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Biotech overweight hurts Worldwide Healthcare

Biotech overweight hurts Worldwide Healthcare

Worldwide Healthcare reports that, over the year ended 31 March 2016, the company’s net asset value per share total return was -9.0% and the share price total return was -10.5%, both underperforming the Company’s benchmark, the MSCI World Health Care Index on a net total return, sterling adjusted basis, which fell by 5.4%. Total dividend for the year of 16.5p (2015: 12.5p per share).

The company had, on average, leverage of 18% (2015: 14%) during the year which, due to difficult market conditions, detracted 1.5% from performance (2015: contribution to performance of 4.5%). The company’s option strategy contributed c. 0.1% (2015: 0.9%) to returns.

In terms of positive contribution, the most significant contributor in both absolute and relative terms was the Osaka-based Ono Pharmaceutical. Over the course of the year under review, the company transformed itself from a mid-tier domestic player to one of the largest pharmaceutical companies in Japan. How?

The worldwide roll out of the most important cancer drug in over 10 years, Opdivo (nivolumab) has revolutionised how cancer is being treated and how long patients are staying alive. Opidvo belongs to a new class of agents called immunotherapy in which the body’s own immune system is recruited to hunt and destroy tumor cells. Ono’s stock started to garner attention after its partner, Bristol-Myers Squibb launched Opdivo for melanoma and lung cancer in 2015 in the United States and across Europe. The roll-out portended mega block buster status and Ono is the recipient of a (blended) double-digit royalty on end-user sales from those geographies. Meanwhile, the sales opportunity for Ono in Japan alone started to attract investor attention, in particular in lung cancer, which was approved in Japan in December 2015. Patient uptake as reported by the company surprised on the upside early in 2016, suggestive of a blockbuster in Japan alone, sending the stock higher. The result was a share price that essentially doubled in the period (in sterling terms).

One biotechnology company that proved to be immune to the epic sell-off in biotechnology stocks was Swiss-based Actelion, Ltd. Its European domicile helped protect it from the difficult U.S. environment, but solid fundamentals were also critical. The company is a global leader in the treatment of pulmonary arterial hypertension (PAH), a severe lung disease characterised by an increase in blood pressure in the blood vessels of the lung, leading to a series of breathing complications, lung transplantation, and in some cases, death. Actelion’s latest offering to patients afflicted with PAH is called Uptravi (selexipag). Uptravi has been shown in clinical trials to reduce significantly the risk of a morbidity/mortality event by 40% versus a placebo in patients with PAH, making it the most efficacious agent ever to be marketed for this disease. A December approval by the U.S. Food and Drug Administration (FDA) and solid launch early in 2016 pushed Actelion’s share price to an all-time high by the Company’s year-end.

Intuitive Surgical Inc. is the leader in robotic-assisted surgery with the company’s da Vinci suite of systems and instrument set solutions. During the period, the company’s share price was driven by solid new adoption rates of its “Xi” robotic system, as well as accelerating procedure growth in key new general surgical categories such as hernia repair. Importantly, procedure growth was materially outpacing both company guidance and investor expectations. Lastly, investor concerns had declined over the launch of competing robotic platforms from Medtronic/Covidien and Johnson & Johnson/ Google, as early feedback has pointed to less robust systems that will be marketed toward procedure categories in which Intuitive does not currently compete.

The year ended 31 March 2016 saw multiple advances for the coming wave of generic alternatives to biologic therapies, or so called biosimilars. Celltrion is a South Korean company that is in the forefront of biosimilars as a leading developer, manufacturer, and marketer. Celltrion’s lead monoclonal antibody biosimilar, Remsima (infliximab) – a copy of Johnson &Johnson’s Remicade – showed impressive market share penetration in Europe after launching in February 2015. Celltrion also won the backing of an FDA Advisory Committee in February 2016. Finally, global regulators supported the notion of “extrapolation” of Remsima, allowing the drug to be approved across the entire suite of indications for which Remicade is approved, without needing clinical trial data in all of them. This further validated Celltrion’s biosimilar pipeline, leading to favorable stock performance in the period.

Jiangsu Hengrui Medicine is a leading Chinese pharmaceutical company with strong drug development and commercialization capabilities. The launch of the innovative cancer drug apatinib in China and generic cyclophosphamide in the U.S. (via partnership with Sandoz, the generic unit of Novartis) significantly accelerated Hengrui’s profit growth from 20% in 2014 to over 40% in 2015. Upwards earnings revisions and multiple expansion as a result of investors’ appreciation of the company’s growth potential and value of its pipeline assets drove the outperformance of the stock.

Negative contribution to the portfolio came from two significant sources: (1) overweight positioning in biotechnology stocks; and (2) individual stocks with unexpected negative news flow.

In terms of single stocks, the largest single detractor was Fluidigm, a life sciences company enabling genomics research in the expanding single cell analysis market (the chemical analysis of the contents of a cell). At an industry conference early last year, management introduced multiple new products to further solidify its footprint in the growing single cell market. The new product launches were to layer over an existing product base, affirming investors’ view that Fluidigm was indeed a solid growth stock. However, execution of their new product launches was poor due to a lack of management experience in large scale commercialisation and misunderstanding of the product cycle. The company subsequently had to revise expectations lower numerous times once their new product launches disappointed and existing product sales lagged.

The global large capitalisation biotechnology company, Biogen, began the year on a high. The company had presented impressive data, albeit early, for their novel antibody, aducanumab, for the treatment of Alzheimer’s disease. The data showed preliminary evidence that aducanumab could be disease modifying. Such potential would be transformative for patients inflicted with this insufferable disease. However, an additional data set was released in July 2015, creating some doubt about the compound’s efficacy, causing the stock to fall.

Moreover, safety concerns over rare adverse events for the company’s flagship drug for the treatment of multiple sclerosis, Tecfidera (dimethyl fumarate), arose in 2015. Price erosion in Europe for Tecfidera also impacted sales. These events prompted the company to significantly lower financial guidance for 2015. Unfortunately, this announcement came only two days after the aducanumab update, causing the share price to spiral downward and the further general sell-off in biotechnology stocks never allowed for a recovery in the stock.

Shares in the Swiss global pharmaceutical giant, Novartis, underperformed after the company experienced two key missteps. First, the launch of their novel chronic heart failure drug, Entresto (sacubitril/valsartan), failed to take off as expected in the second half of the calendar year 2015. Second, revenues from the company’s ophthalmology unit, Alcon, unexpectedly faltered late in 2015. These problems persisted throughout the reported period and the share price subsequently underperformed.

Shares of Bluebird Bio, a leading gene therapy company focused on genetic blood disorders, also came under pressure during the fiscal year. Bluebird had presented early data showing promising results in patients with beta thalassemia and sickle cell disease. However, the stock started sliding lower in August 2015 with the Initial Public Offering (IPO) of a competing biotechnology company developing an oral treatment for sickle cell disease that would compete directly with Bluebird’s gene therapy approach. In December 2015, Bluebird stock fell when they presented updated data at a major haematology medical meeting showing disappointing data in sickle cell disease and a particularly severe form of beta thalassemia. While the gene therapy approach still appears sound, it looks like second-generation modifications to the process will be required to increase the success rates of the treatment.

In addition to being affected by difficult market conditions, shares in the emerging biotechnology company, Portola Pharmaceuticals, fell sharply after the company’s lead pipeline product, betrixaban for the treatment of blood clots, failed in a late stage clinical trial. This unexpected event occurred right before the Company’s year-end, resulting in a share price that sank over 60% (in U.S. $ terms) in the first three months of 2016.

WWH : Biotech overweight hurts Worldwide Healthcare

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