it's a good idea to focus on companies that can't get waylaid by a recession.

Go with those that produce things many people will have absolutely no choice but to use sooner or later -- like treatments for cancer or diabetes, or diagnostic tests that might help them avoid chemotherapy.

My MSN Money colleague Jon Markman likes to warn that the biotechnology field is full of profitless companies and promising drugs that never reach market. So how do you know which ones to choose?

I turn to two tenacious brothers with a proven record of finding huge biotech winners: the Baker brothers.

Expertise on record

Haven't heard of Julian and Felix Baker? I'm not surprised. Other than the occasional interview in The New York Times and marriage notices, these New York money managers don't appear much in the press. You won't see them on CNBC. They didn't respond to my inquiries for this article.

But their prowess comes through loud and clear if you dig through the records:

• Shares of Seattle Genetics (SGEN, news, msgs) have gone up 40%, on average, six months after they were purchased by one Baker brothers fund in recent years, according to Thomson Financial. The brothers are up 93% on Seattle Genetics shares purchased in the past 18 months.

• Shares of Incyte (INCY, news, msgs), Genomic Health (GHDX, news, msgs) and ViroPharma (VPHM, news, msgs) have advanced 40% to 66% after being purchased by Baker funds in recent years, Thomson says.

The brothers have some losers, too. But their record is downright impressive.

"They tend to buy at lows," says Michael Panichaud of Market Profile Theorems, an independent adviser whose own picks handily beat S&P 500 Index ($INX) returns. "They define an area of relative attractiveness and are persistent in their accumulation. Over the longer term, their bets are vindicated."

You can't buy shares in any mutual fund run by these two geniuses. They manage money for universities and foundations through a firm called Baker Bros. Advisors, which they founded in 2000 after years of managing money for the family of former CBS television chief Laurence Tisch.

But through public filings, you can see what they've been buying lately and perhaps follow along. Five that look attractive are Seattle Genetics, Genomic Health, ViroPharma, Incyte and Allos Therapeutics (ALTH, news, msgs). (Warning: This column may drive up prices temporarily, so don't buy these stocks for more than what the brothers paid. Don't lose money to a spike.)

Behind the success

What makes the Baker brothers so special? Biotech leaders paint the following picture:

First, they are really smart. "Felix is almost like an encyclopedia of knowledge," says Clay Siegall, the chief of Seattle Genetics. Felix earned a doctorate in immunology from Stanford University after studying biology there as an undergrad. Julian, who studied at Harvard, has a business background.

Next, they put in long hours to understand what they invest in. "They do their homework just about as well as anyone I have met from the Wall Street community," says Genomic Health chief Randy Scott. "They are very intense."

Scott recalls how, years ago, Julian listened for 45 minutes to his presentation on Incyte, a company he was setting up at the time. Julian excused himself to pull his brother from Stanford's nearby campus. Both finished the meeting and later invested heavily in the company.

• Video: Taking the pulse of baby biotechs

The Bakers work well in teams, both as brothers and with colleagues. "When we meet with them it is never only one or two people," says ViroPharma chief Michel de Rosen. "Sometimes it is four or five or six people, and they all take notes."

These managers praise the Baker brothers for their long-term perspective as shareholders and their connections in both the scientific and financial worlds. In at least one case, they helped persuade a large mutual fund to take a position in a stock they held.

Seattle Genetics

Seattle Genetics makes antibodies that attach to cancer tumors and instruct them to die. They also make antibodies on steroids, packing a lethal dose of toxins. "We attach a potent cell-killing agent that stops cancer cells from dividing," Seattle Genetics' Siegall says.

These superantibodies are based on the company's antibody-drug-conjugate (ADC) technology. Seattle Genetics licenses the technology to other drug companies, including Bayer (BAYZF, news, msgs) and MedImmune, a division of AstraZeneca (AZN, news, msgs). It also gets income from a partnership with Genentech (DNA, news, msgs).

Seattle Genetics might not have products on the market until 2011. But it will present findings in the meantime at medical conferences, and those should move the stock. It expects to end the year with more than $160 million in cash while spending as much as $65 million on research and operating costs.

Needham & Co. analyst Mark Monane describes Seattle Genetics as a "rising star" among companies looking blood-cancer treatments. He has a $15-a-share price target on the stock.

The Baker brothers' position: They've owned the stock for years. They also purchased $25 million worth of the stock on Jan. 23 at $8.99. They now own 13.1 million shares, or 16.5% of shares outstanding. Felix Baker leads the board of directors.

Continued: Genomic Health

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