The last year has been volatile for the pharmaceutical and biotech sectors, with a number of market corrections of the stocks in the sector. The reason has been the US Election and the democratic campaign, where Secretary Clinton went after the pharmaceutical companies and the drug prices in the US. US is by far the market dominating the world pharmaceutical market, hence US drug pricing is important for the sector outlook. The unexpected outcome of the election with the Republicans dominating all offices, takes the immediate issue of regulating drug off the agenda and the market traded up the sector immediately.
The pre-election squeeze of the biotech sector put a huge pressure on stock prices in the sector and affected the fund’s performance very negatively in an unselective way. The day after the election, both the broader US pharma index (DRG) and Biotech index (NBI) posted the largest gains in two years with increases of 4.9% and 9% respectively.
The gains could clearly be described as relief gains, now that “Hillary Care part 2” seems to be avoided, but what will come instead? With Trump in the office we expect to see less of drug price regulation in the US. In addition Mr Trump has clearly stated that he will repeal Obamacare with more industry friendly reforms which could further impact the pharma sector in a positive manner. We also believe that with Mr Trump as President we will see increased probability for lower corporate tax rates, and profit repatriation, which should in turn lead to increased capital return to shareholders and more M&A.
Our view of the pharmaceutical market is, and has been ever since we started the fund, that we predicted a market force led process where old standard products should be priced a cost effective as possible, i.e with generic substitutes, but where innovative products will be priced at a premium. The incentives for researching for new medical solutions should be big and we are convinced that areas like orphan diseases or any drug with unique disruptive properties will be priced at very profitable levels for the industry. However, in order to save funding for life saving, new medicines, we foresee a wider use of biosimilars and generics where available. It should be noted, that the focus the last year on drug prices has created an awareness and we foresee the insurance plans continuing negotiating their part of the system, regardless of the political situation.
The focus of Arctic Aurora LifeScience is to achieve excess return by selecting biotech and pharma companies with innovative and leading projects in pipe line. With few exceptions, the companies held in the fund are delivering on milestones. We see the last months as a proof of that our strategy with a mix of innovative biotechs combined with larger pharmaceutical companies is a long term optimal one. We have already seen one take out with high premium (Vitae Pharmaceuticals Inc, 160% premium) and we are invested in several other potential take out candidates. We also expect strong clinical data from many of the biotech companies we are holding. However, in volatile markets, the investments in the big defensive companies serves as a hedge.
We continue to believe that the biotech companies will develop the most innovative new medicines, and it will continue to be a source to big pharma’s pipelines. We predict continued significant scientific development within areas of e.g. oncology and inflammation as well as other areas where there still is high unmet medical needs. For those reasons, we will continue to invest with overweight in the innovative biotech segments.
The team of Arctic Aurora LifeScience – Ulrica, Torbjörn and Daniel