The most prominent positions in Seth Klarman (Trades, Portfolio) equity portfolio are well-known and covered by the financial media.
However, I like to take a look at the smaller positions in his portfolio, the companies that fly under the radar of most investors and are likely to offer more in the way of value, because Wall Street does not widely cover them. There is plenty of research that shows companies not extensively covered tend to outperform over the long term.
According to Baupost's first-quarter 2019 13-F filing with the Securities and Exchange Commission, the hedge fund added several under-the-radar companies to its portfolio during the first quarter of the year. According to data from GuruFocus and SEC filings, one of the smallest positions added to the hedge fund's portfolio during the first three months of 2019 was Gossamer Bio (GOSS, Financial).
Early-stage biotech
The firm added 1.3 million shares in the biotech company, making it a 0.23% position worth around $26 million.
According to Gossamer's website, the company is a "clinical-stage biopharmaceutical company focused on discovering, acquiring, developing and commercializing therapeutics in the disease areas of immunology, inflammation and oncology."
It appears that the business only went public in February, so that seems to suggest that Klarman bought at the initial public offering. This business isn't generating any revenue yet but does have a total of six drugs in its pipeline. Of these, three are in clinical trials, while the rest are still in preclinical stages of development.
The most developed product candidate is in Phase 2 trials for the treatment of eosinophilic asthma. The other two treatments currently in clinical trials are treatments for pulmonary arterial hypertension and another for inflammatory bowel disease.
Everything considered, this seems to be somewhat of a lottery ticket of an investment. In the company's own IPO documents, it admits that it will continue to incur losses for the foreseeable future, and expects these losses to increase substantially.
For the nine months ended Sept. 30, it's spent a total of $109 million on developing its treatments, and it said in an IPO filing, "We anticipate these losses will increase substantially as we continue our development of, seek regulatory approval for and potentially commercialize any of our product candidates." Gossamer projected cash resources of $467 million after its IPO, giving the firm several years' of cash to pursue its objectives, although this might not be enough.
Hidden value?
Klarman also owns Translate Bio Inc. (TBIO, Financial) in his portfolio. At the end of the first quarter, he owned 6.5 million shares in this company, making it a 0.55% position worth around $64 million.
Once again, this is a development-stage business. In the first quarter of the year, the group earned $1.5 million from "collaboration revenue," although this income was more than offset by $36 million of operating expenses. At the current rate of cash burn, the company expects it has enough cash to last until "the second half of 2020." This is not something I would buy, but perhaps Klarman sees something other investors are overlooking?
Big biotech
It's not just early-stage biotechs that Klarman seems to be interested in. He also built positions in a number of large pharma groups during the first quarter.
For example, Baupost bought $217 million worth of stock in Takeda Pharmaceutical Co. Ltd. (TAK, Financial) in the first three months of the year, although this seems to be a hangover from Baupost's holding in U.K.-based drugs group Shire, which was recently acquired by Takeda.
In addition to Takeda, Klarman bought Bristol-Myers Squibb (BMY, Financial) and Celgene Corp. (CELG, Financial) during the first quarter. Celgene was the largest deal of these two. Baupost snapped up 4 million shares in the firm spending a total of $377 million.
The Bristol-Myers Squibb position is worth $190 million and makes up 1.7% of the portfolio. But, with these two companies expected to merge in the third quarter, this seems to be more of a merger arbitrage play than anything else.
Disclosure: The author owns no share mentioned.
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