SKANDIA GLOBAL FUNDS PLC - Fidelity Investments

Skandia Global Funds plc
Annual Report and Audited Financial Statements for the year ended 31 December 2011
SKANDIA HEALTHCARE FUND
INVESTMENT ADVISER’S REPORT FOR THE YEAR ENDED 31 December 2011
Skandia Healthcare Fund – OrbiMed Capital, LLC
Investment Adviser’s Commentary (continued)
In the second quarter, the fund‟s performance in April was hampered by its underweight exposure to rallying large-cap
pharmaceuticals, although this was partly offset by its holdings in Novartis and Roche. Holdings in specialty pharma stocks were
positive for performance in April, in particular Allergan, which participated in the pharma rally. Other key contributions came
from generic drug stocks on a global basis, including Sawai Pharmaceuticals (Japan), Hikma Pharmaceuticals (UK), Watson
Pharmaceuticals (US), and the over-the-counter drug maker Perrigo Co. (US). Biotechnology stocks were mixed in the month,
with a net positive contribution from emerging biotech companies offset by a net negative contribution from large-cap biotech.
Novartis and Roche continued to perform well in May, although again the fund‟s underweight in large-cap pharmaceuticals
detracted overall. Key contributions came from Japan, notably Japanese generic drug manufacturers including Sawai
Pharmaceutical Co. and Towa Pharmaceutical Co. Outperformance from these stocks was fueled by strong fiscal year-end results
and forward-looking guidance. The lingering impact of the Great East Japan Earthquake has been negligible. Additional
contributions came from a variety of sub-sectors, including medical devices (most notably Volcano Corporation on the heels of
better-than-expected Q1 results), managed care (continued momentum in the group), and specialty pharma (such as Elan, posttransaction
with Alkermes and rising expectations for their multiple sclerosis drug, Tysabri).
The only significant headwind in May came from emerging biotech, specifically Allos Therapeutics. The disappointing launch of
Fotolyn (for peripheral T-Cell lymphoma) continued, as confirmed by quarterly results and a lowering of sales guidance by the
company. Additionally, a partnership for Fotolyn was announced, partially defusing some of the M&A bid that was in the stock.
With expectations reset, the Investment Adviser is constructive on the stock.
Positive drivers of fund performance were highly varied in June. Important contributions came from all three Japanese generic
drug firms, Sawai Pharmaceuticals, Towa Pharmaceuticals, and Nichi-iko Pharmaceuticals. Speculation continues to build around
potential positive legislative changes in Japan to further foster generic usage there. Another key contributor was the Ireland-based
Elan Corporation. This specialty pharmaceutical company has been a momentum stock since April 2011, buoyed by a number of
catalysts, including a sale of their drug technology unit to Alkermes, increased enthusiasm for their marketed multiple sclerosis
drug, Tysabri, and anticipation of data for their Phase III Alzheimer‟s drug, bapineuzumab. Pharmacyclics, a California-based
emerging biotechnology company, also performed well in June. The American Society of Clinical Oncology (“ASCO”)
conference saw the release of data about several meaningful new cancer therapies. Pharmacyclics reported positive data for its lead
compound PCI-32765. This compound showed impressive response rates for chronic lymphocytic leukemia in a phase II trial, and
it also shows promise in mantle cell lymphoma and follicular lymphoma.
Detractors in June were few. With pharma stocks giving back some of their earlier gains, Novartis and Roche were notable
detractors. However, this was offset by two overweight positions that were up in the month, namely Sanofi and, importantly,
Bristol-Myers Squibb, which announced positive Phase III data for their blood thinner, Eliquis (apixaban). The fund‟s net
underweight in large-cap pharmaceuticals also helped to mitigate losses.
The Skandia Healthcare Fund slightly lagged its primary benchmark, the MSCI World Healthcare Index, over the third quarter of
2011. As the quarter started, mid-sized Japanese pharmaceutical company, Mitsubishi Tanabe – a key holding in the fund
performed strongly. A series of events fuelled a significant share price move, including a benign resolution of manufacturing
issues with local authorities (an overhang removed), solid quarterly sales of out-licensed multiple sclerosis drug, Gilenya (reported
by partner Novartis), and an increase in the company‟s full year guidance (presented with the first quarter earnings result). Second
quarter earnings reports for large cap pharma stocks were generally positive in July. In particular, we would highlight Bristol-
Myers Squibb, Novartis, and Roche. Sales for Bristol‟s new cancer drug, Yervoy, were well ahead of expectations and contributed
to a “beat and raise” of full year guidance. Novartis and Roche were able to overcome significant currency headwinds and post
results that were ahead of expectations.
Most prominent of the detractors were the managed care companies, and in particular, Wellpoint. Despite solid earnings reports
during July, results were below expectations and concerns over utilisation began to unsettle the market. The mismatch of results
versus expectations ignited a selloff; Wellpoint‟s was the most egregious.
As we moved into August, biotechnology stocks struggled due to some outsized downward moves of a few stocks while large cap
pharmaceuticals were the largest source of positive alpha, given our underweight stance. A key contributor was the emerging
biotechnology company, Pharmasset Inc. Momentum continues to build around the company‟s pipeline in hepatitis C and we
believe they are the best positioned among the next generation therapies for this viral disease.
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