A Simple Formula for Drug (and Biotech and Spec Pharma) Stock Selection – Updated

Richard

Drug and biotech stocks tend to outperform their peers in the months before and after scheduled approvals of major new products. Relative performance gains are spread somewhat evenly across time; risks are somewhat concentrated in the days just before and after the regulatory decision

Using straightforward rules for buying and selling stocks with major pending (or recent) approvals, we seek to maximize exposure to the performance gains associated with major approvals, while mitigating the risks in the days around the actual decision

We have operated three portfolios since November of 2011; each is defined by the relationship of the new product’s sales forecast to the sponsoring company’s total sales forecast. The ‘1 percent’ portfolio includes all companies with pending approvals that represent 1 percent or more of the company’s total sales forecast, and so on for the 5 and 20 percent portfolios

All three portfolios have outperformed the DRG, BTK, and our own ‘therapeutics index’ consisting of all companies eligible for inclusion in these portfolios (all US-listed pharma / biotech, with the exception of OTC-listed stocks with capitalizations < $1B). Relative performance versus the BTK has been 18%, 24%, and 24% for the 1, 5, and 20 percent portfolios, respectively. Relative performance versus the therapeutics index has been 28%, 34%, and 33%, respectively Importantly, performance of the portfolios has been superior on a risk-adjusted basis, e.g. all three portfolios have higher returns but lower volatility than the broader BTK (Exhibit 1) As companies’ real US pricing power fades, the impact of product approvals on relative performance increases; correspondingly we expect the performance gains associated with these portfolios to improve further Our portfolios and supporting materials (candidate companies for inclusion, current phase III pipelines, current NDA/BLA pipelines, current holdings, buy notifications, sell notifications, transaction logs, and performance metrics) are available by subscription on Bloomberg, at our website (www.sector-sovereign.com), or by e-mail

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