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Blip in the biotech story

Schroder is kicking off the second Isa season by launching a global


healthcare fund and analysts believe its timing could not be better.


The healthcare sector has been driven by biotech stocks and valuations


have soared. But the jitters in technology stocks have caused biotechs to


plunge and analysts expect this could open up a buying opportunity.


Framlington sales & marketing director Craig Walton says: “The biotech


story has got way ahead of itself. Tech funds and smaller companies funds


have been piling into them because they think they are like internet


plays.”


But people are living longer and healthcare provision is moving into the


hands of private sector, which should boost the healthcare market over the


long term.


Schroder is aiming to capitalise on companies making new advances in the


field of medicine and takeover activity in pharmaceutical stocks with the


launch of its Medical Discovery fund.


Its move is not surprising given the performance of the only two


healthcare-related unit trusts on the market, the Framlington health and CF


biotech funds.


The Framlington fund has seen its most dramatic growth during the last few


months, with its price per unit rocketing to a recent high of 760p from


270p last October. But the recent tail-off has seen the price fall to 581p.


The main driver of Framlington&#39s outperformance has been the surge in


biotech stocks. These accounted for 53 per cent of the fund until last


month but the weighting has reduced to 45 per cent.


The rest of the portfolio is split evenly between drugs and drug delivery,


medical devices and medical services.


The CF fund is the fourth-best-performing unit trust over the year with a


return of 171 per cent. But while the performance of the two funds is


enough to woo any would-be investor, analysts warn that the sector is


volatile, particularly in the biotech area.


A classic example of the sector&#39s volatile nature is biotech company


Cambridge Antibody. Its share price has been as low as 165p in the last


year but it has also hit a high of £52.50. It now stands at £22.37.


Hargreaves Lansdown head of research Mark Dampier tipped the Framlington


fund at the beginning of the year and he also favoured Rothschild&#39s


international biotechnology investment trust.


But he called the market correctly and sold all his holdings a few weeks


ago. He says: “Framlington&#39s fund was up by 130 per cent at one stage since


I bought it last November.


“But it is an extremely volatile and specialist area. I do not think the


sector is ready to be a core holding in a portfolio and should only be


about 2 per cent. The correction could open up a buying opportunity later


in the summer.”


Schroder insists its fund is not a biotech fund and says it will cover a


broader remit of medical companies.


Client services director Robin Stoakley says: “The Medical Discovery fund


is not a biotech fund but will encompass a broader spectrum of medical


companies. It will look at pharmaceuticals, medical technology, medical


supply, biotechs and healthcare.”


Stoakley says it is vital that medical companies are able to deliver new


products. A company may have developed successful drugs but it needs to


have new products in the pipeline for when patents expire.


For example, Astra Zeneca is expected to generate $6bn in sales this year


but its valuation has been hit by the imminent patent expiry of its


anti-ulcer drug Losec. But Schroder believes its shares could be given an


uplift because it has an improved version of Losec up its sleeve as well as


a stable of new drugs to treat cancer and high cholesterol.


Schroder has added a twist to its offering. The Medical Discovery fund has


linked up with Cancer Research and half of any retained initial charge


together with a percentage of the annual charge will be paid to the


charity.


But the fund manager insists this is not a marketing gimmick and says it


was contacted by the charity. “Cancer Research approached us but it is a


very sound investment story in its own right,” says Stoakley.


Despite the recent volatility, analysts are optimistic for the long-term


biotech story, not least because of the breakthrough made by the Human


Genome Project.


The project has found a way to identify and classify every form of human


DNA. It should help scientists identify which genes cause cancer and other


diseases which are effectively untreatable at the moment.


Framlington holds top US firms such as Medarex, Alexion Pharmaceuticals


and CV Therapeutics in its fund because they are directly involved in


genomics.


The Schroder launch may lead to speculation that a flood of similar funds


will be brought to the market by fund managers worried they are missing the


boat. But many are not convinced that the bandwagon will become overloaded.


Walton says: “We launched our fund in April 1987 and have had the game


pretty much to ourselves. I do not see that changing either. It is a very


specialist field and there are not many experts out there who will be able


to manage such funds.”


The view is shared by Dampier, who says: “It is a very specialist area and


someone like Antony Milford who runs the Framlington fund is an expert in


the field.”

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