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UK pharma is old and tired

Biotech is about to bounce back, but the recovery won't come from UK big pharma, says Worldwide Healthcare Trust's manager, Sam Isaly
February 18, 2016

Healthcare stocks are experiencing a severe wobble after years of sky-high returns, but Worldwide Healthcare Trust's (WWH) manager, Sam Isaly, says biotech will bring the sun back by Easter. Just don't talk to him about UK pharma.

"We will see a recovery within the next few months," he predicts. "The trust started to downgrade at the end of July 2015 and we are now in a six-month correction - but that has happened before. We have always climbed out of it and expect to snap back."

IC Top 100 Fund Worldwide Healthcare's share price return has fallen by more than 20 per cent in six months against a drop of 24.2 per cent for the bruised Association of Investment Companies Biotechnology and Healthcare investment trust sector. Worldwide Healthcare is better insulated than many more aggressive biotech funds as it invests in a balance of big pharma, biotech and healthcare services stocks. But it has still suffered due to the dramatic sentiment shift that has affected the sector in recent months.

A bumper crop of bad news hit the biotech and pharma industries in 2015, bringing an end to the soaring bull market. Headlines centred on a US political crackdown on drug prices and the high-profile case of former hedge fund manager and vilified big pharma chief Martin Shkreli. He is mired in controversy after jacking up the price of Daraprim, which is used to treat the side-effects of HIV, from $13.50 a dose to $750.

"This has been about a shift in psychology," says Mr Isaly. "We have not suffered a disappointment in company fundamentals, in terms of profits and trials. These stocks are highly sensitive to stock market moves, but high beta amid market decline is not a function of fundamental failure."

However he is negative about the fundamentals when it comes to some of the biggest names in big pharma, particularly those headquartered in the UK. "Big pharma stocks are generally old and tired," he says. "Two of the oldest and most tired are GlaxoSmithKline (GSK) and AstraZeneca (AZN), so we don't own either.

Broadly, they have been slow to bring new discoveries to commercial reality. I don't want to denigrate the UK, which has been very good at basic science and fundamental discoveries, but its centres tend to get picked off by groups from outside the UK. GSK and AstraZeneca have not been very good at innovating."

His favourite big pharma stock is US-based Bristol-Myers Squibb (BMY:NYQ), the trust's largest holding at the end of December 2015 accounting for 5.5 per cent of assets. "We own a lot of Bristol-Myers because its innovation in recent years has been extraordinary," he says.

He also owns Roche Holdings (ROG:VTX) and Novartis (NOVN:VTX), but is underweight the MSCI World Healthcare index in terms of these stocks.

Mr Isaly has been selling Novartis as "a well-performing high-sensitivity stock" and a "good source of funds" amid recent market turmoil. Novartis accounted for 3.6 of assets at the end of December.

Mr Isaly says "the best value is in big biotech". But it is also the area with the greatest vulnerabilities, particularly the threat of biosimilars - drugs that imitate existing biotechnology treatments at a lower price. The process is similar to the generics market for pharmaceutical drugs, but unlike chemical compounds the biological therapies derived from living cells cannot exactly replicate the original. Despite that, they are fast gaining market share in the US and could prove a serious threat to major biotech companies such as AbbVie (ABBV:NYQ), currently the owner of the world's top-selling drug, Humira, which faces competition from Amgen (AMGN:NSQ).

The biosimilar issue "certainly is a threat and one that will be an issue by 2020", he agrees. "Biosimilars require huge production capacity and big toxicology and pharma clinics, so are expensive to develop. But they are making real inroads into markets. The companies most involved are Novartis, Amgen, Actelion (ATLN:VTX) and Celltrion (CONIF:PNK). Those big four are approaching the market with similars to the largest-selling drugs in the world.

"We are expecting a biosimilar competitor to Humira, which is selling $20bn a year, before 2020. All the big four are trying but Amgen will probably be the first out."

The company is expected to get US Food and Drug Administration approval for its ABP 501 Humira imitation this year.

Worldwide Healthcare Trust also holds Amgen and AbbVie (3.1 per cent and 3.5 per cent of assets, respectively, at the end of December). Mr Isaly says: "Amgen is curious because it is both at risk and attacking."

He has been taking steps to reduce risk in the trust in the downturn. It has been overweight emerging markets, an area not represented in the MSCI World Healthcare Index, but Mr Isaly says he has now reduced the China element of that. He has also "pulled in the equity exposure a bit".

The trust also deals in securities such as swaps and convertible bonds, which are "insensitive to the stock market", to provide a cushion in tricky times.

Mr Isaly says that, in the short term, the US presidential election will cause uncertainty in the healthcare sector. "We might have to wait until the end of the election to see a recovery," he acknowledges.

But happen it will. "Typically corrections last about two months and the market falls about 25 per cent," he says. "This correction has lasted longer and been deeper than previous ones so, all history considered, we should now be nearing the end."