TIP SHEET: Janus Fund Tries To Manage Risk Of Drug Stocks
04/25/2012| 03:15pm US/Eastern
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--Janus Global Life Sciences fund has year-to-date return of 14.62%
--Manager tries to limit exposure to volatility among small-cap drug stocks
--Pharmasset, Regeneron surges have helped recent performance
By Peter Loftus
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The upside of investing in small drug developers can be dizzying when things go well, but it pays to have a backup plan when things go wrong.
This is a lesson Andrew Acker has taken to heart since getting burned several years ago. He is portfolio manager of the $764 million Janus Global Life Sciences (JNGLX) fund, whose year-to-date return of 14.62% through April 24 has outperformed the S&P 500 and average return of health funds tracked by Morningstar.com.
The Janus fund once owned shares of Nuvelo Inc., which was developing what seemed to be a promising clot-busting drug. But in late 2006, Nuvelo announced the drug failed in clinical testing, triggering an 80% share price plunge in one day. The Janus fund underperformed for 2006 partly because it had allowed the Nuvelo position to get too big, only to watch most of Nuvelo's value disappear, Acker said.
"We didn't have a good year that year," said Acker, still wincing at the "painful experience." He vowed to make changes.
Since 2007, Acker has used a risk-management approach to try to mitigate such losses. For small companies vulnerable to single-product setbacks, the Janus fund sets a maximum ownership position to try to limit the impact of a setback to less than 1% of the portfolio's value.
So if the Janus team projects that a clinical disappointment is likely to cause a stock to drop by 50%, the maximum ownership position would be 2% of the portfolio's value, Acker said.
He thinks this approach helped the fund curb its losses last year in Targacept Inc. (TRGT), which develops drugs for central-nervous system diseases. Acker's fund bought the stock in the summer when it traded around $15, but started selling a portion of it as it appreciated to about $19 during the fall.
That helped limit the damage in November when Targacept shares plunged after revealing that an experimental antidepressant failed in a clinical trial. The stock now trades at about $4.75.
Of course, the upside has played a role in driving returns for the Janus fund. Last year, the fund was helped by the almost five-fold increase in shares of hepatitis C drug developer Pharmasset, which was acquired earlier this year by Gilead Sciences Inc. (>> Gilead Sciences, Inc.) for $11 billion.
More recently, the fund has done well with Regeneron Pharmaceuticals Inc. (>> Regeneron Pharmaceuticals Inc), which has more than doubled year-to-date on rising sales of the new eye-disease drug Eylea and a promising research pipeline.
As the son and grandson of doctors, Acker says he has medicine in his blood, and he majored in biochemistry at Harvard University. But he was drawn to the business side of health care. While getting an MBA at Harvard Business School, he preferred managing his stock portfolio over the business-school staple of delving into case studies. He joined Janus in 1999.
The fund, which Acker manages with the help of five senior research analysts, isn't confined to drug stocks. Its average of 50 to 70 holdings are spread across four main sub-sectors of health care: biotechnology, pharmaceuticals, health-care services and medical devices.
Acker and his team search for companies addressing high unmet medical needs, which are positioned to drive strong profitability and cash flows. Ideally, Janus finds these companies before the broader market has recognized the opportunity, he said.
Top holdings include Celgene Corp. (>> Celgene Corporation), Express Scripts Holding Co. (ESRX), Valeant Pharmaceuticals International Inc. (VRX), Mylan Inc. (>> Mylan Inc.) and Alexion Pharmaceuticals Inc. (>> Alexion Pharmaceuticals, Inc.).
(Peter Loftus covers the pharmaceutical industry for Dow Jones Newswires. He can be reached at 215-982-5581 or by email at peter.loftus@dowjones.com)
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