Worldwide Healthcare has published interim results covering the six months to the end of September 2015. Over this period the pharmaceutical and biotech sectors experienced a sell off as US politicians waded into price gouging allegations at some forms. Worldwide Healthcare’s benchmark index (MSCI World Health Care Index) fell by 9.7%. the total return on net assets and the share price return were -12.0% and -12.2% respectively- giving up some of the gains the fund made in the previous six months.
Two major themes contributed to the underperformance in the six month period. First was sector positioning in both large capitalisation and emerging biotechnology stocks. Our overweight sector stance created both negative absolute and relative returns as biotechnology led the declines in healthcare. The NASDAQ Biotechnology Index (NBI) declined 13.6%, in sterling terms, in the period under review. Hillary Clinton, a candidate for the Democratic nomination for the next U.S. Presidential election, precipitated the most egregious portion of the biotechnology collapse. Her threatening late September “tweet” about drug prices in America was the principal catalyst for the biotechnology collapse, sending the NBI down nearly 20% in sterling terms over the last two weeks of the period.
Second was stock picking in the life science tools sector. One key position in the portfolio exhibited repeat negative surprises, leading to a crisis of investor confidence, resulting in a collapse of market capitalisation of over 80%.
Some offsetting outperformance was generated in two separate sectors. First and foremost were large capitalisation pharmaceutical stocks. Our underweight positioning did not mitigate against absolute losses, but did add some significant positive relative performance. Second was our underweight positioning in health care services, specifically distributors, managed care, and diagnostics. Again, this strategy did not preclude against absolute losses, but did add some positive relative performance.
Individual top contributors to performance for the six month period reflect the conditions detailed above. Thus, emerging market names were prominent although one emerging biotechnology stock bucked the trend.
Jiangsu Hengrui Medicine, is a leading Chinese pharmaceutical company with superior drug development and commercial capabilities. The launch of new cancer drug, apatinib, in China and generic cyclophosphamide in the U.S. (via partnership with Sandoz) significantly accelerated Hengrui’s profit growth to around 40% in the first six months of fiscal year 2015. In addition to upwards revisions to earnings, investors’ appreciation of the company’s pipeline also increased, driving multiple expansion and ultimately outperformance of the stock.
Incyte, is an emerging biotechnology company developing drugs for cancer. The outperformance of the shares can be attributed largely to increased enthusiasm among investors for their immune-oncology agent, a so-called “IDO inhibitor” known as epacadostat. Epacadostat is thought to enhance the immune response against cancer, similar to inhibitors of PD-1 and CTLA-4. Data presented during the review period showed benefit of the combination of epacadostat with the CTLA-4 inhibitor Yervoy (ipilimumab) for the treatment of melanoma. Additionally, the company has indicated that the combination of epacadostat with PD-1 inhibitors also appears to be active. Therefore, epacadostat is a leading candidate to potentially extend the benefit of immune-based cancer approaches to more patients.
Perrigo, was a notable outperformer owing to a hostile takeover approach from Mylan NV in early April 2015. Mylan, one of the world’s largest generic drug manufacturers, announced an unsolicited cash and stock offer to acquire Perrigo, a global manufacturer of generic and over-the-counter drugs, after an unsuccessful attempt to negotiate a friendly transaction. We liquidated our entire Perrigo position in April 2015.
The Korea-based dental implant company, Osstem Implant, is an implant company with a worldwide sales network. Outperformance of the stock in the first half of fiscal 2015 can be traced to the overall margin improvement trends in both Korea and overseas markets, including China and the U.S. Sales growth in Korea continued to remain robust, as a result of government expanded insurance coverage to younger age groups. Margin improvement in overseas markets was a result of economy of scale with increased sales. Thus, share price performance was predicated on increased investor confidence in the company’s earnings growth acceleration curve post multi-year investment into its direct sales and dentist education network.
Aurobindo Pharma, an India-based, global generic drug manufacturer, was also a strong performer. The company experienced a significant uptick in U.S. generic drug launches following successful inspections of several manufacturing sites by the U.S. Food and Drug Administration (FDA). This increased launch activity was an important driver of Aurobindo’s solid operating performance during the period.
The largest detractors to performance in the period reflected mostly idiosyncratic events to individual stocks rather than any common thematic occurrence.
Fluidigm, is a life science tools company equipping research labs and bio-pharmaceutical companies with microfluidic technologies. Specifically, Fluidigm is a leader in single cell analysis allowing researchers to isolate and examine cells on individual levels compared to the traditional method of analysing cells in groups. 2015 proved to be a difficult year for Fluidigm with execution issues stemming largely from mismanaging multiple new product launches earlier in the year. Aggressive expansion plans caused salesforce confusion in their core product lines. Execution issues caused Fluidigm to miss expectations for two straight quarters causing significant underperformance in its stock price.
The major biotechnology company, Biogen, specialises in neurology, with a market-leading franchise in multiple sclerosis. Its shares performed poorly because the company reduced 2015 sales guidance for Tecfidera (dimethyl fumarate), their oral multiple sclerosis pill, on their second quarter earnings call. Tecfidera is one of the main growth drivers for Biogen and sales have disappointed due to physician and patient concerns about a rare safety event associated with the drug.
Bluebird Bio, is a leading gene therapy company that has demonstrated proof of concept for a potential curative procedure for two genetic blood disorders, beta-thalassemia and sickle cell disease. Its shares have come under pressure over concerns that a competitor, Global Blood Therapeutics, will dominate the sickle cell disease market with their once-daily oral pill, obviating the need for Bluebird’s more complex and expensive treatment.
The Swiss-based, global pharmaceutical company, Novartis, was a modest detractor in the period. There was no catalysing event for the share price decline. Rather, the stock traded mostly in-line with the Swiss market. Negative contribution was modestly exacerbated by franc/sterling currency effects.
Shares in the specialty pharmaceutical company, Ironwood Pharmaceuticals, underperformed during the period due a number of reasons. First, the company reported lower than expected first quarter 2015 sales of their drug for irritable bowel syndrome drug, Linzess (linaclotide). Second, the company announced a convertible Senior Notes issuance in June, causing the share price to fall. Finally, solid Phase III data for Synergy Pharma’s plecanatide, a potential competitor to Linzess, were released causing further volatility in the shares. Linzess’ prescription trends accelerated markedly during the summer, which helped stabilise the stock.
WWH : Worldwide Healthcare hit by sector sell off