Stand: 30.11.2023
Despite significant volatility, global equity markets ended May 2022 relatively flat in US-dollar terms as investors grappled with persistently high inflation, tightening monetary policy, geopolitical instability, slower economic growth, and trade disruptions due to the Russia-Ukraine war. In USdollar terms, developed market equities performed in line with a global index, emerging market equities outperformed it, and frontier market equities declined and significantly underperformed it. Stocks collectively rose in most major regions, with value equities strongly outperforming growth stocks. The health care sector fared better than average and ranked fifth out of the 11 sectors (according to a broad US equity index). A mixture of gains and losses led the biotechnology industry to end the month close to breakeven on the funds benchmark index. For the month, the funds A (acc) USD shares returned ‐6,41%, and its benchmark, the NASDAQ Biotechnology Index, returned ‐1,32%. Several of the funds higher-conviction holdings in the biotechnology industrythe primary point of weakness versus the benchmark index suffered steep double-digit percentage declines in May, none more so than Iovance Biotherapeutics and Kezar Life Sciences. Cellular immunotherapy specialist Iovances share value was cut by more than half following the release of disappointing results from a pivotal melanoma drug trial using tumour-infiltrating lymphocytes (a type of immune cell that can recognise and kill cancer cells). Iovance had previously reported strong results for melanoma treatment Lifileucel in mid-2021 when it generated a response rate of 36%. Those results were for a different subset of patients, however. This years follow-on study of cancer patients with advanced melanoma who had shown improvement after previously receiving and responding to anti-PD-1/L1 therapies was not as encouraging, with an objective response rate of only 29%. Although Lifileucels fading efficacy is a concern since it features prominently in the companys research-and-development programme, that pipeline currently has more than a dozen other clinical trials in motion. Iovance remains optimistic about the drugs prospects and is ready to present it to regulators; the company aims to submit a biologics license application for Lifileucel to the US Food and Drug Administration (FDA) in August. Kezar Life Sciences develops novel small molecule therapeutics to treat autoimmune diseases and cancer. In general, investors have been punishing development-stage biotech firms while favouring commercial stage companies with revenues not tied to binary outcomes. As it pertained to Kezar, a small Phase 2 clinical trial failed to show an effect in a rare autoimmune disease. This was not a core indication for the companys drug candidate, but it served to remind us that investors have become very sensitive to clinical readouts in the current environment. This event appeared to make some investors nervous around the risk/reward prospects for an upcoming binary Phase 2 readout of KZR-616 in lupus nephritis, expected in June. Several of our overweighted or off-benchmark biotechnology and pharmaceuticals industry holdings rallied in May. Within the portfolios core biotech allocation, the funds negative absolute and relative returns were pared by key contributors such as Intra-Cellular Therapies, Argenx, Neurocrine Biosciences, Legend Biotech and Rocket Pharmaceuticals. In particular, we think European biotech Argenx is a high-quality commercial-stage mid-capitalisation company with a best-in-class antibody discovery platform, a smart management team, and a best-in-class drug (Vyvgart) with potential applicability across multiple severe autoimmune diseases. The company is now in the commercial stage and recently reported positive developments on several fronts, including the addition of new high-value pipeline programmes. Businesses globally, including biotechnology and pharmaceuticals companies, have grown more nervous about overall economic conditions and prospects through 2022. Business sentiment was struggling to break free from the pandemic, with Russias invasion of Ukraine adding to the general angst. The war has introduced some sector-specific disruptions, specifically surrounding clinical trial recruitment, as a number of CROs (contract research organisations) and trial sites in Ukraine are sources of patient recruitment in fields such as psychiatry. Moreover, there are plenty of other geopolitical uncertainties, including China-induced tensions in Hong Kong and Taiwan and the ongoing conflict between the United States and Iran. Partially as a result, economists consensus expectations for the economy through the end of 2022 have slumped. On the upside, the Omicron wave of the COVID-19 virus appears to have peaked in many regions, particularly regarding hospitalisations. Many biotechnology and pharmaceuticals (biopharma) companies continue to benefit from robust drug development pipelines, while the industry has been seeing greater support from the return in demand for elective procedures, drug sales, medical equipment and diagnostics, as impacts on hospital utilisation from the pandemic have generally subsided. We believe valuations within the biopharma industry were relatively attractive heading into June and balance sheets in the large-capitalisation tier were strong, increasing the possibility of merger-and-acquisition (M&A) activity. However, disappointing clinical trial readouts and a string of highprofile regulatory setbacks have weighed on investor sentiment. Our outlook also depends on the direction the pandemic takes, as its second-order impacts have thus far proven nearly impossible to predict. This year, we are focused on stocks we believe were oversold but whose fundamentals remain intact and strong. We are optimistic that positive proof-of-concept and late-stage clinical trial readouts will unlock value for these companies in the coming months. When we think about our current opportunity set, the core theme of biopharma innovation is still very much intact and remains a key driver. In the past year alone, we have seen numerous advancements in the areas of immuno-oncology, autoimmune diseases and neurodegenerative disorders, and we expect to see further clinical validation of novel mechanisms to address these disease areas this year. We also see opportunities at the other end of the “prevalence spectrum in addressing rare diseases. In addition, we are focused on innovative drug modalities, such as in vivo gene editing, gene therapy, targeted protein degraders and targeted oligonucleotide therapeutics. Alongside the biotech and pharma spheres, we are also encouraged by what we are seeing in background processes, as novel discovery tools and the adoption of artificial intelligence and machine learning technologies are enabling faster drug discovery and development.