A Word On The Markets
After a reasonably orderly end to 2015, global equity markets started 2016 with extreme tumult and volatility. A significant sell”‘off to start the calendar year was primarily driven by macro factors.
Two primary concerns roiled global equities: The continued slowing of the Chinese economy and further declines in the price of oil. The resulting tumult created a “risk”‘off” environment in which investors fled the market and particularly sold high”‘flying, risky sectors, such as biotechnology.
While global equities stopped their dramatic swoon in February and partially rebounded in March, U.S. health care stocks slid further. The backdrop of rhetoric emanating from the U.S. presidential election cycle, in which drug pricing has been a hot”‘button topic, had not dissipated.
This was evident in the respective indexes. The MSCI World Index1 ended the quarter nearly flat, down 0.2% (total return). The MSCI World Health Care Index declined 6.8%. However, U.S. biotechnology stocks, as measured by the NASDAQ Biotechnology Index (NBI), fell almost 23% in the quarter.
Performance Summary
Eaton Vance Worldwide Health Sciences Fund (the Fund) underperformed its benchmark, the MSCI World Health Care Index (the Index), for the quarter ended March 31, 2016, returning ”‘11.24% for Class I shares at net asset value versus the Index’s ”‘6.82% return. Underperformance was due to sector positioning in biotechnology stocks, exacerbated by stock picking in specific biotechnology stocks that experienced precipitous share price declines triggered by negative catalysts.
-- Fund positioning within biotechnology in the first quarter was a notable overweight versus the Index. However, the NASDAQ Biotechnology Index fell 23% in the quarter, significantly impacting relative performance.
-- This was partially offset by the Fund’s positioning in large”‘cap pharmaceutical stocks, where an underweight led to positive alpha generation.
-- Another key offsetting factor was stock selection in specialty pharmaceutical stocks, most notably in Japan and Korea.
-- Additional headwinds to relative performance came from stock selection in medical devices and life science tools.
Quarterly Attribution Analysis
Contributors
Notable contributions to relative Fund performance in the quarter came almost exclusively from stock selection.
-- The most significant individual contributor was Ono Pharmaceutical Co. Ltd. (TSE:4528, Financial) The company’s early launch of Opdivo for lung cancer in Japan surpassed company and investor expectations.
-- U.S. hospitals operator HCA Holdings Inc. (HCA, Financial) outperformed on strong results for the fourth quarter of 2015 and initial 2016 guidance above expectations.
-- A more modest contribution came from Celltrion Inc. (XKRX:068270, Financial) The Korea”‘based manufacturer of biosimilars gained the support of an FDA panel for its biosimilar of Johnson & Johnson’s Remicade.
-- Share price gains for medical robotics manufacturer Intuitive Surgical, Inc. (SCAI, Financial) were driven by strong new system placements and expansion of procedures in new therapeutic categories.
-- Finally, shares of managed care provider WellCare Health Plans Inc. (WCG, Financial) outperformed on positive 2017 Medicare reimbursement rates announced by CMS in February.
Detractors
Performance detractors were significant during the quarter. The biotechnology sell”‘off was severe, and negative news was met with prompt, decisive selling.
-- The share price of biotech company Regeneron Pharmaceuticals (REGN, Financial) fell more than 30% in the quarter. The launch of its novel cholesterol drug underwhelmed, while IP concerns about the same drug overwhelmed.
-- The share price of biotech company Portola Pharmaceuticals Inc. (PTLA) fell more than 60% after the company’s lead pipeline product, betrixaban, failed in late”‘stage clinical trials.
-- The share price of biotech company Incyte Corp. (INCY, Financial) fell more than 30% after data presented for its lead oncology product underwhelmed investors.
-- Litigation concerns pressured shares of Wright Medical Group NV (WMGIZ, Financial), maker of orthopedic devices. The stock fell more than 30%.
-- The share price of biotech company Ophthotec Corp. Inc. fell more than 45%, as investors took profits following a strong run”‘up in the previous quarter.
The views expressed in this report are those of portfolio manager(s) and are current only through the date stated at the top of this page. These views are subject to change at any time based upon market or other conditions, and Eaton Vance disclaims any responsibility to update such views. These views may not be relied upon as investment advice and, because investment decisions are based on many factors, may not be relied upon as an indication of trading intent on behalf of any Eaton Vance fund. This commentary may contain statements that are not historical facts, referred to as “forward looking statements”. The Fund’s actual future results may differ significantly from those stated in any forward”‘looking statement, depending on factors such as changes in securities or financial markets or general economic conditions, the volume of sales and purchases of Fund shares, the continuation of investment advisory, administrative and service contracts, and other risks discussed from time to time in the Fund’s filings with the Securities and Exchange Commission.
