A surge of discoveries and innovation is breathing new life into the formerly ailing biotechnology sector, says Dr. Robert Deresiewicz, a portfolio manager for Renaissance Global Health Care.
The roaring four-year bull market in biotech came to a screeching halt at the end of 2015, says Deresiewicz. He added that January 2016 was one of the worst months in the history of this health sub-sector. (For all of 2016, the S&P 500 Biotechnology Total Return Index had a 13% loss in U.S.-dollar terms, but has a positive return of 5.9% in the year to date to June 7.)
Deresiewicz says he and his colleagues now feel "generally bullish" about the sub-sector. "Pharma biotechnology is an innovative business and the pipeline of new drugs is richer now than it's really ever been in my career."
Deresiewicz is also a partner and global industry analyst at Wellington Management Co. LLP in Boston, Massachusetts, a sub-advisor to CIBC Asset Management Inc. He considers his academic and research background -- which includes a business degree, experience as an academic physician, and biomedical research at a laboratory -- as a competitive advantage. "My secret sauce is one of experience and understanding in regard to how diseases work, how chemistries and research schema can be brought to bear in the development of drugs."
Deresiewicz says volatility in expectations and valuations, especially in biotech, are generally much higher than the volatility related to the likelihood of a drug working. "Therefore, the markets give us opportunities all the time to revisit stories that we like or more attractive valuations," he says.
An example among his holdings is U.S.-based 
Incyte Corp. (INCY), a biopharmaceutical company that the managers have been following for over 20 years. The company has evolved from a heavy-duty chemistry company to the area of immuno-oncology today, and has grown from a market cap of well under $1 billion to over $30 billion, with fluctuations along the way.
When the biotech market fell, says says Deresiewicz, "a lot of our companies took a hit on the chin, including Incyte. If I remember correctly, Incyte went from a market cap of about $20 billion to a market cap of about $12 billion, without, in our judgment, any change fundamentally in its outlook."
Most recently, shares of Incyte and another Renaissance holding, Eli Lilly and Co. (LLY), each took a hit in April in response to an unfavourable ruling by the U.S. Food and Drug Administration. Incyte and Eli Lilly are partners in developing a drug designed to treat rheumatoid arthritis, but more testing is needed, the FDA ruled.
As a result, says Deresiewicz, he and his colleagues now have to stop and ask themselves whether they should choose to buy more, trim, or continue to hold their positions in Incyte. (At recent prices, Incyte stock was trading near Morningstar's fair-value estimate of US$120, while Eli Lilly's shares were cheaper than the fair-value estimate of US$89.)
Despite the challenges and slow process of getting drugs to market, new themes and discoveries offer ongoing investment opportunities. According to Deresiewicz, starting in the 1980s and 1990s, there was an explosion of science information for cancer and enormous interest in developing new types of cancer drugs, and we're now in one of those waves again. "Personalized medicine," pertaining to the genetics of a tumour on a patient-by-patient basis, has been on the scene for about 20 years now but there's still plenty to do in that regard, he adds.
The newer theme in cancer is in the area of cancer immunotherapy, also referred to as immuno-oncology -- the use and relationship of the immune system to treat cancer. Active immuno-oncology, for example, directs the immune system to target and attack tumour cells.
"Immuno-oncology," says Deresiewicz, "is going to be a driver of drugs over the next five to 10 years. It has the promise of really changing the way cancer is treated, and we're only at the leading edge in terms of drugs for approval."
A huge factor, and ongoing debate, in the health-care services area is how Americans will get health insurance under President Trump's administration. On May 4, a new law to repeal and replace major parts of the Affordable Care Act was passed in the U.S. House of Representatives.
"Our baseline position, says Deresiewicz, "has been that any change to the Affordable Care Act, Obamacare, is likely to be less not more because of the political cost to anybody who votes for a bill that takes 20 million people off insurance. We still think the chances that it's completely torn down are much lower than the opposite."
Deresiewicz can't predict whether the fund will continue to offer historical double-digit returns but the future looks healthy. "In a biotech bull market," says Deresiewicz, "if there's a fund out there that can put 60% of the assets in biotech and they're correct that it's a bull market, they will kill us during that bull market. What this product does is expose you to some of that growth but protect you on the downside. We are value investors in a growth space. That's one of our calling cards."
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