andresr/E+ via Getty Images
Performance Recap
The second quarter of 2024 saw continued resilience in U.S. economic activity as it exceeded the pace of most economies outside the United States. Evidence of an anticipated deceleration in growth began to emerge with consumer sentiment declining and the unemployment rate gaining slightly through quarter end.
The level of the Federal Reserve’s current federal funds rate remained steady, reflecting ongoing strength of the economy with policymakers awaiting further evidence of softening to emerge before acting however have begun signaling to markets cuts are on the way. All this while other central banks have started cutting.
In the second quarter of 2024, the S&P 500 appreciated by 4.2%. For the same period, the Nasdaq rose by 8.3% while the healthcare sector was down 1.07%. The industries leading in the second quarter were semiconductor stocks, particularly in the artificial intelligence segment. Ultimately, only three of the eleven economic sectors exceeded the overall S&P 500 for the quarter. As a result, the market breadth has continued to narrow further since the trend began in 2023. In the technology sector, for example, only the equities of semiconductor companies beat the market while software companies were generally flat. To underscore that point further, only 25% of the S&P 500 constituents beat the index return for the quarter while 60% of index stocks generated a negative return.
Specific to healthcare, demand and enthusiasm for ongoing growth of GLP-1 drugs for weight loss and a rich catalyst calendar of highly innovative companies with clinical trial data releases particularly related to oncology drove returns for biotechnology and pharmaceuticals in the quarter. This was offset by lowered sales guidance among some MedTech companies, as well as sentiment towards service providers remaining weak from increases in claims for costly treatments pressuring medical loss ratios.
Month
The S&P 1500 Health Care Index gained 1.8% in June, underperforming the S&P 500, which advanced 3.6%. Biotechnology and pharmaceuticals outperformed the index during the period. Meanwhile, MedTech and health care providers & services also advanced but underperformed the index. Health care technology and life sciences tools & services lost ground during the period.
The PGIM Jennison Health Sciences Fund advanced and outperformed the index during June. Security selection within pharmaceuticals along with an overweight in biotechnology added the most value. Stock selection within biotechnology and life sciences tools & services were the only notable detractors for the month.
Notable contributors for the month were Eli Lilly (LLY), Argenx (ARGX), and Intuitive Surgical (ISRG). Among the notable detractors were Cabaletta Bio, Inc. (CABA), Maravai LifeSciences Holdings (MRVI), and Cooper Companies, Inc. (COO).
Quarter
The S&P 1500 Health Care Index declined 1.1% in the second quarter, underperforming the S&P 500, which gained 4.3%. While Biotechnology and pharmaceuticals both advanced during the quarter, health care technology, life sciences tools & services, MedTech, and health care provides & services underperformed during the period.
The PGIM Jennison Health Sciences Fund modestly underperformed the index for the quarter. Security selection within pharmaceuticals, MedTech, and health care provides & services added the most value during the period. Stock selection within biotechnology was largely responsible for the performance shortfall.
Key Contributors
Eli Lilly and Company is a diversified biopharmaceutical company with core franchises in Diabetes, Obesity, Immunology, Neurodegeneration, and Oncology. The company is one of the two global leaders in diabetes with blockbuster products in Trulicity and recently launched Mounjaro (tirzepatide) to serve this large underserved market. To date, the Mounjaro launch is the strongest for any diabetes drug ever launched, which we attribute to off label usage in the obesity indication as well as on label use in diabetes. We believe the tirzepatide (the generic name for Mounjaro) franchise is also uniquely positioned to grow substantially from here thanks to its recent approval for obesity. To that note, in late 2023, Eli Lilly received approval for tirzepatide in obesity and is commercializing it for obesity under a new brand name, Zepbound. While still early in the launch, uptake has been extremely strong, exceeding that of both Wegovy and Mounjaro at the same timepoint in their launches. While Alzheimer’s Disease has been a tough market for drug developers, Eli Lilly has breakthrough designation from the food and drug administration (FDA) for donanemab and recently presented Phase III pivotal trial data that positions donanemab as the most efficacious drug in the class. In June, the FDA advisory committee voted unanimously in favor of donanemab as an effective treatment where the benefits outweigh the risks, praising the therapy as innovative. Donanemab was then approved under the brand name Kisunla in early July. Eli Lilly also has exciting franchises in dermatology, immunology, and oncology that are starting to add meaningfully to growth. With a proven history of strong commercial execution and one of the highest research and development (R&D) success rates in the industry, we see opportunity for continued success. With a lack of meaningful patent expirations for the rest of the decade. Eli Lilly is uniquely positioned amongst its larger-cap peers. Recent positive performance has been driven by the continued strong growth of Mounjaro and Zepbound, which led to a big guidance raise on the 1Q call, an unusual action for Eli Lilly this early in the year, which speaks to their confidence in the strong trends they are seeing.
|
PGIM Investments ranked 3 out of 49, 13 out of 47, and 10 out of 46 firms for the 1-, 5-, and 10-year periods ended 12/31/2023, respectively. See back page for methodology which takes into account Lipper rankings. PGIM Jennison Health Sciences Fund (Class Z) Lipper total return ranking for the 1-, 3-, 5-, and 10-year periods as of 12/31/2023 for the Health/Biotechnology Fund category were: 10/125, 38/111, 5/94, and 18/76, respectively. Lipper Funds category rankings are based on total return, do not take sales charges into account, and are calculated against all funds in each fund’s respective Lipper category. Lipper total return ranking for the 1-, 3-, 5-, and 10-year periods as of 6/30/2024: 19/136, 32/123, 5/105, and 10/86, respectively. Past performance is no guarantee of future results. |
Amgen is a large cap global biotech company with a diverse portfolio of marketed and pipeline products. Amgen’s discovery pipeline had led the company to broaden its focus from oncology, immunology, and renal disease to include musculoskeletal, cardiovascular, and neurologic conditions. In addition, Amgen has turned its expertise in antibody manufacturing into a leading position in the development of biosimilars of competitor drugs. Most recently, Amgen shares advanced in 2Q following its announcement that its novel injectable GLP-1 agonist / GIPR antagonist, MariTide, for obesity showed promising interim Phase 2 data and has shown enough promise to warrant advancement into pivotal trials as soon as late 2024. While Eli Lilly and Novo Nordisk will remain the market leaders in the diabetes / obesity space, we think there is room for Amgen to carve out a meaningful share of the market with its antibody-peptide conjugate approach that could enable monthly or better dosing for MariTide.
Vertex Pharmaceuticals is a commercial stage biopharmaceutical with a core franchise of small molecule CFTR modulators for cystic fibrosis (CF), a genetic and progressively fatal respiratory disease. Vertex has built a unique and unrivaled market position as the dominant market leader in CF, having created and expanded the market into a nearly $10B franchise and growing. Later this year, we expect them to receive approval for their next-gen CF triple therapy, which we think will drive top-line growth and margin expansion in 2025 onwards. Vertex is also developing an acute and chronic pain franchise. Vertex reported positive Phase 3 data in acute pain and Phase 2 data in chronic pain earlier this year; the FDA filing in acute pain has been completed, and pending approval, Vertex expects to launch in acute pain in early 2025. Beyond CF and pain, Vertex has focused its pipeline around genetically driven diseases with the potential for a transformative clinical benefit. It currently spans 5 disease verticals: sickle cell/beta thalassemia, type 1 diabetes, APOL-1 kidney disease, IgA nephropathy (from the recent acquisition of Alpine Immune Sciences), and alpha-1 antitrypsin disease. Vertex has had a strong start to the year and has delivered positively on several clinical trial readouts, as well as beat Q1 revenue estimates and maintained what was a better than expected ’24 guidance. Vertex has a busy catalyst calendar in 2H24 which include next-gen CF approval, acute pain approval for their first-in-class pain drug, and additional data sets in chronic pain.
Key Detractors
Apellis Pharmaceuticals Inc. is a biotech company focusing on complement therapeutics. The company sells two drugs. The first is subcutaneous pegcetacoplan for the treatment of Paroxysmal Nocturnal Hemoglobinuria (PNH) which was approved in 2021. The second, approved in February 2023, is Syfovre for the treatment of Geographic Atrophy (GA). Syfovre has shown compelling data out to 36 months and its launch has been going extraordinarily well. Outside of Empaveli and Syfovre, Apellis also has a growing pipeline of complement therapeutics focused on rare disease and ophthalmology. Weakness the past several months is attributed to the launch of a competitive drug from Astellas Pharma named Izervay and concerns around how Izervay securing reimbursement would impact Syfovre’s launch. While we believe the market opportunity for GA is large to support both drugs, we also believe Syfovre is the better drug. The long-term data for APLS has supported this, while Izervay’s lack of long-term data should negatively impact its brand, eventually. Syfovre grew 20% from 4Q23 to 1Q24 and their market share dropped from 90% to 85%. We remain focused on the overall growth of the GA market as a key metric. The company has recently initiated new marketing efforts and a branded DTC campaign. We are closely monitoring the growth rates in the GA market as well as the share split between Syfovre and Izervay. Apellis has several catalysts between now and year end, including an appeal decision on European Union approval, Phase 3 data for Empaveli in kidney disease, and as it relates to the competition, the final Izervay label in November that will give us the final decision on treatment duration.
Marinus Pharmaceuticals is a biopharmaceutical company focused on the development of Ganaxolone, a GABA_A receptor modulating mechanism intended to treat various forms of epilepsy. Their approved asset, Ztalmy, launched in July 2022 and is an oral suspension formulation of Ganaxolone for Cyclin-dependent kinase-like 5 (CDKL5) deficiency disorder (CDD) – a rare, genetic, pediatric epilepsy syndrome. The company is also developing an IV formulation of Ganaxolone for refractory status epilepticus (RSE), another seizure condition. Marinus shares modestly sold off in March, largely in line with the general biotech market. Unfortunately, in April, the RAISE trial read out negatively and it looks like this asset will not be able to get FDA approval. The company is awaiting the full details of the data and we do not yet know exactly what went wrong in the trial. The company will no longer be allocating capital to the IV formulation and will be focusing on Ztalmy and formulating a go forward plan in the coming months. As a result, we meaningfully reduced our position size.
AbbVie, Inc is a global pharmaceutical company with a commercial presence in four key therapeutic verticals: immunology, hematology/oncology, neuroscience, and aesthetics. AbbVie’s flagship product Humira is widely used across multiple immunology indications (totaling $21b in worldwide FY22 sales, or 37% of overall sales in the last year before biosimilar entry) but is declining steeply due to U.S. biosimilar entry in 2023. However, AbbVie’s successful development and launch of next-gen immunology drugs Skyrizi and Rinvoq should enable revenues and earnings to grow strongly from its trough earnings-per-share (EPS) in 2023, with Skyrizi and Rinvoq now expected to generate >$27B in sales by 2027, driving an HSD revenue compound annual growth rate (CAGR) from 2024 to 2029. Importantly, AbbVie faces limited patent cliffs through the end of the decade post-Humira. We turned more constructive on AbbVie stock in late 2023 due to these dynamics but decided to reduce exposure following the stock’s rapid run-up to start the year. This was driven by our expectation that faster-than-expected Humira erosion and one-off headwinds in 2025 will reduce growth to below consensus 2025 expectations. As a result, we were underweight AbbVie again by the time the market started reacting to the 2025 concerns, which were crystallized by management commentary on the 1Q earnings call. We have since exited our position.
Portfolio Outlook
As we reach the year’s halfway point, markets continue to focus on and reward companies that are generating growth at above-average rates. Profits generally are growing at a faster rate than the previous year and the economy has remained largely resilient. The federal funds rate, as a result, remains unchanged from the start of the year. We continue to believe that the trajectory of short rates is lower, though the timing of the movement remains uncertain. The consumer slowdown is gathering pace but not suggestive of acute distress. Strong employment and growing wages will likely continue to support a positive backdrop, though with moderating gains over the balance of the year.
We believe the environment ahead should be supportive of further performance gains, with our Fund holdings favorably positioned to execute against our expectations. Hence, our stock selection and position sizing in names that have benefitted from these trends has led to multi-year outsized absolute and relative gains.
We continue to believe 2024 is going to be an exciting year thanks to a plethora of clinical catalysts, as well as revenue acceleration resulting from many new product launches. As we have said, many companies came to the public markets’ way too early and their data was too immature (or non-existent) for the public markets to get excited about. Several of these companies are finally hitting the “investable” stage and we are doing our diligence to find the best of these names to add to the Fund.
A few of the catalysts we are excited to see data for include the FCRNs in myositis, COVID-POTS, Sjogren’s, Graves and TED, additional data for AstraZeneca’s ADC platform in breast cancer, Krystal Biotech’s aesthetics pipeline, data from several new targets in various forms of epilepsy, data from new mechanisms in neuropsychiatric diseases as well as data for Crinetics Pharmaceutical in several endocrine disorders. In the new product launch side, we are closely following Arcutis Biotherapeutic’s launch of Vtama in sub derm and atopic dermatitis, Krystal Biotech’s launch in DEB, Argenx’s launch in CIDP, Eli Lilly and Novo Nordisk’s continued launch in obesity, Merck & Co’s launch in in PAH and several more!
In MedTech, our view continues to be that of gradual recovery in procedural volumes as the last vestiges of COVID-related headwinds abate and the broad system returns to its normal rhythm. As nurse shortages end and hospitals look to accelerate profitable growth, certain areas of devices have begun to demonstrate above historical market growth. As always, we are very selective in our exposure, focusing on market leaders and product innovation as recent weakness within this industry may be suggesting that the surge in demand for routine medical care may be peaking. Similarly, we were not believers in a broad MedTech slowdown (due to the impact of GLP1 therapies on the growth/size of medtech end markets broadly), we do think certain parts of the sub-sector will be adversely impacted.
Conversely, above trend utilization observed over the past two years may be maturing. This led to managed care organizations having to manage through a higher cost trend pressuring their margins and EPS. We believe the pent-up demand among higher cost seniors will stabilize and decelerate and as a result be priced in and easier in 2025. We recognized this dynamic in 2023 and have been underweight the industry. We believed this would be an overhang on the stocks until the cost trend concerns were resolved. While this utilization has provided a short-term overhang for companies such as UnitedHealth and Humana, we identify several catalysts for the next leg up which include improved sentiment around Medicare, improved perceptions around cost trend, continued confirmation of earnings targets, and potential industry positive political dynamics.
Since the second half of 2023, a healthy backdrop of successful capital raise and M&A have been just as impactful to the biopharma industry as scientific breakthroughs. Overall activity has been driven by the availability of clinical data as bolt-on and in-licensing deals have outpaced cost synergy-driven acquisitions. Year to date, acquirers have targeted immune system disorders, oncology, and rare disease. The trend of science-led deals has benefited our Fund as we have owned multiple acquisition targets year to date and for the trailing year.
As previously discussed, our focus has been and continues to be on generating solid absolute and relative returns irrespective of the environment, be it in healthcare or the broader equity markets and most importantly, taking advantage of points of volatility when they arise. That being said, we are closely paying attention to three things as it pertains to broad risks for healthcare. We continue to pay close attention to the details of the 2024 Presidential candidates’ proposals/changes to the current U.S. healthcare system but generally believe the proposals will be more benign and less impactful than previous years. We are closely monitoring the health of the U.S. economy. Healthcare has tended to trade counter cyclical to a recessionary slowdown, but various sub-sectors within healthcare may lose or benefit depending on the broader economic growth rates. Lastly, even though interest rates do not have a direct impact on healthcare we do care about the shape of the yield curve and the absolute yield, as it creates favorable/less favorable set up for M&A as well as instructs various factor moves. Obviously, interest rate moves are tied to expected economic activity, thus we feel comfortable that there will not be major changes in broad yields. As of this writing we remain in the “soft landing” camp, but we will be watching data carefully, particularly inflation and employment reports.
We believe there are many opportunities for alpha generation in the Healthcare Sector in 2024. The unprecedented spread between the broad market and the sector observed in 2023 has only slightly narrowed for the trailing year as of quarter end. The trailing 3-year relative performance puts the cycle into perspective as the healthcare sector has trailed the broad market by approximately 5% annualized when it historically outperforms. As a result, we have become increasingly optimistic for the forward opportunity as the relative performance of the sector is not aligned with the fundamental strength we are now realizing across multiple industries as a healthy capital market backdrop is supporting accelerating innovation and continued acquisitions. Additionally, for a sector that historically trades at a premium to broad markets, it continues to trade at a discount and in line with its long-term average. It is our view that the Fund is well positioned to benefit from an acceleration in investment and innovation that is not yet reflected in the price of many stocks and remains well-positioned to capitalize on many alpha-generating opportunities through stock selection. During the quarter, the Fund initiated 6 stocks across 4 industries. Market and active weight change resulted in increases in pharmaceuticals and biotech while reducing exposure to MedTech and life science tools & services.
Source: PGIM Inc. Past performance does not guarantee future results. Current performance may be lower or higher than the past performance data quoted. Investment return and principal value will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than original cost. For the most recent month-end performance go to pgiminvestments.com.
|
Gross operating expense: Class Z, 0.86%. Expenses are as of the most recent prospectus. Net operating expenses reflect expenses after fee waivers and/or expense reimbursements by PGIM Investments, if any. The contractual reduction date is the date through which PGIM Investments has agreed to waive fees or reimburse expenses, if applicable. Expenses for the current year may exceed the net operating expenses listed above due to exclusions from any applicable contractual waiver or reimbursement, which may fluctuate. PGIM Investments may recoup certain waived fees or reimbursed expenses. See the prospectus for more information. Class Z shares may be available to group retirement plans and institutional investors through certain retirement, mutual fund wrap and asset allocation programs. They may also be available to institutional investors and through fee- or commission-based retail brokerage programs of certain financial intermediaries. Class Z shares are generally closed to new retirement plans. Please see the prospectus for additional information about fees, expenses, and investor eligibility. Annualized returns without sales charges describe the return to the investor before any sales charges are imposed. SEC standardized return describes the return to the investor after maximum sales charges are imposed. All returns assume share price changes, as well as the compounding effect of reinvested dividends and capital gains. Returns may reflect fee waivers and/or expense reimbursements. Without such, returns would be lower. Performance by share class may vary. The performance data featured represents past performance for a period of less than one year. While past performance is never an indication of future results, short periods of performance may be particularly unrepresentative of long-term performance for certain types of funds. Risks of investing in the fund include but are not limited to the following: The Fund concentrates in investments in health sciences companies, which may be relatively small and thinly traded, have persistent losses during a new product’s transition from development to production, or erratic revenue patterns, and may be under regulatory scrutiny and are subject to risks of the adverse impact of legislative actions and government regulations. Growth style investing may subject the Fund to above-average fluctuations as a result of seeking higher than average capital growth. Equity and equity-related securities may be subject to changes in value, and their values may be more volatile than those of other asset classes. Small- and Mid-cap investments may be subject to more erratic market movements than large-cap stocks. Foreign securities are subject to currency fluctuations and political uncertainty. Investments in currency may result in a decline in the fund’s net asset value due to changes in exchange rates. There is no guarantee the Fund’s objective will be achieved. Risks are more fully explained in the fund’s prospectus. The following are the top 10 holdings by percentage of total net assets as of 06/30/2024: Eli Lilly & Co (13.90%), Merck & Co Inc (8.00%), Amgen Inc (4.89%), Vertex Pharmaceuticals Inc (4.86%), UnitedHealth Group Inc (4.60%), Novo Nordisk A/S – ADR (4.33%), Humana Inc (3.99%), Boston Scientific Corp (3.48%), Regeneron Pharmaceuticals Inc (3.36%) and Intuitive Surgical Inc (3.26%). Holdings are subject to change. S&P 1500 Health Care Index is an unmanaged capitalization-weighted index that measures the performance of the health care sector of the S&P Composite 1500 Index. Standard & Poor’s 500 (S&P 500) Index is an unmanaged market capitalization-weighted index of 500 stocks of large U.S. companies. Indices are unmanaged and an investment cannot be made directly into an index. The S&P index(es) (“Index”) is a product of S&P Dow Jones Indices LLC and/or its affiliates and has been licensed for use by PGIM Investments. Copyright © 2024 S&P Dow Jones Indices LLC, a division of S&P Global, Inc., and/or its affiliates. All rights reserved. Redistribution or reproduction in whole or in part are prohibited without written permission of S&P Dow Jones Indices LLC. For more information on any of S&P Dow Jones Indices LLC’s indices please visit www.spdji.com. S&P® is a registered trademark of S&P Global and Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC. The views expressed herein are those of Jennison Associates investment professionals at the time the comments were made, may not be reflective of their current opinions, and are subject to change without notice. Neither the information contained herein nor any opinion expressed shall be construed to constitute investment advice or an offer to sell or a solicitation to buy any securities mentioned herein. Used with permission. ©2024 Dow Jones & Company, Inc. Source: Barron’s, Feb. 29, 2024. Barron’s rankings are based on asset-weighted returns in funds in five categories: U.S. Equity; World Equity; Mixed Asset; Taxable Bond; and Tax-Exempt (each a “Barron’s ranking category”). Rankings also take into account an individual fund’s performance within its Lipper peer universe. Lipper calculated each fund’s net total return for the year ended Dec. 31, 2023, minus the effects of 12b-1 fees and sales charges. Each fund in the survey was given a percentile ranking, with 100 the highest and 1 the lowest in its category. That ranking measured how a fund compared with its peer “universe,” as tracked by Lipper, not just the funds in the survey. Individual fund scores were then multiplied by the 2023 weighting of their Barron’s ranking category as determined by the entire Lipper universe of funds. Those fund scores were then totaled, creating an overall score and ranking for each fund family in the survey in each Barron’s ranking category. To qualify for the ranking, firms must offer at least three active mutual funds or actively run ETFs in Lipper’s general U.S. Stock category; one in World Equity; and one Mixed Asset. They also need to offer at least two taxable bond funds and one national tax-exempt bond fund. All funds must have a track record of at least one year. Consider a fund’s investment objectives, risks, charges, and expenses carefully before investing. The prospectus and summary prospectus contain this and other information about the fund. Contact your financial professional for a prospectus and summary prospectus. Read them carefully before investing. Investment products are distributed by Prudential Investment Management Services LLC, member FINRA and SIPC. PGIM Investments is a registered investment adviser and investment manager to all PGIM US open-end investment companies. Jennison Associates is a registered investment advisor. All are Prudential Financial affiliates. ©2024 Prudential Financial, Inc. and its related entities. Jennison Associates, PGIM, PGIM Investments, and the PGIM logo are service marks of Prudential Financial, Inc. and its related entities, registered in many jurisdictions worldwide. This material is being provided for informational or educational purposes only and does not take into account the investment objectives or financial situation of any client or prospective clients. The information is not intended as investment advice and is not a recommendation. Clients seeking information regarding their particular investment needs should contact their financial professional. INVESTMENT PRODUCTS: Are not insured by the FDIC or any federal government agency | May lose value | Are not a deposit of or guaranteed by any bank or any bank affiliate 1004567-00074-00 ID 10312024 |
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.
