Healthcare fund managers have started taking tentative steps back into the biotechnology sector, after shifting their portfolios into more defensive names as the recent sell-off took hold.
High-growth healthcare stocks in sectors such as biotechnology and medical technology have been selling off heavily since the end of February, having risen sharply for several years.
The sell-off in biotech stocks has coincided with a flight to larger, more defensive healthcare names, such as the big pharmaceutical firms, and managers admitted they have been part of that flight.
OrbiMed Advisors’ Samuel Isaly, who manages the Worldwide Healthcare Trust, said that investors had been “looking for defensive characteristics and we were guilty of that as well”.
Mr Isaly said he had rotated part of the portfolio towards defensive names in the pharmaceutical sector and he had even established a small position in pharmaceutical giant AstraZeneca, which he had never owned before.
He bought the stock in spite of his view that the company is set to go through a “stressful” period in the coming years. But he said the prospects for the company’s cancer research unit, which he thinks are being underestimated by the market, has drawn him back to buying it.
Mr Isaly said that the market correction in biotechnology has been “about as bad a correction the sector has ever seen”, apart from during the dotcom crash and the financial crisis.
However, he claimed the fundamentals underlying the future profitability of biotechnology companies had not changed and that, due to the extent and viciousness of the market sell-off, he thought “we must be at, or at least quite near to, the market low”.
As a result, he said he had identified a number of biotechnology stocks that he wanted to either add to within the fund or buy into for the first time. He had begun to put on one such trade last week.
The sell-off coincided with a report from the US Congress criticising the high price biotech firm Gilead Sciences was charging for its new hepatitis C drug.
But healthcare managers have contested that the actual reason for the sell-off was more likely down to the fact that the growth sectors had run too far, had become stretched, and that investors had decided to take some profits.
Dan Mahony, co-manager of the Polar Capital Healthcare Opportunities fund and the Polar Capital Global Healthcare Growth and Income investment trust, said it had just been one of “these periods in biotech in which the volume of money rushing into the sector just becomes too much”.
However, he pointed out that in spite of the dramatic fall in the Nasdaq Biotechnology index, which fell 20 per cent in dollar terms in a matter of weeks, it was still at the same height it reached in November 2013, which was at the time a new record high for the index.
Mr Mahony said he thought a lot of the “hot air” has now come out of the biotechnology sector and that “we are buyers again now”.
He claimed stocks in both biotechnology and other growth sectors, such as medical technology, had all sold off together and indiscriminately, which he said was “strange”, and speculated it may have been due to generalist investors using exchange-traded funds to access the sector and then panicking at the first sign of trouble.
Mr Mahony said he and co-manager Gareth Powell had built up a cash pile of 15 per cent by the end of February and was now looking to deploy it into beaten-up stocks.
The manager claimed the correction “was something that was just waiting to happen” and said he had lowered the weighting to biotechnology in the Healthcare Opportunities fund at the beginning of 2013 due to concerns around the incredible rally the sector had gone through.
He acknowledged that was the “wrong move” at the time and he “had to reverse it”, but he added that he had been anticipating a correction for some time.
Four biotech stocks that have suffered in the recent sell-off
Gilead Sciences
Gilead seemed to spark the rout in biotech stocks when a report from the US Congress questioned whether it should be allowed to price its new hepatitis C drug at £84,000. Though it has been falling since February, it has held up better than many of its peers in the past month.
Biogen
Along with Gilead Sciences, Celgene and Amgen, Biogen is one of a select few biotech firms that has become solidly established with a wide range of products. In spite of being consistently profitable, it has been sold off heavily with the rest of the sector.
Alexion Pharmaceuticals
Alexion Pharmaceuticals currently has only one marketable drug, Solaris, which is used to treat very rare but life-threatening diseases of the blood. Even after the sell-off, its share price still has a trailing 12-month price-to-earnings ratio of more than 100 times.
PTC Therapeutics
PTC Therapeutics is a much smaller company than the others on this list, and is the only one that isn’t profitable. The sharper fall in its shares relative to its larger peers reflects the pattern of the biotech sell-off, in which investors jettisoned smaller companies.
All eyes will be on Asco
Most healthcare managers will be closely monitoring the annual meeting of the American Society for Clinical Oncology (Asco), which takes place from May 30 until June 3 in Chicago. This gathering is hugely important because it is where many of the world’s biggest healthcare firms will reveal what progress they have made in their efforts to manufacture treatments for cancer.
Many of the major pharmaceutical and healthcare firms are racing against each other in this field and, according to healthcare managers, the current front runners include the likes of Roche and Bristol-Meyers.
Dan Mahony recently made Roche the top holding in his Global Opportunities fund, specifically citing the Asco conference, at which he expects Roche to unveil its latest plans for cancer drugs.
Roche is also the top holding in the Worldwide Healthcare Trust, although manager Samuel Isaly also tips Bristol-Meyers as a possible front runner.
