Whether the market will continue to favor biotech and pharmaceutical stocks this year remains to be seen, and Isaly believes the outcome of the presidential elections could have an enormous impact on the sector. "The general wisdom is that Republicans are good for business, while Democrats are bad for business," he says. "Those political sensitivities are magnified for the pharmaceutical and biotechnology industries."
Generally, the drug industry has benefited from policies of the Bush administration, which have included controls on drug imports to the United States and Medicare pricing policies that pharmaceutical companies find palatable. "I think a Kerry-Edwards election would be very bad for this business because Democrats would introduce more pricing controls than a Republican administration," he says. "Of course, consumers want less expensive drugs. But the downside of pricing pressure is stifling innovation."
Balancing out short-term concerns is Isaly's longer-term view that aging baby boomers and increased spending on health care bode well for the industry, which now accounts for more than 15% of the U.S. gross domestic product. He believes that the industry is "coming of age," a view he believes is supported by the increasing number of profitable biotechnology companies. In 1986, Genentech was the only profitable publicly traded biotechnology company. In 2003, there were 35 of them. OrbiMed Advisors predicts that the number of profitable biotech firms should double by the end of 2006.
As he waits for longer-term demographic trends to take hold, Isaly will of course welcome the shot in the arm that companies receive when the drugs they develop do well in clinical trials and move into wide public use. One treatment that shows promise of widespread use is Avastin, Genentech's new colon cancer drug designed to restrict the blood supply that feeds tumors. Avastin rang up sales of $117 million in the second quarter, a period when the company posted net income of $170.8 million, an increase of 29% over the previous year. Isaly says Genentech has several new products on the market with long lifespans in front of them, including drugs used to treat asthma and psoriasis.
Another big winner for the fund has been Biogen IDEC, a company created through the merger of Biogen and IDEC. Its stock was up more than 70% in the first half of 2004 as investors responded favorably to the company's early filing for Antegren with the Food and Drug Administration. The drug, used to treat multiple sclerosis, could be launched by early 2005. Another drug, Rituxan, has become the standard for treating non-Hodgkin's lymphoma, the fifth most common cause of cancer deaths. Fund holding OSI Pharmaceuticals has more than doubled since its purchase in March of this year, thanks to positive results in clinical trails for a drug used to treat lung cancer.
Those hits have been offset by misses such as NPS Pharmaceuticals, whose stock lost more than one-third of its value in the first half of the year because of investor concerns over marketing costs for Preos, a drug used to treat osteoporosis. Isaly, who expects the drug to receive FDA approval in late 2004, believes it will eventually be "a worldwide success."