Over a few trading days, Biotech-stocks erased a 10+ point- performance lead against the MSCI World, with culprits said to range from the bursting biotech “bubble”,de-risking due to rising geopolitical issues, and concerns about the sustainability of (extraordinarily high) US drug-price levels. While biotech equities went on a bit of a roller coaster, other segments of healthcare – most notably generics and large-cappharma - fared better.
Generics stocks were the clear winners this quarter, up an impressive 12.5%, as measured by our own custom index of global generic names. Performance here was driven by both actual M&A, notably Actavis for Forest, but also smaller deals, such as Mallinckrodt for Cadence, as well as by anticipated M&A/tax optimization for a handful of other companies. Teva staged a decent comeback, being rewarded for hiring a new CEO, the successful launch of their three-times-weekly Copaxone, and a Supreme Court look at one of their Copaxone patents. This product is designed to blunt the impact of once-a-day Copaxone generics likely to be approved next quarter (eg, from Momenta and Mylan). Emerging markets, which have underperformed their developed market peers for the past few quarters, did not yet stage a comeback as a group: +1.6% for EM healthcare this quarter, compared with -0.8% for emerging markets generally. Nonetheless, some individual companies returned strong performances. The clear front runner wasJordan-based Hikma Pharmaceuticals, with its significant exposure to the Middle East and North Africa, which was up over 35% on a strong quarter and solid outlook. Given the relative underperformance of emerging markets, the contracting valuation spread, relative to their development market peers, and the solid fundamentals suggest that the investor with a mid- to long-term horizon should be rewarded.
