Performance Review 2005Michael Sjöström:"The fund outperformed the index in Q1/2005, both over the quarter and on a year-to-date basis. The fund benefited from its positions in Vicuron and TKT, which were both acquired during the quarter, but also from some of its main positions such as Amylin, Celgene and Gilead, which all turned in very solid performances over the quarter. The poorest performers were cancer companies Onyx and ImClone. Amgen also weighed on performance due to its large weight and below average return for the period.
During Q2, the fund outperformed the index, both over the quarter and on a year-to-date basis. The fund benefited from its positions in Vicuron and TKT, which were both acquired during the quarter, but also from some of its main positions such as Amylin, Celgene and Gilead, which all turned in very solid performances over the quarter. The poorest performers were cancer companies Onyx and ImClone. Amgen also weighed on performance due to its large weight and below average return for the period.
Over Q3, the fund performed in-line with the index. The fund benefited from the strong performances of its main holdings, Amylin, Celgene and Amgen in particular. However, the structural underweight position in Amgen vs the Nasdaq Biotech Index was penalizing in relative terms. Main negative contributors were OSI Pharmaceuticals, NABI, and Invitrogen.
In Q4, the fund performed in-line with the index during the quarter but clearly outperformed over the full year. During the last quarter, strong performances were posted by some of the funds largest holdings, such as Neurocrine Biosciences, Amylin and Celgene. On the negative side, the biggest impacts came from Nabi, due to its failed phase III trial with StaphVax, and Alexion, due to failure of one of their phase III products, and Idenix.
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With regards to investments in healthcare, the fund did very well."
Performance Review 2006
Michael Sjöström:"Over Q1/2006, the fund outperformed the index. The strongest positive contributors were Alexion Pharmaceuticals, Celgene and Amylin. Amylin benefited from strong uptake for its lead product Byetta (diabetes). Celgene rose following Revlimid approval and strong initial uptake, and Alexion jumped in response to positive phase III data for Eculizumab in Paroxysmal Nocturnal Haemoglobinurea. On the negative side, Amgen dropped on continuing worries about potential competition in its core anaemia franchise. ICOS suffered as Cialis scrip trends remain unconvincing. Affymetrix was down on continuing product setbacks and increasing competition. Onyx shares were soft on concerns over competition for its renal cell cancer drug. In Q2, the fund outperformed the index thanks to the strong performances of ImClone (+39%), Illumina (+25%) and Celgene (+7%). The main performance detractors were Neurocrine Biosciences (-89%), CV Therapeutics (-37%) and Onyx (-36%).
In Q3, the fund again outperformed the index. The top performance contributors were Gilead Sciences (+16.2%), OSI Pharmaceuticals (+13.9%) and Genzyme General (+10.5%). The main performance detractors were CV Therapeutics (-20.3%), Amylin Pharmaceuticals (-10.7%) and Celgene (-8.7%). Finally, in Q4 of the year, the fund markedly outperformed the index. The top performance contributors were Intermune (+87.3%), Celgene (+32.9%) and Genmab (+61.2%). The main performance detractors were Onyx (-38.8%), Amylin Pharmaceuticals (-18.2%) and Genzyme (-8.2%).
2006 was a very successful year for the fund."
Performance Review 2007
Michael Sjöström:"During Q1 of 2007, the fund outperformed the index. The top performance contributors were Onyx Pharmaceuticals (+135%), Gilead Sciences (+18%) and Novo-Nordisk (+10%). The main performance detractors were Illumina (-26%), CV Therapeutics (-44%) and Intermune (-20%). In Q2, the fund again outperformed the index. The top performance contributors were MedImmune (+59%), Novo-Nordisk (+20%) and Illumina (+39%). The main performance detractors were The Medicines Company (-30%), ImClone (-13%) and Human Genome Sciences (-16%).
Also in Q3, the fund outperformed the index. The top performance contributors were Onyx (+62%), Alexion (+45%) and Celgene (+24%). The main performance detractors were InterMune (-26%), CV Therapeutics (-32%) and Genzyme (-4%). Q4 was the weakest in terms of relative performance to the NBI. In the 4th quarter, the fund performed in-line with the index. The top performance contributors were Genzyme (+20%), Onyx (+28%) and Gilead (+13%). The main performance detractors were Celgene (-35%), Amylin (-26%) and Amgen (-18%). Profits were taken on Pharmion after acquisition announcement and on Genzyme. Our position in Medarex was reduced ahead of data release. Proceeds were invested in Genentech, Amgen and Vertex on weakness. All in all, 2007 was a dramatically positive year for the fund."
Performance Review 2008
Michael Sjöström:"In Q1/2008, the fund outperformed the Nasdaq Biotech Index. The top performance contributors were Celgene (+33%), Illumina (+28%) and Genentech (+21%). The main performance detractors were Onyx (-48%), Progenics (-64%) and Alexion (-21%). Profits were taken on Genentech, Gilead and Illumina. Proceeds were invested in Savient, Myriad Genetics and Amylin on weakness. During Q2, the fund outperformed the Nasdaq Biotech Index. The top performance contributors were Vertex (+40%), Progenics (+143%) and Amgen (+13%). The main performance detractors were Genmab (-25%), Biogen Idec (-9%) and Amylin (-13%). Profits were taken on Alexion on strength and on Millennium after the acquisition. The ImClone position was sold off as we had concerns on the approvability of Erbitux in lung cancer. Proceeds were invested in OSI Pharmaceuticals and Genzyme on weakness. A position on Auxilium was built ahead of the phase III Xiaflex results.
As for Q3, the fund underperformed the Nasdaq Biotech Index. The top contributors to performance were Amgen (+26%), Myriad Genetics (+43%) and Genzyme (+13%). The main detractors from performance were Novo Nordisk (-22%), Savient (-41%) and Gilead (-14%). Profits were taken on Genentech and Myriad Genetics. The position in Gilead was reduced due to valuation. Proceeds were invested in Novo Nordisk and Savient on weakness. A position was built in Sequenom, as we believe its diagnostic test for Down´s syndrome has significant commercial potential. Finally, in Q4 of the year, the fund underperformed the index. The top performance contributors were Gilead Sciences (+12%), Novo Nordisk (+3%) and Cubist (+9%). The main performance detractors were Savient (-61%), Genzyme (-18%) and Life Technologies (-38%). Profits were taken on Amgen and Genzyme. The Gilead position was sold off on valuation grounds. Proceeds were invested in two new positions – Xenoport and United Therapeutics. The Sequenom position was strengthened on weakness.
Over the year 2008, which became very volatile towards its end (Lehman crisis), within Healthcare, the fund was in line with the market."
Performance Review 2009
Michael Sjöström:"Over the 1st quarter of 2009, the fund outperformed the index in the first quarter. The top performance contributors were Myriad Genetics, Illumina and Life Technologies . The main performance detractors were Basilea, Celgene and Amgen. Profits were taken on Illumina and Vertex on valuation grounds. The position on Genentech was divested. Proceeds were invested in Gilead, Biomarin and OSI Pharmaceuticals on weakness. In Q2, the started to underperformed the index. The top performance contributors were Life Technologies (+28.4%), United Therapeutics (+26.1%) and Savient (+179.4%). The main performance detractors were Sequenom (-72.5%), OSI Pharmaceuticals (-26.2%) and Biogen Idec (-13.9%). Profits were taken on Life Technologies and Novo Nordisk. The Sequenom position was liquidated after the company announced that its previous data on the Down syndrome test were mishandled by company employees. Proceeds were invested in Gilead, Genzyme and Vertex.
In Q3, the fund continued to underperform the index. The top performance contributors were Celgene (+16.8%), Amgen (+13.8%) and OSI Pharmaceuticals (+25.0%). The main performance detractors were Myriad Genetics (-23.1%), Genmab (-25.3%) and Luminex (-8.3%). Profits were taken on Illumina and Amgen. The Genmab position was liquidated as we believe the NHL indication, which holds larger commercial potential, will be pushed out for years. Proceeds were invested in United Therapeutics and Intercell. A new position was initiated in Affymax. Affymax is developing a novel treatment for anemia and we anticipate positive clinical results for this program in 2010.
Biotech stocks traded sideways during the fourth quarter, with the Nasdaq Biotech Index closing slightly above zero. Positive clinical newsflow and numerous corporate activities were offset by several regulatory setbacks. The second lupus trial for Benlysta (Human Genome Sciences), less frequent dosing of Telaprevir (Vertex) for hepatitis C and Revlimid (Celgene) in the maintenance setting for myeloma all had positive results. In addition, Targacept and Incyte signed deals with pharma partners. However, a number of new drugs including Denosumab (Amgen), Lumizyme (Genzyme), Solzira (Xenoport) and Ceftobiprole (Basilea) had regulatory delays or setbacks. The fund underperformed the Nasdaq Biotech Index for the quarter. During the quarter, the main performance contributors were United Therapeutics (+15.5%), Biogen Idec (+14.0%) and Medivation (+22.6%), while the main detractors were Basilea (-18.6%), Gilead Sciences (-6.1%) and Auxilium (-14.0%). Positions in Auxilium and OSI Pharmaceuticals were reduced on valuation grounds, while profits were taken on United Therapeutics. Proceeds were invested in Onyx Pharmaceuticals and Gilead Sciences on weakness. A new position in AMAG Pharmaceuticals was initiated. AMAG recently launched its intravenous iron product in the US for treating anemia.
After 11 out of 13 years since its launch in 1995, this was one of the toughest for the fund. The main reasons for the underperformance were twofold:
1. investors did prefer small-capish biotech firms over the large-caps that are in the focus of the Pictet-Biotech
2. roughly 20% of the Nasdaq Biotech Index stocks are not investible for the fund, as we don’t consider them biotechnology stocks (e.g. Mylan, Teva)."
Performance Review 2010 - Year to Date
Michael Sjöström:"Over the 1st quarter of 2010, the fund still continued to underperform the Nasdaq Biotech Index. The main performance contributors were Intermune (+241.8%), OSI Pharmaceuticals (+91.7%) and Celgene (+11.3%), while the main detractors were Medivation (-72.1%), Xenoport (-49.9%) and Intercell (-21.7%). Profits were taken on OSI Pharmaceuticals and Intermune. The Gilead position was reduced in favour of more attractive opportunities. The proceeds were invested in AMAG Pharmaceuticals, Auxilium and Life Technologies on weakness.
In Q2, the fund underperformed the Nasdaq Biotech Index too. The main performance contributors were Novo-Nordisk (+15.5%), Cardiome (+23.3%) and Algeta (+15.4%). The main detractors were Intermune (-79.0%), Celgene (-18.0%) and Gilead Sciences (-24.6%). Given the sharp price decreases of stocks in companies with current or imminent new product launches and/or approvals, the opportunity was seized to increase positions in Human Genome Sciences, AMAG and Novo-Nordisk, while new positions were taken out in Dendreon and Illumina. Owing to the lack of growth catalysts, the position in Biogen-Idec was sold off and the positions in Gilead Sciences was reduced significantly.
After biotech investors returned to more normal patterns, ie., favouring larger caps over small-caps firms, the fund started to outperformed the Nasdaq Biotech Index. The main performance contributors were Genzyme (+39%), Savient (+82%) and Human Genome Sciences (+31%). The main detractors were AMAG Pharmaceuticals (-50%), Xenoport (-28%) and Cardiome (-25%). The Genzyme position has been significantly reduced in the wake of the Sanofi-Aventis informal acquisition proposal, and the Vertex holding has been paired down on relative valuation. Proceeds have been invested opportunistically in Biomarin, Gilead Sciences and Onyx."
Performance since 2005
Michael Sjöström:"The Pictet-Biotech fund has outperformed the NBI 9 out of 14 years. In the past, it was only in 1998-99, when the biotechnology bubble was being built up, that the fund achieved returns lower than those of the NBI. For one, this had been the result of soaring stock prices of companies that were selling a lot of hope on the back of illusive expectations, both scientifically and economically. Furthermore, the index itself did not accurately measure the diversity of the industry at that time, with a company like Amgen, for instance, making up approximately 40% of the index, a weight that the fund was not allowed to have in any particular stock for legal reasons.
Albeit the situation of 2008-09 is not quite the same as it was in the late 1990s, the fund most recently went through a period of relative underperformance compared with the NBI. The reasons for this situation, which have been discussed over the last months, can be summarised in short as follows:
• Defensive characteristics of the management mandate vs. increased risk appetite of the investor community, favouring small-cap stocks over large caps, a trend that goes into 2010
• Strong performance of the non-biotech constituents of the NBI.
• A few missed opportunities and stock picks that failed."
Investment Process and Strategy – How does the Fund Manager Invest?
It cannot be stressed more that the fund is not managed against a particular benchmark. The reason why, if we refer to a particular index, we refer to the Nasdaq Biotech Index, is simply because there is no better reference point out there. For the daily management of the fund, the fund manager has no obligation to beat any particular index. None of the well known biotechnology indices are anything close to the investment objective of the Pictet-Biotech fund and all have their drawbacks.
• Nasdaq Biotech Index: almost US-only index; various constituents are by no means biotech firms (ex. Mylan, Shire, Teva, Warner Chilcott)
• AMEX Biotech: US-only and equal-weighted index; only 20 constituents
• MSCI World Biotechnology Index: global index, only 11 constituents
Since the launch of the Pictet-Biotech fund in 1995, Pictet has provided investors with access to the growth opportunities in Biotechnology. In order to carefully manage the risks of this comparably volatile market, the investment universe of the fund has been designed to focus on companies that have a commercially successful business model. Small companies with great ideas, but no near-term sales potential, are filtered out of the investment focus. Except for these few but important constraints, the fund manager is free to select companies from any market, provided they are listed on a public stock exchange.
The investment process is bottom-up. The fund manager focuses on commercially successful companies or firms with late-stage development products. It is a five-steps process:
1. Idea generation:
Although the investment process is a continuum, the trigger point of any single process is an idea. The original idea may have several possible sources such as Sectoral´s Scientific Advisory Network (SAN), industry contacts, interactions with companies, scientific and lay literature, Wall Street research, screening, etc.
2. Fundamental analysis
Sectoral conducts preliminary research and analysis to select candidates for further evaluation. This includes desk research such as reviewing literature and documentation, interaction with companies and with our SAN. Finally, we perform a summary model and scenario analysis before selecting the investment candidates.
Once the financial modeling is complete, the analysts attempt to determine the fair value for each investment candidate as well as a 1-year and a 3-year price target. Depending on the development stage of the company, these are determined using various models such as discounted cash-flow models, EBITDA models, classical growth models (PE approach), enterprise value/sales and peer group analysis.
We then compare the resulting fair value to the current market value of each investment candidate and issue a Buy or Sell recommendation.
In this last step, the portfolio manager assesses the impact of including each investment candidate on the portfolio´s risk/return profile and proceeds with the construction of the portfolio. Our clients’ portfolios tend to be relatively concentrated with 25-35 positions. Portfolio implementation can be executed promptly or gradually depending on liquidity issues and time sensitivity.
Michael Sjöström:"The recent approvals of several blockbusters and pipeline progress position the industry for continued growth despite the deteriorating pricing and reimbursement environment. We expect biotechnology companies to significantly outgrow the pharmaceutical market averaging 20% top-line growth over the three years. The recent uptick in biotechnology equity prices may signal a more bullish phase for the sector as investors realize the limited impact of the US healthcare reform on the industry and as top-line growth from recently approved products is gaining in visibility in quarterly earnings reports."