Investment Process and Strategy – How does the Fund Manager invest? (ISIN: LU0090689299)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.
Performance Review 2005
Michael 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.
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
Michael Sjöström: "The Nasdaq Biotech Index rose 11.3% in Q1/10. Earnings and 2010 financial guidance for the sector were generally solid. However, clinical and regulatory news was mixed. Medivation’s Dimebon failed in Alzheimer’s disease. Pirfenidone (Intermune) was recommended for approval by FDA panel members. Fampridine (Acorda), Victoza (Novo Nordisk) and Xiaflex (Auxilium) received marketing authorisation in the US, while Horizant (Xenoport) did not. Genzyme announced notification of FDA enforcement action on its Allston manufacturing plant. On the M&A front, Abbott outbid Biogen Idec on Facet and Astellas entered into a confidentiality agreement with OSI Pharmaceuticals after OSI´s board had rejected Astellas’ previous USD3.5bn offer.
The fund underperformed the Nasdaq Biotech Index in 1Q2010. 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%).
The fund underperformed the Nasdaq Biotech Index in 2Q2010. 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%).
The fund outperformed the Nasdaq Biotech Index in 3Q2010. 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%).
Biotechnology equities ended the year on a strong note, with the Nasdaq Biotech Index gaining 8.4% during Q4 and thus ending the year on a high. The index rose 15.1% over the year. In particular, the sector was driven by positive regulatory decisions and pipeline progress. FDA approval was obtained by Amgen’s Xgeva (treatment of bone fractures in cancer patients), while recommendations for approval were obtained by Human Genome Sciences (with Benlysta for lupus) and Intermune (with Esbriet for a rare lung condition). In clinical news, Amgen also announced that Xgeva helped delay the development of metastases in prostate cancer patients. Novo Nordisk presented the first set of positive Phase III data for Degludec (their next generation insulin analogue). Active Biotech announced positive phase III results in multiple sclerosis with laquinomod. Incyte announced positive phase III results for its compound “424” in myelofibrosis. The fund outperformed the Nasdaq Biotech Index. The main contributors to performance were Intermune (+167%), Onyx (+40%) and Illumina (+29%). The main detractors were Savient (-51%), Human Genome Sciences (-20%) and Intercell (-30%)."
Performance Review 2011
Michael Sjöström: "In Q1/2011, the fund underperformed the Nasdaq Biotech Index over the quarter. The main performance contributors were Intermune (+30%), Vertex (+37%) and Gilead Sciences (+17%). The main detractors were Micromet (-31%), Intercell (-23%) and Xenoport (-30%). The Genzyme and Pharmasset positions were sold to take profits. The Celgene position was slightly reduced. Proceeds were invested in Novo-Nordisk among the main positions and new positions in Ariad, Sequonom and Medivir were initiated.
The fund underperformed the MSCI World Healthcare Index and Nasdaq Biotech Index this second quarter. Top performance contributors were Algeta (+48%), Amgen (+9%) and Ariad (+51%). The main detractors were Intermune (-24%), United Therapeutics (-18%) and Intercell (-68%). The Vertex position was diminished after its strong performance in the run-up to approval. United Therapeutics was also reduced after the somewhat disappointing oral Remodulin data and several smaller positions were sold. Positions in Pharmasset and Biogen were initiated early in the quarter. A new position in cancer company Aveo was also built, while the Ariad position was upped significantly before and after ASCO.
In Q3/2011, the fund underperformed both the MSCI World Healthcare Index and the Nasdaq Biotech Index, mainly because of its exposure to companies in the early phase of product launch. Top performance contributors were Pharmasset (+47%), Alexion (+36%) and Biomarin (+17%). The main detractors were Dendreon (-77%), Intermune (-43%) and Human Genome Sciences (- 48%). The market turmoil and price dislocations following the Dendreon announcement were put to use to increase positions in high conviction positions of companies in the early phases of product launch, in particular Intermune, Ariad and Algeta. New positions in Amarin and Actelion were initiated. Positions in outperforming large caps such as Amgen and Celgene were trimmed. The positions in AMAG and Targacept were sold off.
In Q4/2011, the fund outperformed the MSCI World Healthcare Index but underperformed the Nasdaq Biotech Index. Top performance contributors were Pharmasset (+58%), Medivation (+171%) and Onyx (+47%). The main detractors were Intermune (-38%), Vertex (-25%) and Human Genome Sciences (-41%). The Pharmasset position was liquidated and the Medivation position trimmed. Two smaller positions were also liquidated. Proceeds were mainly reinvested in Ironwood Pharmaceuticals (new position) as well as Gilead Sciences and Vertex."
Performance 2012 - Year-to-Date
Michael Sjöström: "Biotech stocks made a strong start to the new year, with the Nasdaq Biotech Index up more than 10% for the month. The MSCI World Healthcare index gained just over 2%. Newsflow was dense and positive across the board. On the M&A front, Roche initiated a hostile takeover of lifescience tools company Illumina for USD 5.7bn. Bristol-Myers agreed to acquire Inhibitex (an early stage company developing treatments for Hepatitis C) for USD 2 bn and Amgen announced a USD 1.1 bn bid for Micromet (an early stage company developing antibody-based therapies for cancer). On the regulatory front, Vertex secured approval of Kalydeco for the treatment of Cystic Fibrosis two months ahead of schedule and Amylin finally obtained FDA approval of their long-acting GLP-1 (Bydureon) for the treatment of diabetes. In clinical news, Aveo Pharmaceuticals announced positive results for Tivozanib in advanced renal cell cancer and Theravance announced somewhat mixed phase III results for Relovair in COPD and asthma. Most companies pre-announced 2011 financial results. Surprises, if any, were mostly on the positive side. Most dramatically, Dendreon pre-announced sales significantly ahead of quite bearish expectations. The fund outperformed the broader MSCI World Healthcare Index, but underperformed the Nasdaq Biotech Index. Top contributors to performance were Dendreon (+79%), Illumina (+70%) and Ariad (+20%). Dendreon rose on much stronger than expected sales of Provenge in Q4 2011. Illumina was the subject of a hostile takeover bid by Roche and Ariad rose further as enthusiasm for the company’s cancer pipeline keeps building up. The main detractors were Theravance (-20%), Aveo (-23%) and Onyx (-7%). Theravance dropped on mixed initial phase III results for Relovair. Aveo dropped, as positive phase III data for Tivozanib in renal cell cancer came in short of expectations. Onyx dropped on worries about a delay in approval of Carfilzomib (multiple myeloma)."