Janus Global Life Sciences Fund Investment Environment 3Q14 PORTFOLIO COMMENTARY

3Q14 PORTFOLIO COMMENTARY
Janus Global Life Sciences Fund
Investment Environment
Strong returns in biotechnology led to gains for the sector, while broader indices
declined in the third quarter. Quarterly financial results for leading biotechnology
companies were strong and positive data for a small-cap company, Puma Biotechnology,
highlighted the potential for the sector with its stock nearly quadrupling in one day.
There were also a number of buyouts at significant premiums to spur investor interest in
companies addressing high, unmet medical needs. Hospitals also performed well on
stronger earnings, reflecting increased demand as more previously uninsured Americans
enter the health care system through the Affordable Care Act. Health insurance
companies, benefiting from the same dynamic as hospitals, also aided the sector’s
returns.
Performance Discussion
The Fund outperformed its primary benchmark, the S&P 500 Index, and its secondary
benchmark, the MSCI World Health Care Index, for the quarter. We seek to invest in
growth companies worldwide that are addressing high, unmet medical needs and
providing efficient and cost-effective health care solutions. We believe the health care
sector, with its rapid growth and high complexity, offers abundant opportunities for
differentiated research. We believe understanding both the science and the business
behind new therapies is critical.
Our significant overweight and holdings in biotechnology drove the Fund’s relative
performance. Puma led the way after its breast-cancer drug, neratinib, showed an
impressive benefit in adjuvant breast cancer (treatments given after surgery to increase
the chance of long-term disease-free survival) in a late-stage clinical trial. In the previous
quarter, Puma was among our top detractors after a disappointing data release on a
competitive drug raised questions about one of the approval pathways for neratinib.
While we continue to see significant potential for the drug in adjuvant breast cancer, we
took some profits after the stock’s strong gains.
Also in biotechnology, the Fund’s largest holding, Gilead Sciences, also recorded robust
gains. An arbitration panel rejected Roche Holding’s patent infringement claims related
to Gilead’s key hepatitis C drug, Sovaldi. Since its launch earlier this year, the drug has
become the largest selling product in the history of the pharmaceutical industry. We
think the launch of a Sovaldi combination pill in the fourth quarter could be another
bellwether for the industry. This combination would provide the first true one-pill, once-aday treatment for the majority of hepatitis C patients.
Pharmacyclics, another top contributor, appreciated after management announced the
Food and Drug Administration (FDA) had approved its cancer drug Imbruvica for
expanded use among chronic lymphocytic leukemia (CLL) patients, which should further
support sales growth. Also noteworthy, there were no adverse safety updates in the
drug’s label. We consider Imbruvica a highly effective and well-tolerated oral
maintenance treatment for CLL, a relatively common form of leukemia. We continue to
believe the market potential for the drug is underappreciated.
Mallinckrodt also aided returns on continued merger and acquisition (M&A) activity
among specialty pharmaceutical companies. We believe the company’s acquisition of
Questcor Pharmaceuticals, which was completed in August, will generate higher
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Portfolio Manager:
Andry Acker, CFA
Executive Summary
• Strong returns in biotechnology
led to gains for the sector, while
broader indices declined in the
third quarter.
• Our significant overweight and
holdings in biotechnology drove
the Fund’s relative
performance.
• Puma Biotechnology and Gilead
Sciences led our individual
contributors.
• In many cases, stock gains
have been driven by
fundamental improvements,
such as profit growth,
innovative drugs advancing and
more insured patients gaining
access to health care.
Janus Global Life Sciences Fund
3Q14 PORTFOLIO COMMENTARY
earnings and cash flow than the market anticipates. We believe
Questcor’s key drug Acthar, indicated for multiple sclerosis,
rheumatoid arthritis and keratitis, will be a strong contributor for
Mallinckrodt for many years to come.
Detractors were led by NPS Pharmaceuticals, which traded
lower after a mixed FDA panel narrowly recommended approval
of the company’s hormone replacement therapy Natpara. Given
the mixed panel, which questioned the clinical benefits of the
drug, there could a brief delay in the drug’s approval. However,
we believe approval is still likely due to the high, unmet medical
need and the launch could occur by early next year. We
continue to like the company longer term based on growth
prospects for both Natpara and its injectable therapy Gattex for
short bowel syndrome.
GW Pharmaceuticals, a top contributor in the second quarter,
also weighed on performance due to profit taking and investor
concerns that market expectations for its drug Epidiolex (a
marijuana derivative) may have gotten too high. The stock rose
significantly during the second quarter after the company
reported early clinical success for the drug in children suffering
from several treatment-resistant epilepsy syndromes. The drug
showed compelling efficacy in patients whose seizures did not
respond to several other medicines. We continue to see
significant potential for Epidiolex as well as some of the
company’s other pipeline candidates.
Repros Therapeutics, another top detractor, suffered when an
FDA panel said that doctors were prescribing testosterone
drugs too broadly and advised the agency to limit the use of
such drugs to a specific patient population. This could
effectively limit the size of the market and extend the regulatory
timelines for FDA approval of new drugs in this category. We
sold our position in Repros, which is seeking marketing
approval of its testosterone replacement drug, Androxal, due to
heightened regulatory risks.
In medical technology, Endologix also weighed on performance.
The medical device company, which makes stent grafts for
aortic aneurysms, declined late in the period when it modestly
lowered its revenue guidance for its third quarter and full year.
There were also concerns over competitive products that are
undergoing trials. We believe the stock’s decline more than
compensated for these worries. Based on our belief in the longterm potential for Endologix’s new pipeline devices, we added
to our position on the stock’s weakness.
For detailed performance information or to download a Fact Sheet, please visit www.janus.com/funds
Outlook
In many cases, stock gains have been driven by fundamental
improvements, such as profit growth, innovative drugs
advancing and more insured patients gaining access to health
care. There are areas that have become more fully valued, such
as some small-cap biotechnology companies due to recent
merger and acquisition activity. Caution is warranted in these
areas because development products that face setbacks can
lead to significant share price corrections.
Among our major investment themes, we continue to see an
acceleration of innovation. There were 29 drug approvals in the
first nine months of this year, more than all of last year, and
more should be coming. Particularly noteworthy during the
period were advances in immuno-oncology, an innovative
approach to cancer research that seeks to harness the body’s
immune system to fight tumor cells. Approval of Merck’s
Keytruda in September may be a watershed event for this new
class of treatments, which could lead to cures for patients with
cancers previously considered incurable.
Roche Holding’s acquisition of U.S. biotechnology company
Intermune in August for over $8 billion showed that M&A
activity continues to be a strong force in the sector. Mitigating
this somewhat, the U.S. Treasury took steps during the quarter
to discourage tax inversions (re-incorporating a company
overseas in order to reduce the tax burden on income earned
abroad), which could reduce some of the benefits on those
types of mergers. However, low interest rates, high cash
balances, and excess industry capacity are still incentives for
companies to rationalize assets via acquisitions rather than add
sales people and build manufacturing facilities. We remain
focused on companies with significant growth potential and
strong drug pipelines, which could be attractive to potential
acquirers.
Another major theme is the Affordable Care Act, which has
helped over 10 million previously uninsured Americans obtain
health insurance through Medicaid or health insurance
exchanges over the past year. This should continue to be a
significant tailwind for hospital companies, which have provided
essentially free care to the uninsured until the advent of health
care reform. In states that embraced an expansion of Medicaid
eligibility, there has been a 50% reduction in utilization by
uninsured patients. This has resulted in improved volumes and
improved profitability for the hospitals. Health insurance
companies have also benefited from increased enrollments and
have been surprised at the low attrition of the previously
uninsured. We anticipate another uptick in demand as the
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Janus Global Life Sciences Fund
3Q14 PORTFOLIO COMMENTARY
second year of enrollment opens on Nov. 15 and continues
through Feb. 15.
During the period, we sold two positions in companies that had
been acquired at significant premiums. Among new purchases
was a pharmaceutical company with promising prospects for its
immuno-oncology drugs. We also added a company to our
emerging growth segment of the portfolio based on our belief it
may have a viable drug for hepatitis C, one of the biggest and
most attractive markets in the pharmaceutical universe. Both
companies fit our focus on companies addressing high, unmet
medical needs.
Top Contributors and Detractors for the Quarter Ended 9/30/14
Top Contributors
Ending
Weight (%)
Contribution (%) Top Detractors
Ending
Weight (%)
Contribution (%)
Puma Biotechnology, Inc.
0.85
2.14
NPS Pharmaceuticals, Inc.
1.27
-0.39
Gilead Sciences, Inc.
3.55
1.07
GW Pharmaceuticals PLC (ADR)
0.70
-0.26
Pharmacyclics, Inc.
2.42
0.72
Repros Therapeutics, Inc.
0.00
-0.26
Mallinckrodt PLC
2.70
0.45
Endologix, Inc.
0.53
-0.25
Medivation, Inc.
1.66
0.45
Biostime International Holdings, Ltd.
0.51
-0.24
The holdings identified in this table, in compliance with Janus policy, do not represent all of the securities purchased, held or sold during the period. To obtain a list
showing every holding as a percentage of the portfolio at the end of the most recent publicly available disclosure period, contact 877.33JANUS (52687) or visit
janus.com/advisor/mutual-funds.
Top Contributors
Top Detractors
Puma Biotechnology: The development-stage
biotechnology company develops novel therapeutics for the
treatment of various forms of cancer. Puma focuses on inlicensing drug candidates that are undergoing or have
already completed initial clinical testing for the treatment of
cancer and then seeks to further develop those drug
candidates for commercial use. We believe its oral breast
cancer drug, neratinib, has significant sales potential in
breast cancer and other tumor types.
NPS Pharmaceuticals: The biotechnology company is
focused on the development of treatment options for
patients with serious unmet conditions in the areas of rare
gastrointestinal and endocrine disorders. We believe the
company’s injectable therapy, Gattex, for short bowel
syndrome (an inability to absorb food nutrients due to severe
disease or surgical removal of a significant portion of the
small intestines) could drive robust sales growth.
Additionally, we see significant growth potential for NPS’
injectable therapy, Natpara, for hypoparathyroidism, a rare
endocrine disorder characterized by insufficient levels of the
human parathyroid hormone, the body’s principal regulator of
calcium and phosphorus. A bioengineered replica of the
hormone, Natpara is being developed as a replacement
therapy for the underlying cause of the disorder. NPS
expects to file with the FDA later this year and hopes to
receive approval in 2014. Finally, we appreciate significant
annual royalty income the company receives from Amgen’s
Sensipar drug, which is used in the treatment of secondary
HPT in patients with chronic kidney disease.
Gilead Sciences: A research-based biotechnology
company, Gilead’s primary areas of focus include human
immunodeficiency virus (HIV)/AIDS; liver diseases, such as
hepatitis B and C; and oncology. The launch of its hepatitis
C drug, Sovaldi, in the first quarter of 2014 was the largest
in the industry’s history and rapidly became the top-selling
drug in the U.S. We consider Gilead’s once-a-day oral
regimen a groundbreaking change in a field in which less
than 5% of patients had been treated because the prior
standard of care (weekly injections that caused flu-like
symptoms) were so poorly tolerated. The potential market
size is significant since approximately 3% of the world’s
population (170 million people) is believed to be infected,
including over four million in the U.S. As treatment moves to
an all-oral, well-tolerated therapy, the market should expand
significantly, and we believe Gilead is poised to be a leader
GW Pharmaceuticals: The UK-based company researches
and develops cannabinoid (marijuana derivative) prescription
medicines for the treatment of cancer pain, multiple
sclerosis and neuropathic pain. We appreciate the growth
potential for GW’s product candidate, Epidiolex, for a range
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Janus Global Life Sciences Fund
3Q14 PORTFOLIO COMMENTARY
Top Contributors (continued)
Top Detractors (continued)
in this wave of therapies. We anticipate the launch of a
combination therapy, including Sovaldi, in the second half of
the year to be even larger since it will address a higher
percentage of the market. We also value the company’s
dominant HIV drug franchise (85% market share), which
continued to grow double digits with high margins.
of epilepsies in which current anti-epileptic drugs have been
unsuccessful at adequately controlling seizures. We also see
potential in the company’s other pipeline candidates.
Pharmacyclics: This biotechnology company is focused on
discovering and developing innovative small-molecule drugs
for the treatment of cancer and immune mediated diseases.
The company's pharmaceutical drug development
candidates are synthetic small-molecules designed to target
key biochemical pathways involved in human diseases with
critical, unmet needs. We are particularly excited about the
recent launch of Pharmacyclics’ cancer drug, Imbruvica, a
well-tolerated and highly effective maintenance treatment
for chronic lymphocytic leukemia (CLL), a relatively common
form of leukemia.
Mallinckrodt: Mallinckrodt develops and manufactures
specialty pharmaceutical products and medical imaging
agents. We believe the company’s acquisition of Questcor
will generate higher earnings and cash flow than the market
anticipates, given the potential long duration of Questcor’s
specialty drug and Mallinckrodt’s low Irish tax structure as
well as its ability to raise low-cost debt.
Medivation: The biopharmaceutical company is focused on
the rapid development of small-molecule drugs to treat
serious diseases for which there are limited treatment
options. Medivation has developed a promising prostate
cancer drug with Astellas Pharma called Xtandi, which we
think could grow significantly. The drug has been approved
by the FDA for men with metastatic castration-resistant
prostate cancer after they fail other chemotherapy and more
recently for patients who have not yet undergone
chemotherapy. We believe, based on our market surveys, the
drug’s differentiation from existing therapies is more
substantial than is currently perceived by the market due to
its strong efficacy, ease of use, and safety profile. All of
these attributes should allow use in the much larger earlierstage prostate cancer market.
Repros Therapeutics: We sold our position in the clinical
stage pharmaceutical company due to our concerns about
the regulatory pathway for the company’s lead drug
Androxal, an oral therapy designed to restore normal
testosterone levels to men with hypogonadism, a condition
characterized by low levels of the hormone.
Endologix: The company manufactures minimally invasive
treatments for vascular diseases, including a catheter-based
stent graft to treat abdominal aortic aneurysms, the 13thleading cause of death in the U.S. We believe Endologix has
differentiated technology that has allowed it to take market
share from larger competitors. Additionally, we think its
robust development pipeline will allow it to continue
increasing market share while also growing their
addressable market.
Biostime International Holdings: Biostime is a leading
infant milk formula company in China, focused on the superpremium segment of the market. The company markets a
fully-imported product to mother/baby stores and selected
on- and offline distribution channels. We appreciate the
company’s market share gains despite a challenging nearterm environment in which large multinational brands are
responding to its success. Longer term, we believe that the
brand value Biostime has created will persist and that
promotional practices will ease, yielding higher net pricing
and gross profits. The company’s balance sheet is strong,
and can be deployed efficiently to create value through the
acquisition of products in adjacent markets, and by driving
organic growth through the successful launch of new
products in new categories.
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Janus Global Life Sciences Fund
3Q14 PORTFOLIO COMMENTARY
Please consider the charges, risks, expenses and investment objectives carefully before investing. For a prospectus
or, if available, a summary prospectus containing this and other information, please call Janus at 877.33JANUS (52687)
or download the file from janus.com/info. Read it carefully before you invest or send money.
Past performance is no guarantee of future results. Call 877.33JANUS (52687) or visit janus.com/advisor/mutual-funds for current month-end performance.
Discussion is based on performance of the Fund's "parent" share class (typically that with the longest history).
As of 9/30/14 the top ten portfolio holdings of Janus Global Life Sciences Fund are: Gilead Sciences, Inc. (3.36%), Valeant Pharmaceuticals International, Inc.
(U.S. Shares) (2.68%), Celgene Corp. (2.57%), Mallinckrodt PLC (2.56%), Johnson & Johnson (2.52%), Biogen Idec, Inc. (2.42%), Aetna, Inc. (2.37%),
Pharmacyclics, Inc. (2.30%), Roche Holding A.G. (2.25%) and Actavis, Inc. (1.93%). There are no assurances that any Janus portfolio currently holds these
securities or other securities mentioned in this commentary.
The opinions are as of 9/30/14 and are subject to change at any time due to changes in market or economic conditions. Janus may have a business relationship
with certain entities discussed. The comments should not be construed as a recommendation of individual holdings or market sectors, but as an illustration of
broader themes.
Security contribution to performance is measured by using an algorithm that multiplies the daily performance of each security with the previous day’s ending
weight in the portfolio and is gross of advisory fees. Fixed income securities and certain equity securities, such as private placements and some share classes of
equity securities, are excluded.
A Fund’s performance may be affected by risks that include those associated with nondiversification, non-investment grade debt securities, highyield/high-risk securities, undervalued or overlooked companies, investments in specific industries or countries and potential conflicts of interest.
Additional risks to a Fund may also include, but are not limited to, those associated with investing in foreign securities, emerging markets, initial
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S&P 500® Index is a commonly recognized, market capitalization weighted index of 500 widely held equity securities, designed to measure broad U.S. equity
performance.
MSCI World Health Care Index is a capitalization weighted index that monitors the performance of health care stocks from developed market countries in North
America, Europe and the Asia/Pacific Region. The index includes reinvestment of dividends, net of foreign withholding taxes.
A Fund’s portfolio may differ significantly from the securities held in an index. An index is unmanaged and not available for direct investment; therefore its
performance does not reflect the expenses associated with the active management of an actual portfolio.
Funds distributed by Janus Distributors LLC
C-0914-72654 01-15-15
188-15-16676 10/14
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