Next Edge Bio-Tech Plus Fund: Commentary

FUND COMMENTARY – September 2017

The relatively flat performance by the biotech benchmark in September masked considerable flux in underlying holdings reacting to triumphs for some companies and setbacks for others.

For September, the Next Edge Bio-Tech Plus Fund (the “Fund”) Class A Units advanced +5.47% and +5.59% for the Class F Units versus an increase of +1.35% for the Fund’s Benchmark.  For the past 12 months, the Fund appreciated +12.39% and +11.86% for the Class A Units and F Units respectively versus an increase of +3.70% for the Fund’s Benchmark.

While the Nasdaq Biotech Index (NBI) was flat in September, the TSX Healthcare Index (^TTHC) rose +5% on the back of a 20% advance in a heavily weighted pot stock that has been misplaced in this Index. Posing as a healthcare company, ideally, it should be in Consumer Discretionary, reflecting its real target market, rather than medical indications it seeks legitimacy through.

 

Gene Therapy: ‘ONCE’ Science-Fiction is now Science-Fact

Futurists have long hypothesized about the prospect of one day being able to cure defective genes at the root cause of some diseases. It involves using a virus to shuttle a gene into specific cells, and inserting the gene into the genome so that the correct gene can be expressed.  Gene therapy has been one of our focus themes since the inception of the Fund almost three years ago. This year two of our gene therapy companies have been stellar performers based on breakthrough data presented and the inevitable FDA approval for Spark Therapeutics, Inc. (ONCE) drug Luxturna in January 2018, a near cure for a rare form of blindness.  It would be the first-ever approval of a gene therapy treatment for the FDA.

Last year, GlaxoSmithKline plc. (GSK) received EMA approval for its gene therapy that cures severe combined immunodeficiency (‘SCID’) also known as bubble boy disease. You may remember the Seinfeld episode. “Who invaded Spain in the 8th Century?  Bubble Boy: ‘The Moors’.  George: ‘The MOOPS’!”

Voyager Therapeutics Inc. (VYGR) is targeting several central nervous system (“CNS”) disorders such as Parkinson’s disease (“PD”), Huntington’s disease and Alzheimer’s disease. In September, it reported outstanding clinical data showing that its revolutionary approach to treating PD was effective. PD results from the loss of dopamine-producing neurons in the putamen region deep in the brain.  Using MRI Interventions, Inc. (MRIC) elegant mapping solution to reach the putamen region, Voyager Therapeutics Inc. was able to safely deliver functional copies of the AADC gene that enables its expressed enzymes to convert L-DOPA into dopamine.

Importance of Hedging Binary Outcomes

In September, the Fund turned in a strong performance of 5.47%1 for the Class A Units, despite three of our largest holdings enduring negative returns due to clinical trial outcomes or Serious Adverse Events (“SAEs”). It underscores why risk management strategies are employed to contain the impact of such setbacks. I will outline what our approaches were in each of those cases.

There has not been a successful clinical trial outcome and newly approved treatment for Alzheimer’s disease (“AD”) in 14 years. The crisis has gotten dire with over 5 million4 North Americans diagnosed and, it will only get worse in the decades ahead. The biotech company that is able to develop a disease-modifying treatment will be ascribed an out-of-this-world valuation. With a failure rate of 100%, the only way to position in a possible breakthrough is through a diversified, risk-managed approach such as the one your Fund has positioned.

1.    In January, the Fund held a +3% weight in Axovant Sciences, Inc. (AXON) in anticipation of the pivotal readout in late September. As is typical, we expected the company to advance in anticipation of the outcome, upon which we would sell the position, bank the gains, and reinvest some of the profits into Call spreads. The stock advanced from to the ’s. If the outcome was positive, we would participate in some of the appreciation up to a certain level. With the negative outcome, only the premium invested was lost rather than all the stock appreciation and more, while preserving the gains earned from the advance from to .

2.    Intercept Pharmaceutical, Inc. (ICPT) has an approved therapy for primary biliary cholangitis (“PBC”) which has specific dosage and patient restrictions issued by FDA upon approval. Dosing higher or in a patient population not approved for, resulted in some fatalities. The market reaction to SAEs is typically very negative. Respecting this, we immediately stopped out most of our position, sidestepping a further loss of -40%

3.    SAGE Therapeutics (SAGE) was expecting to readout its Phase III trial outcome in September for super-refractory status epilepticus (“SRSE”), a serious form of epilepsy. We were not confident in a positive outcome but wanted to continue to hold our position in SAGE for the readout in postpartum depression (“PPD”) next year, which we think will be successful as a breakthrough. So we exploited the high implied volatility to our benefit by establishing a Put-Spread-Collar hedge for a credit per position.  Even though the position tumbled from to , the loss was completely offset by the hedge.

Simmering to a Boil

One of the best measures of companies participating in a bull or bear trend is to measure the percent of biotech companies above or below their 200-Day Moving Average (DMA). Ordinarily, readings reach 80% to 95% before the new bull trend pauses.  For the past year, this measure has been consolidating between 40% and 65%. As the sector continues to improve, participation in the new bull market will expand and the current reading of 61% will increase toward 80% or higher.  That possibility will result in significant appreciation for many of the Fund’s holdings.

Composition of Holdings for September 29th,  2017

At the end of September, the Fund held US investments amounting to 60% assets, a decrease of 1%, while the value of Canadian holdings rose 1% to 31%. Cash was unchanged at 9%.

 

1. Next Edge Bio-Tech Plus Fund returns are net of all fees and expenses associated with Class A Units charged from May 1st, 2015. Next Edge Bio-Tech Plus Fund returns are net of all fees and expenses associated with Class A1 Units, Class F Units, and Class F1 Units charged from March 1st, 2015. The historical annualized rates of return for September 29th, 2017 for Class A are 1 yr 12.39%, 3 yr – N/A, 5 yr – N/A, 10 yr – N/A, CARR 0.69%; for Class A1 are 1 yr 12.00%, 3 yr – N/A, 5 yr – N/A, 10 yr – N/A, CARR 2.85%; for Class F are 1 yr 11.86%, 3 yr – N/A, 5 yr – N/A, 10 yr – N/A, CARR 2.61%; for Class F1 are 1 yr 12.40%, 3 yr – N/A, 5 yr – N/A, 10 yr – N/A, CARR 3.66%.
2. The Benchmark for the Next Edge Bio-Tech Plus Fund is: (i) 40% of the percentage gain or loss of the S&P/TSX Capped Health Care Index; plus (ii) 60% of the percentage gain or loss of the NASDAQ
Biotechnology Index The Benchmark returns are unaudited and subject to final confirmation. The historical annualized rates of return for the Benchmark for September 29th, 2017 are 1 yr 3.70%, 3 yr – N/A,
5 yr – N/A, 10 yr – N/A, CARR -5.96%.
3. Part Year
* Part Month start date April 13th, 2015 to April 30th, 2015
** Part Month start date: February 17th, 2015 to Feb 27th, 2015.
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