The manager of the £430m fund has recently bought US-listed Gilead Sciences and Amgen believing a surge of innovation around the development of immunogenetics – genetically-driven tailored drug treatments – will boost the industry’s profits and usher in a boom for the pharmaceuticals sector.According to FE Analytics, pharmaceuticals have seen significant growth over the past eight years with the S&P 500 Composite 1500 Pharmaceuticals Industry, FTSE World Index Pharmaceuticals & Biotechnology and FTSE All Share Pharmaceuticals & Biotechnology indices up 104.9, 158.02 and 158.42 per cent, respectively.
Performance of indices over 8yrs
Source: FE Analytics
However, as the above graph shows, the indices have been subject to several corrections of up to 10 per cent over this period.
Pharmaceuticals currently represent nearly 4 per cent of the total holdings in Rathbone Global Opportunities, but Thomson says this could grow to around 10 per cent in the future.
The manager had completely avoided the sector since he took over the fund in November 2003 as it has experienced a “humiliating” past 15 years.
“The investment case has changed dramatically. Breakthrough drugs are approaching approval; drugs where no substitute exists, and treatments for rare diseases and drugs that will command pricing power,” he said.
“It started with the mapping of the human genome – up until then only 50 per cent of proteins and genes were mapped and understood, which means 50 per cent of the market for new treatments was unknown.”
“Ten years on and we’re in an age of genetically-driven tailored drug treatments.”
“We’re about to see a wave of innovation that’s meeting an increasingly pragmatic and sympathetic FDA – a breakthrough in first in class drugs that will cure conditions like hepatitis C, slash the number of deaths from stroke, give much better treatment of type II diabetes and improve immune-oncology.”
Thomson is not the only top-rated manager to buy the sector. FE Alpha Manager Neil Woodford has several early-stage pharmaceutical names in his newly launched CF Woodford Equity Income fund, including Circassia, 4D Pharma and Oxford Pharmascience.
Woodford also has pharmaceutical giants AstraZeneca and GlaxoSmithKline as his largest and second largest holdings.
Within the IMA universe 20 funds have more than 10 per cent of their portfolios exposed to the pharmaceutical sector.Most of these are specialist healthcare and biotechnology funds such as AXA Framlington Biotech, Polar Capital Healthcare Opportunities and Close FTSE techMark – a passive fund tracking the FTSE techMark Focus Index.
Other well-known funds with high weightings to the sector include the MFM Slater Recovery and MFM Slater Growth funds which have 13.38 and 13.68 per cent, respectively.
The Henderson Global Growth and Henderson Global Equity Income funds have 12.4 and 11.1 per cent.
Investors can also access the sector on more global basis with the £100m L&G Global Health & Pharmaceutical Index fund which tracks performance of those companies in the FTSE World Index which are engaged in health, pharmaceuticals and biotechnology.
Since January 2006 [as far as our data goes back] the fund has returned 128.6 per cent compared to a gain in the index of 155.49 per cent.
The average fund in the IMA Global sector made 57.03 per cent over this period.
Performance of fund, sector and index over 8yrs
Source: FE Analytics
Thomson notes that over the past decade, the pharmaceutical industry lost patent-protection on some of its largest and most profitable drugs.
“The US FDA [Food and Drug Administration] became very risk-averse in the 1990s following some high profile drug safety failures, which meant fewer products, were getting approved.”
“This culminated in the patent cliff of 2012, the worst year in history for the industry, where seven of the world’s nine largest pharmaceutical companies lost their biggest or most profitable drugs to generic competition.”
The result was a ‘lost decade” for the sector, according to Thomson. In the 1980s and 1990s the pharmaceutical industry experienced average annual growth of 12 per cent, but this slowed to around 3 per cent over the last 10 years.
However, the plummeting price of gene-sequencing has been touted as the beginning of an era of personalised drug therapy for some of the world’s most universal diseases.
“Potentially one of the biggest drug approvals in history, we could see a first-in-class drug which will dramatically slow the progression of Alzheimer’s, which is all the more significant because brain diseases are some of the greatest areas of unmet medical need.”
“These and a pipeline of drugs awaiting approval mean we’re about to experience accelerating growth – better growth every year, at least to 2017.”
Over the past 10 years the Rathbone Global Opportunities fund has returned 216.05 per cent, almost doubling the returns of the IMA Global sector average. The FTSE World index has gained 144.68 per cent over the period.
Performance of fund, sector and index over 10yrs
Source: FE Analytics
Rathbone Global Opportunities has ongoing charges of 0.8 per cent.
