FCP OP MEDICAL BioHe@lth-Trends - medical.lu

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Development of the Capital Markets in the Period under Review listed companies with a total market capitalisation of around USD 2,500 billion (source: Pacific Growth, 2005). Over half of this investment volume is accounted for by the 41 Big Cap companies with market capitalisation in excess of USD 10 billion (i.e. Blue chips such as Pfizer, Johnson & Johnson and Amgen). Most of the Big Cap companies belong to the pharmaceuticals sector. Yet it is the far more extensive and, at the same time, disparate Mid and Small Cap segment, with its 602 companies, which contains many companies with innovative product developments and better than average opportunities for growth. The majority of investors are interested in blue-chip companies with a high market capitalisation. It is for this reason that the shares represented in the well-known indices represent, for the most part, the focus of interest for both institutional investors – such as insurance companies and investment funds – and many private investors. Second-line stocks, that is to say companies with average or low market capitalisation, remain for the most part out of the picture. Accordingly, most of the investment funds in the health sector have shown that they concentrate their investments in Big Cap companies in the pharmaceutical, biotech and MedTech sector. This, in turn, means that there is a risk of overlapping with global investment funds. One of the reasons for this is the often lack of, or at best inadequate level of, research, the consequence of which could be an inefficient market for these second-line stocks. Investment teams with special expertise within the sector, such as the investment adviser Medical Strategy, exploit this market inefficiency, tracking down as yet largely unknown companies through carefully targeted analysis. With such a stock picking strategy, it should be possible – in the healthcare sector in particular – to achieve investment performance above the index level over the long term. Development trends in the various segments of the health sector Some of the most important segments in the health market, from an investment point of view, are set out in more detail below: Pharmaceutical industry The global drugs market was worth USD 550 billion in 2004. Of this figure, 45.1% was accounted for by North America, 26.2% by the European Union, and 10.5% by Japan. Just 60% of these drugs sales are generated by the 20 largest pharmaceuticals companies, led by Pfizer, Sanofi and Glaxo (source: Pharmaceutical Executive, May 2005, IMS Health Data). Following the dynamic growth of the pharmaceuticals companies in the second half of the 1990s – a situation made more favourable, in particular, by a new product cycle, expansion of field services and facilities for direct advertising to consumers – the current decade is characterised rather by weak growth as a consequence of a large number of patents set to expire for so-called blockbuster products (annual sales of over USD 1 billion) and thus competition among generic products. In 2004, there were 82 such blockbuster products (source: MedAdNews, May 2005), though many of them will lose their patent in coming years. WR Hambrecht (2005), for example, anticipates patents set to expire for drugs with annual sales of USD 88 billion (related to 2004) for the period 2006 to 2010. This is aggravated by the fact that, due to a decline in research efficiency, there is an insufficient number of products in the pipeline at the pharmaceutical companies, and therefore there are too few new blockbusters available to compensate for the decline in sales. The current successful strategy of compensating for growth problems through price increases and so-called ‘me-too products’, i.e. through modifications and combinations of known medical preparations, also appears to be reaching its limit. Insurance companies are increasingly excluding such “apparent innovations” from their recommended drugs lists, while at the same time calling for far higher additional contributions for brand products than for their generic counterparts. For example, the average additional contribution per patient is USD 5 to 10, whilst for brand preparations the figure is between 20 and 50 dollars. It is easy to see from these statistics why drug companies are relying increasingly on the licensing-in of products and M&A measures on the one hand, and on cost reductions – e.g. in Administration, Sales and Research – on the other. Companies such as Pfizer, Merck and Wyeth have already begun to introduce corresponding restructuring measures. The valuations of the pharmaceutical companies remain considerable. Ten companies, for example, have a market capitalisation of over USD 60 billion – with Pfizer heading the list at around USD 180 billion. The pricesales ratios are between three and five for most of these companies. Biotechnology Biotechnology is increasingly emerging as the crucial driving force behind innovative drug development. In the past 25 years, for example, almost 200 medical preparations have been introduced as a result of research in the field of biotechnology, with around 800 products currently at the clinical development stage (source: BIOS/IMS, 2005). In 2004, annual sales of the biotech companies stood at USD 54.6 billion (source: E&Y Report 2005) and, with a large number of pioneering innovations for the treatment of cancer, diabetes and infectious diseases, double-figure growth rates are expected to continue. According to an analysis carried out by Morgan Stanley (September 2005), oncological drugs, in particular, will contribute to the success of the biotech companies. The expectation is that in the next few years, new cancer drugs will account for more than 50% of the increase in drug expenditure. This would represent oncological preparations as a proportion of US expenditure on drugs increasing from 16% (2004) to 22% (2007). The market capitalisation of all listed biotechnology companies in the USA stands at around USD 350 billion. Of this figure, 70% is accounted for by the ten largest companies (such as Amgen, Genentech, Gilead Sciences etc.). The more than 300 remaining listed biotechnology companies, responsible for the majority of the potential products currently undergoing clinical testing, account for just 30% of the total market capitalisation of this sector. This represents an average valuation of around USD 300 million per company. These Mid and Small Cap stocks are primarily development companies, that is to say the products are at the clinical development stage or are going through the licensing process. The Small and Mid Cap companies therefore represent an interesting opportunity-risk profile. For the large biotech companies, on the other hand, licensing-in and M&A measures are becoming increasingly important in the battle to secure an adequate growth rate. The licensing-in competition for new medical preparations with Big Pharma has 3
Development of the Capital Markets in the Period under Review significantly strengthened the negotiating hand of the Small- and Mid Cap biotech companies and may be interpreted as a potential value-adding factor. In terms of the valuations, the limits between Big Pharma and Big Biotech become visibly blurred. Six biotech companies already have market capitalisations in excess of USD 10 billion, with two – Amgen and Genentech – are valued at around USD 90 billion. The price-sales ratios of the large biotech companies are in the 6 to 10 range. Speciality Pharma Speciality Pharma companies concentrate for the most part geographically on one region, e.g. North America or Europe. They cover few, i.e. two or three, therapy areas, focusing primarily on sales and marketing. Other key functions are outsourced. In the 1990s, this type of company became increasingly important in the drugs market as Big Pharma concentrated increasingly on so-called blockbuster products for the wider market at the expense of the potential in many special indication areas. The younger speciality pharmaceutical companies were able to take full advantage of these gaps in the market, licensing-in and successfully marketing, in particular, innovative medical preparations for fast-growing specialist areas such as dermatology, ophthalmology, gastroenterology, gynaecology and neurology. The advantages of these niche segments are that there is reduced competition, and therefore lower marketing costs and, in most cases, less price sensitivity. This means that, with lower sales volumes, specialist companies can achieve above-average profits. In recent times, because of the increasing price competition, generic product companies in particular have been expanding their business model towards patented specialist drugs. Drug delivery companies The drug delivery companies represent a further sub-segment in the drugs sector. By developing new types of administering technologies, known as drug delivery, these companies are making a substantial contribution to progress in the field of drugs. According to a study carried out by Nomura, the number of drugs that employ innovative release technologies – such as delayed release of active agents, transdermal plaster systems and inhalable active agent preparations – has increased substantially. They now account for 13% of drug sales worldwide. According to the Institute for Medicines Research, about 15% of pharmaceutical research budgets is spent on projects using drug delivery technologies. In biotechnology, in particular, these procedures are used to extend the duration of the effect of the drug (e.g. deposit injections) or as an alternative to injections (e.g. administration as a nasal spray). Since drug delivery products, in contrast with research into new drugs, are based for the most part on known substances, a shorter development time and lower development risk can make this area of the healthcare sector a particularly attractive one. Medical technology In addition to the drugs, medical technology is the second-largest product area in the healthcare sector. The segment is relatively heterogeneous, comprising hospital products (e.g. syringes and catheters), laboratory equipment (including for in vitro diagnostics), complicated medical products (e.g. defibrillators) and 4 a broad range of diagnostics equipment such as nuclear magnetic resonance tomographs. Technical progress in areas, such as microelectronics and materials technology is making a significant contribution to the increasing importance of new products in the field of medical technology used in the treatment of impaired bodily functions or illness conditions. So, for example, in many sectors – including cardiology and neurology – medical technology in the form of active implants such as heart pacemakers and neurostimulators are competing with more traditional drug-based forms of therapy. Medical technology has enjoyed particular success recently in the combination of medicines and drugs, such as drug-releasing stents for preventing arteriosclerotic vascular obliterations. Medical technology in the field of passive implants such as artificial hip and knee joints is currently without competition. Moreover, new image-based procedures provide improved diagnosis facilities and increased application of minimally invasive surgical techniques. The development period for many Medtech products is far shorter than it is for drugs and, thanks to ongoing technological improvements, there are no problems associated with generic products. The rapidly growing worldwide Medtech market is estimated at more than USD 230 billion (source: Oppenheim Research, 2004). Healthcare information technologies (e-health) Health costs are growing more quickly than gross national products, while at the same time the efficiency of the health economy is trailing far behind that of the rest of the economy (Information Week Study 2004). One response to this dilemma therefore lies in the call for increased use of modern information technologies in the health sector. The American government is at the forefront of this initiative, investing some USD 125 million over the next few years to promote the application of information technologies in the healthcare sector. Similar initiatives are also being pursued in Europe. The group of e-health companies is very heterogeneous, as information technology can be used in many and varied ways to resolve a host of different tasks. The companies have set themselves the overall goal of improving administration, coordination, documentation and therapy management – including monitoring success in hospitals, general practices and other care facilities – through the use of modern information and Internet technology. Apart from efficiency, the lack of up-to-date information technology also has an adverse impact on the quality of medical care. The Institute of Medicine, for example, has established that mistakes in medical treatment could account for as many as 98,000 unnecessary deaths in the USA. This makes avoidable medical mistakes the eighth most frequent cause of death in the USA. The consequential financial costs of such mistakes are estimated at USD 8 billion a year. As a result, health insurance companies are becoming increasingly interested in the introduction of information technology. In particular, electronic patient files in combination with electronic prescription software promises to make a major contribution to improved quality and increased efficiency, since by taking into account all illness-related data both erroneous drug prescriptions and duplicate examinations can be avoided.
Page 1 and 2: FCP OP MEDICAL Sub-fund: FCP OP MED
Page 3: Development of the Capital Markets
Page 7 and 8: Development of the Capital Markets
Page 13 and 14: FCP OP MEDICAL BioHe@lth-Trends Aud
Page 19 and 20: Notes to the Audited Annual Report
Page 21 and 22: Tax information for German investor
Page 23 and 24: Partners Scientific Advisory Board:

FCP OP MEDICAL BioHe@lth-Trends - medical.lu

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