16.03.2019

Polar Capital

Investing in Biotechnology’s Growth Story

The biotechnology sector offers investors the potential for market-beating returns over the long term. Since its inception in 1993, the NASDAQ Biotechnology Index has returned an annualised 12.4% versus the S&P 500’s 9.5%*. Recent years have seen significant volatility for the sector with a surge of enthusiasm driven by the emergence of exciting new medicines with significant commercial potential. This was followed by controversy over the price of these new medicines that caused widespread concern over the ability of the industry to continue to price these new products to maintain the growth and profitability that investors have become accustomed to. Over the past year or so, those concerns have ebbed away, in part due to political deadlock in the US, but also perhaps more positively because the industry continues to successfully discover and develop exciting new breakthrough medicines for patients and healthcare systems in need of innovation.
The convergence of an ever better understanding of complex human biology alongside the emergence of sophisticated new drug discovery and development technologies is powering a phenomenal surge of innovation in biomedical research. In 2018, 59 new medicines were approved for sale in the US, perhaps the strongest year ever in terms of new drug approvals. However, it is not just the quantity that is important – the quality is improving every year and new medicines are getting much better. For example, drugs have recently been developed that intelligently harness the body’s own powerful immune system to drive late-stage cancer patients into durable remission, and gene therapy approaches have succeeded in fixing inherited genetic deficiencies to, for example, restore vision or overcome blood disorders such as haemophilia. At the same time the regulatory environment is adjusting to support and encourage this innovation, making breakthrough therapies available to patients faster than ever before.
As the industry’s renaissance has unfolded, so has the nature of the global biotechnology industry. Driving the strong momentum of the sector in recent years were the established commercial-stage biotech companies that have become well-known among the investment community as their rejuvenated growth rates and profitability captured the attention and collective imagination of investors starved of growth. With success, these companies have now become much larger and increasingly resemble their more traditional pharmaceutical company peers. The rapid commercial launches of the exciting new medicines that drove their renaissance are now moderating to a steadier pace of growth. The tricky reality for investors is that the most attractive opportunities are perhaps now to be found further down the market capitalisation spectrum, among those smaller companies that are either making the transformation to revenue and cashflow-generating businesses, or those still unprofitable but developing potentially breakthrough new medicines.
The success of the larger biotechnology companies, as well as a supportive capital markets environment, has driven investor appetite for smaller earlier-stage companies, in turn enabling several hundred of them to list on the stock market, significantly refreshing and rejuvenating the opportunity set for investment. Yet for many investors attempting to pick the winners among these earlier-stage companies is daunting – the science involved is difficult to understand and fraught with risk, the fast-moving competitive landscape complex to analyse, and the shares of the companies concerned often illiquid and share prices volatile. The use of powerful drug discovery and development technologies leveraging the insights of truly excellent scientists can result in breakthrough new medicines, but it needs a trained eye to identify the right companies and invest in them at the right time. The way to access the return potential offered by investment in these smaller companies is through actively-managed funds run by experienced specialist healthcare investment teams.
David Pinniger
Fund Manager Biotechnology
12 March 2019
* Note: USD total return; 31 December 1993 to 28 February 2019

Disclaimer
Important Information: This document is provided for the sole use of the intended recipient and is not a financial promotion. It shall not and does not constitute an offer or solicitation of an offer to make an investment into any fund managed by Polar Capital. It may not be reproduced in any form without the express permission of Polar Capital and is not intended for private investors. This document is only made available to professional clients and eligible counterparties. The law restricts distribution of this document in certain jurisdictions; therefore, it is the responsibility of the reader to inform themselves about and observe any such restrictions. It is the responsibility of any person/s in possession of this document to inform themselves of, and to observe, all applicable laws and regulations of any relevant jurisdiction. It is not designed to contain information material to an investor’s decision to invest in Polar Capital Funds Plc – Biotechnology Fund. SUCH INFORMATION, INCLUDING RELEVANT RISK FACTORS, IS CONTAINED IN THE FUND’S OFFER DOCUMENT WHICH MUST BE READ BY ANY PROSPECTIVE INVESTOR.
Statements/Opinions/Views: All opinions and estimates constitute the best judgment of Polar Capital as of the date hereof, but are subject to change without notice, and do not necessarily represent the views of Polar Capital. This material does not constitute legal or accounting advice; readers should contact their legal and accounting professionals for such information. All sources are Polar Capital unless otherwise stated.
Third-party Data: Some information contained herein has been obtained from third party sources and has not been independently verified by Polar Capital. Neither Polar Capital nor any other party involved in or related to compiling, computing or creating the data makes any express or implied warranties or representations with respect to such data (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any data contained herein. 
Holdings: Portfolio data is “as at” the date indicated and should not be relied upon as a complete or current listing of the holdings (or top holdings) of the Fund. The holdings may represent only a small percentage of the aggregate portfolio holdings, are subject to change without notice, and may not represent current or future portfolio composition. Information on particular holdings may be withheld if it is in the Fund’s best interest to do so. It should not be assumed that recommendations made in future will be profitable or will equal performance of the securities in this document. A list of all recommendations made within the immediately preceding 12 months is available upon request. This document is not a recommendation to purchase or sell any particular security. It is designed to provide updated information to professional investors to enable them to monitor the Fund.
Benchmarks: The following benchmark index is used: NASDAQ Biotechnology Index. This benchmark is generally considered to be representative of the Biotechnology Universe. This benchmark is a broad-based index which is used for comparative/illustrative purposes only and has been selected as it is well known and easily recognizable by investors. Please refer to https://indexes.nasdaqomx.com for further information on these indices. Comparisons to benchmarks have limitations as benchmarks’ volatility and other material characteristics that may differ from the Fund. Security holdings, industry weightings and asset allocation made for the Fund may differ significantly from the benchmark. Accordingly, investment results and volatility of the Fund may differ from those of the benchmark. The indices noted in this document are unmanaged, unavailable for direct investment, and are not subject to management fees, transaction costs or other types of expenses that the Fund may incur. The performance of the indices reflects reinvestment of dividends and, where applicable, capital gain distributions. Therefore, investors should carefully consider these limitations and differences when evaluating the comparative benchmark data performance. Information regarding indices is included merely to show general trends in the periods indicated and is not intended to imply that the Fund was similar to the indices in composition or risk.
Regulatory Status: Polar Capital LLP is a limited liability partnership number OC314700. It is authorised and regulated by the UK Financial Conduct Authority (“FCA”) and is registered as an investment adviser with the US Securities & Exchange Commission (“SEC”). A list of members is open to inspection at the registered office, 16 Palace Street, London, SW1E 5JD. FCA authorised and regulated Investment Managers are expected to write to investors in funds they manage with details of any side letters they have entered into. The FCA considers a side letter to be an arrangement known to the investment manager which can reasonably be expected to provide one investor with more materially favourable rights, than those afforded to other investors. These rights may, for example, include enhanced redemption rights, capacity commitments or the provision of portfolio transparency information which are not generally available. The Fund and the Investment Manager are not aware of, or party to, any such arrangement whereby an investor has any preferential redemption rights. However, in exceptional circumstances, such as where an investor seeds a new fund or expresses a wish to invest in the Fund over time, certain investors have been or may be provided with portfolio transparency information and/or capacity commitments which are not generally available. Investors who have any questions concerning side letters or related arrangements should contact the Polar Capital Desk at the Administrator on (+353) 1 434 5007. The Fund is prepared to instruct the custodian of the Fund, upon request, to make available to investors portfolio custody position balance reports monthly in arrears.
Information Subject to Change: The information contained herein is subject to change, without notice, at the discretion of Polar Capital and Polar Capital does not undertake to revise or update this information in any way.
Forecasts: References to future returns are not promises or estimates of actual returns Polar Capital may achieve. Forecasts contained herein are for illustrative purposes only and does not constitute advice or a recommendation. Forecasts are based upon subjective estimates and assumptions about circumstances and events that have not and may not take place. 
Performance/Investment Process/Risk: Performance is shown net of fees and expenses and includes the reinvestment of dividends and capital gain distributions. Factors affecting fund performance may include changes in market conditions (including currency risk) and interest rates and in response to other economic, political, or financial developments. The Fund’s investment policy allows for it to enter into derivatives contracts. Leverage may be generated through the use of such financial instruments and investors must be aware that the use of derivatives may expose the Fund to greater risks, including, but not limited to, unanticipated market developments and risks of illiquidity, and is not suitable for all investors. Those in possession of this document must read the Fund’s Prospectus for further information on the use of derivatives. Past performance is not a guide to or indicative of future results. Future returns are not guaranteed and a loss of principal may occur. Investments are not insured by the FDIC (or any other state or federal agency), or guaranteed by any bank, and may lose value. No investment process or strategy is free of risk and there is no guarantee that the investment process or strategy described herein will be profitable.
Allocations: The strategy allocation percentages set forth in this document are estimates and actual percentages may vary from time-to-time. The types of investments presented herein will not always have the same comparable risks and returns. Please see the private placement memorandum for a description of the investment allocations as well as the risks associated therewith. Please note that the Fund may elect to invest assets in different investment sectors from those depicted herein, which may entail additional and/or different risks. Performance of the Fund is dependent on the Investment Manager’s ability to identify and access appropriate investments, and balance assets to maximize return to the Fund while minimizing its risk. The actual investments in the Fund may or may not be the same or in the same proportion as those shown herein. 
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