Investment Process and Strategy – How does the Fund Manager invest? (ISIN: LU0188501257)
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.
3. Valuation
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.
4. Recommendation
We then compare the resulting fair value to the current market value of each investment candidate and issue a Buy or Sell recommendation.
5. Implementation
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.
Performance Review 2005
Michael Sjöström: "In Q1/2005, the fund underperformed the MSCI World Pharma Index, as pharmaceutical companies benefited from their defensive feature in the current uncertain macroeconomic environment. Some specific news such as the FDA panel’s decision in favour of a re-launch of Vioxx and the clean label granted to Crestor (AstraZeneca’s cholesterol drug) kept the industry flat in otherwise down equity markets. However, the fund outperformed its universe due to its key positions in both Eon Labs (+12.0%) and Ivax (+25.0%) – the former gained on Sandoz’s takeover bid and the latter on strong earnings and optimistic earnings guidance for 2006. Japanese generic companies Sawai Pharmaceutical (+10.2%) and Towa Pharmaceutical (+10.4%) rose in anticipation of a strong 2005 for generics in Japan. On the negative side, Elan fell 88.1% and King Pharmaceuticals lost 33.0% after Mylan walked away from the merger. During Q2/2005, the fund slightly outperformed the MSCI World Pharma Index and the generics industry as well, strongly benefiting from second top holding Endo Pharmaceutical, which gained 17% the day the Oxycontin patent was overturned. Momenta Pharmaceuticals and Alkermes were important positive contributors as well. Smaller positions in KV Pharmaceuticals and Connetics (- 30%) contributed negatively . the former on lower earnings guidance, the latter on the non-approval of Velaq gel, an acne drug. In addition, American Pharmaceutical Partners lost 20% after releasing disappointing sales for injectible generics.
In Q3/2005, the fund outperformed both the MSCI World Pharma index and the generics universe. The important exposure in Alkermes (+27%), King Pharmaceuticals, and Momenta Pharmaceuticals (+38%) contributed positively. QLT and to a smaller extent Skyepharma and Inspire Pharmaceuticals (-10%) impacted the fund negatively. In the 4th quarter, the fund continued to outperform both the MSCI World Pharma index and the generics universe in 2005, despite underperformance during the fourth quarter of 2005. The fund was penalized for its lack of exposure to Elan and through exposure to MGI Pharma (-26% in Q4) and Taro Pharmaceutical (-46%). Cephalon, Teva Pharmaceutical and Alkermes (+14% in Q4) contributed positively, with Alkermes. performance due to the approvable letter of Vivitrol from the FDA."
Performance Review 2006
Michael Sjöström: "In Q1/2006, the fund outperformed both the MSCI World Pharma index and the generics universe. Key holdings that performed particularly well were First Horizon Pharmaceutical (+46%) on solid earnings results, Andrx following Watson Pharmaceuticals. bid and QLT (+21%) on takeover rumours. Negative contributors were Skypharma (-23%), which fell after takeover rumours were not confirmed, Cephalon following a negative FDA panel decision on ADHD drug Sparlon, and Teva Pharmaceutical (-4%) after the competing multiple sclerosis drug Tysabri received a positive panel recommendation. As in Q2/2005, the fund underperformed both the MSCI World Pharma index and the generics universe. With respect to the underperformance compared to the generic industry, the Fund suffered from Dov Pharmaceuticals (-87%) stream of setbacks, but also from Momenta Pharmaceuticals (-35%) after the Lovenox litigation was remanded to the Lower District Court, and Teva Pharmaceutical (-23%) on reduced profits during the Zocor/Zoloft exclusivities. Nevertheless, their negative contribution was mitigated by strong performance of Sawai Pharmaceutical, MGI Pharma and Sepracor (+17%).
During Q3/2006, the fund underperformed the MSCI World Pharma and the generics universe. Hana Biosciences and Critical Therapeutics, two smaller-capitalisation companies, decreased respectively by 24% and 33%, without any fundamental reason behind this decline. Sepracor also contributed negatively. On the positive side, top holding Forest and the fund’s exposure to Eastern Europe had a positive impact. In the 4th quarter of the year 2006, finally, the fund outperformed the MSCI World Pharma index, but underperformed the generics universe. Positive contributors were Sciele Pharma (+27%) on good quarterly earnings, Lonza (+25%) after its strategic move into microbial fermentation and Sepracor (+27%) on a better reimbursement landscape for Xopenex. Endo, Alkermes and Taro contributed negatively. The Fund underperformed its benchmark over the year 2006."
Performance Review 2007
Michael Sjöström: "In Q1/2007, the fund performed inline with the generics universe and outperformed the MSCI World Pharma index (-1%). Positive contributors were Teva and Alkermes on good earnings, as well as Zentiva following the purchase of a 75% stake of Eczacibasi. Laggards were Gedeon Richter, Momenta (-18%) and Hana. During Q2/2007, the fund outperformed the MSCI World Pharma index. Positive contributors were Endo (+16%) after being added to the S&P 400, Japanese generics company Towa (+29%) as well as Slovenian generics company Krka on strong earnings. Labopharm and Momenta contributed negatively to performance.
In Q3/2007, the fund outperformed the MSCI World Pharma index. Krka (+23%), Nichi-Iko (+17%) and specialty pharma Alkermes (+26%) contributed positively, the latter on anticipation of positive data on Byetta LAR, an extended release version of Byetta. Laggards were Sawai (-14%) and Nippon Chemiphar (-13%) on lower-than-expected earnings, as well as Forest (-18%), even though the patent dispute on Lexapro ended in its favour. PF(Lux)-Generics outperformed the MSCI World Pharma both in Q4 (+2% vs. -2%) and for 2007 (+7% vs. -1%). Main positive contributors in Q4 were Japanese generics (Sawai +44%, Nippon Chemiphar +39%, Nichi Iko +16%) and strong performance by Indian companies (Sun Pharma +28%, Biocon +24% and Cipla +18%). The main setback for the fund came from Momenta (-37%) following the FDA’s non-approvable letter for generic Lovenox (blood thinner), Nektar (-24%) whose partner Pfizer discontinued sales of Exubera (inhaled insulin) and Alkermes (-15%), which released excellent clinical results for Byetta LAR (diabetes), which nonetheless fell a little short of analysts. expectations.PF(Lux)-Generics was in line with its benchmark over most of the year 2007."
Performance Review 2008
Michael Sjöström: "In Q1/2008, the fund outperformed the MSCI World Pharma Index in (-3% vs. -10%). Main positive contributors were Stada (+19%) up on strong results and a delay in the implementation of discount contracts with Germany’s largest insurer AOK, as well as Zentiva (+14%), which is emerging from two quarters of disappointing financial performance. Nichi-Iko (+18%) and Sawai (+17%) were also strong, in part due to new government incentives to increase generics use in Japan. Negative contributors include Indian players Biocon (-27%) and Dr Reddy (-21%), hurt by an overall weakness in the Indian market and less than stellar quarterly results. Shire (-15%) corrected in Q1 due to investor concern about the pace of market adoption of Vyvanse (ADHD) and Alkermes was down on the Air Insulin news. During Q2/2008, the fund underperformed slightly with respect to the MSCI World Pharma Index (-2% vs. -1%), but has continued to outperform nicely since the beginning of the year (-5% vs. -11%). Positive contributions came from Savient (US, +27%), Zentiva (Eastern Europe, +14%) and Ranbaxy (India, 11%), while KV Pharmaceutical (-23%), Shire (-15%) and Nichi-Iko (Japan, -14%) lagged behind.
In Q3/2008, the fund (-11.5%) underperformed the MSCI World Pharma Index (-4.5%) in. Key negative contributors include Stada (-45%), Savient (-41%), which fell despite releasing positive clinical data, owing to investor disappointment about lack of progress on the partnership or M&A front. We expect the impact of Ranbaxy’s fall (-57%) to be moderated in coming weeks, as 46% of the Fund’s position was accepted for tender to Daiichi Sankyo at a price close to 300% the stock’s current levels. Positive contributors this quarter were specialty players Cephalon (+16%) and KV-Pharma (+18%), as well as Barr (+45%), which is being acquired by Teva. Finally, in Q4/2008, the PF(Lux)-Generics (-17%) lagged the MSCI World Pharma Index (-7%), despite outperforming in December (+10% vs. +7%). The fund was negatively impacted by its exposure in KV Pharma and companies from emerging markets, particularly Krka (Slovenia, -36%), Hikma (Jordan, -30%) and Pharmstandard (Russia, -65%). Strong performance of Japanese generics Nichi-Iko (+27%), Sawai (+25%) and Towa (+22%) as well as specialty pharma company Endo (+29%) helped mitigate the losses."
Performance Review 2009
Michael Sjöström: "In Q1/2009, the fund significantly outperformed the benchmark. Positive contributors included Mylan, Hospira and Lonza. Top negative contributors included Stada, Gedeon Richter and Endo. Also in Q2/2009, the fund significantly outperformed the benchmark. The top positive performance contributors were all emerging market stocks, including Hikma, based in Jordan; Gedeon Richter from Hungary; and the Indian players Dr. Reddy’s and Biocon. Negative performance contributors included Mylan, Lonza and Endo.
As for Q3/2009, the fund slightly underperformed its benchmark. Top contributors to performance were Mylan, Pharmstandard and Shire. Top detractors from performance included Momenta, Hikma and Towa. Finally, in Q4/2009, the fund slightly underperformed the benchmark. Top performance contributors included Stada, Mylan and Teva. Top performance detractors included Lonza, Krka and the Japanese generic player Nichi-Iko. PF(Lux)-Generic significantly outperformed its benchmark over the whole year."
Performance Review 2010
Michael Sjöström: "Generics had a strong start to the year, outperforming both the MSCI World Index (+3%) and the MSCI World Healthcare Index (+1%) in Q1. Many companies continued to benefit from a stronger pricing environment in the US, which was reflected in the generally good financial results reported for 2009. Consolidation in the sector continued, with Teva making a EUR3.625bn bid for the German generic player Ratiopharm, significantly expanding its position in the European markets. Perrigo also announced two acquisitions: Orion Labs, a leading OTC drug supplier in Australia, and PBM Products, the market leader in store-brand infant formula, a new and complementary product segment for Perrigo. On the negative side, the European regulator recommended a recall of Acino’s clopidogrel (generic Plavix) following an inspection of its Indian API supplier, which uncovered quality control issues.
The fund significantly outperformed its benchmark in Q2. Top performance contributors were Japanese generics players Sawai, Nichi-Iko and Towa. Top performance detractors were Mylan, Teva and the Hungarian generic player Egis, whose USD performance was negatively impacted by the 17% decline of the Hungarian forint versus the dollar.
The fund underperformed its benchmark in Q3. Top performance contributors included South African player Aspen, Hungarian generic Gedeon Richter and Swiss contract manufacturer Lonza. Top performance detractors were the Japanese generic players Towa, Sawai and Nichi-Iko.
Healthcare stocks underperformed the broader equity market rally in Q4, with the MSCI World Healthcare Index up just 3% and lagging behind the MSCI World Index, which was up 9%. Generics performed in line with other healthcare stocks. On the positive side, most emerging market generics delivered a strong performance fuelled by growing demand in local pharmaceutical markets. Russia’s Pharmstandard and the Indian players Aurobindo, Lupin, and Sun were all up over 20%. Watson (+22%) was up after settling with Sanofi to distribute an authorised generic version of ADHD drug Concerta. On the negative side, concerns about price controls in the EU continued to affect local players including Alapis (-68%), whose poor performance was compounded by general investor unease about Greek and Hungarian securities.
In a positive move on the regulatory front, the EMEA released long-awaited guidelines for approving copies of monoclonal antibody drugs, which appear favourable to biosimilar developers.
The fund outperformed its benchmark in Q4. Top contributors to performance were all emerging market players, including Russian generic market leader Pharmstandard, Jordan-based Hikma and Lupin, based in India. Top detractors were Alapis, Gedeon Richter and Egis."
Performance Review 2011
Michael Sjöström: "In Q1/2011, the fund underperformed the MSCI World Pharmaceuticals index over the quarter. Top performance detractors were Nichi-Iko (-26%), Aurobindo (-26%), and Aspen (-16%). Top performance contributors were Perrigo (+24%), Shire (+21%) and Mylan (+8%). Some profits were taken on Mylan and Pharmstandard, reducing exposure to both names. The position in Hikma was also reduced due to volatility in the Middle East. A new position was initiated in Korean vaccine player Green Cross. Exposure to Lonza was increased on a stronger outlook for 2011, while Aspen and Sun Pharma were added to on weakness.
The fund underperformed its benchmark in Q2. Top performance contributors were Green Cross, Sawai and CFR Pharmaceuticals, a Chilean company that was up 33% in its first weeks of trading on the Santiago stock exchange. Performance detractors included Pharmstandard, Aurobindo, and Lonza. Two new positions were established in the quarter: Sagent, a US-based injectable generics company and CFR Pharmaceuticals, a leading Latin American branded generic company based in Chile. The positions in Aspen and Hikma were increased on recent weakness and improved outlook. Exposure to Teva and Hospira was decreased somewhat, while the positions in Swiss generic Acino and Hungarian player Egis were exited completely.
The fund underperformed its benchmark in Q3/2011. Top performance contributors included Perrigo and the Japanese players Sawai and Nichi-Iko. Top negative contributors included Stada, Mylan and Hikma. Exposure to CFR Pharmaceuticals was increased on continued strong prospects for the Latin American pharma market. A new position in specialty pharma player Valeant was initiated after the stock pulled back sharply. Positions in Indian players Lupin and Strides were increased using funds from the liquidation of Aurobindo. Exposure to Hospira, Teva and Stada was decreased in the quarter on a more negative near-term outlook for these companies.
The fund underperformed its benchmark in the fourth quarter. Top performance contributors included Mylan, Stada and Teva. Top performance detractors included Pharmstandard, Ranbaxy and Lupin. Exposure to specialty pharma player Valeant as well as Teva and Watson was increased. Lupin was added to on weakness. The position in Ranbaxy was liquidated following its launch of generic Lipitor, while exposure to Hospira was reduced somewhat. Some profits were taken on Mylan."
Performance Review 2012 - Year-to-Date
Michael Sjöström: "The fund significantly outperformed its benchmark in January. Top contributors to performance included Hikma, Lupin and Strides. Top performance detractors included Lonza, Shire and Mylan. A new position in Indonesian generics player Kalbe Pharma was initiated in January, while the positions in Teva and Valeant were increased somewhat. The position in Indian player Biocon was liquidated completely, while exposure to Aspen Pharmaceuticals was reduced somewhat, following a strong run. Some profits were taken on Hikma and Lupin.
Contingent upon a stabilization of global equity markets, we expect companies based in emerging pharmaceutical markets including India, MENA (Middle East North Africa), Asia and Russia to perform well, benefiting from strong domestic growth mainly driven by branded generics. Government incentives to increase the use of generics in Japan appear to be working and the generics market is growing at a healthy pace. A large number of new product launches over the next 12-24 months combined with a more stable pricing environment have contributed to a strong outlook for generics in the US market. Consolidation in the sector is likely to continue, as generic companies look to gain scale, new markets and more efficient cost structures. The industry remains attractively valued at 13x 2012E earnings, with projected sales and earnings growth of 10-15% annually over the next 5 years."
