Polar CapitalOct 18 2016

IA 100 Club: Polar's move to reduce pharma holding pays off

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IA 100 Club: Polar's move to reduce pharma holding pays off

Polar Capital manager Dan Mahony’s caution towards pharmaceuticals company Bristol-Myers Squibb appears to have been vindicated after one of its products faced a new setback in medical trials.

Mr Mahony, who co-manages the £239m Polar Capital Global Healthcare Growth and Income trust alongside Gareth Powell, noted the firm had been a “leader” in immunotherapy – a drug that helps prevent illnesses by stimulating the immune response and is used in cancer treatment. 

However, a setback in medical trials earlier this year prompted the managers to reduce their position in the company.

“There’s a new group of drugs that enable the patient’s own immune system to fight the tumour. The results have been amazing in certain groups of patients,” Mr Mahony said.

“Bristol-Myers Squibb has been the leader in the space, but we thought the market was too optimistic on it,” the manager said. 

“[The company] had a hiccup in its medical trials – we reduced [the holding] after it went down because we are not quite sure. We need clinical data to be produced to have a view on that.”

This stance looked justified after further details emerged earlier this month, with the company’s Opdivo drug’s seeing disappointing clinical trials, dealing a blow to the share price.

Rival pharma firm Merck & Co – which represented a top-10 holding in the Polar Capital trust with a 7.2 per cent weighting at the end of August – looks likely to benefit.

Merck had its own good news earlier this month when clinical data showed its Keytruda immunotherapy product could provide significant benefits for untreated lung cancer patients.

Mr Mahony added that it could be dangerous to invest in companies whose share price depended on a product pipeline with “high expectations” attached.

One example is Eli Lilly, a position the team reduced earlier this year.

“Everyone wanted to talk about their Alzheimer’s drug and expectations are very high,” Mr Mahony explained. 

“We think it’s high risk. We don’t want to take the risk where the share price moves $10. We had about 6 per cent in the company, but took that down to about 2 per cent in May.”

But he acknowledged market volatility had been high in the past year, meaning managers required patience.

“Companies often have a product cycle of 10 years, but stocks seem to be able to move 3 or 4 per cent a week and that’s normal volatility,” the manager said.

“When you can sit through that, you can make some decent returns.”

This year the team – which also runs the open-ended Healthcare Opportunities fund – added to holdings including Novartis. 

The managers said they were looking for companies with growth that have new drugs coming through but “don’t have older drugs that are eight or nine years old that could see pricing pressure [when patents expire]”.

Meanwhile, a significant portion of the trust’s returns this year have come from an unlikely source.

“The big thing that helped us this year was the Brexit [result], because most of our portfolio is denominated in currencies other than sterling,” Mr Mahony said.

“The fact we moved 11 per cent in a month is not down to the skill of the portfolio manager,” he acknowledged.