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Select Biotechnology Portfolio

  • Symbol: FBIOX
  • No Transaction Fee No Transaction Fee 1
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Fourth Quarter 2013 Summary

Strategy Review:

  • Select Biotechnology Portfolio is an industry-based, equity-focused strategy that seeks to outperform the benchmark through active management.
  • Fundamental, bottom-up research leveraging Fidelity's deep and experienced global health care team is the primary source of idea generation. Our analysis is driven by a data and statistical approach that places an emphasis on valuation through free cash flow and the probability risk-adjusted net present value of future cash flows.
  • Our investment approach includes evaluating a company's drug pipeline, the size of its market opportunity and its valuation relative to other opportunities. The fund's holdings center around the following four major investment themes: long-term winners and strong pipelines, turnaround companies, breakthrough innovations, and early-stage firms with promising science.
  • Sector strategies could be used by investors as alternatives to individual stocks for either tactical or strategic allocation purposes.
  • While this review mainly outlines drivers for the past quarter, our buy and sell decisions are typically based on the longer-term prospects for stocks and not on short time periods.

Sector Review:

  • For the three months ending December 31, 2013, the biotechnology industry returned 6.12%, as measured by the MSCI® U.S. IMI Biotechnology 25-50 Index, underperforming the broadly based S&P 500® Index, which returned 10.51%. A general industry sell-off to start the quarter put biotechnology stocks in a hole and, despite reversing the correction, they were not able to catch up with the broader market by quarter-end. A few of the more heavily weighted stocks in the index, such as Regeneron Pharmaceuticals, Vertex Pharmaceuticals and Amgen, which drove a large part of the industry's outperformance during 2013, were a drag on the group in the fourth quarter.
  • Despite early-stage companies receiving lofty valuations, the market continued to discipline those firms that reported regulatory obstacles and failed clinical trials. Additionally, a favorable regulatory environment thanks to new U.S. Food and Drug Administration legislation improved the pace for regulatory approval of novel drugs in areas of unmet needs.

Drivers of Fund Performance:

  • For the fourth quarter ending December 31, 2013, Select Biotechnology Portfolio returned 3.80%, underperforming the 6.12% advance of its sector benchmark, the MSCI® U.S. IMI Biotechnology 25-50 Index.
  • Negative stock selection drove the fund's relative underperformance during the period. The single largest detractor during the period was our overweighting of Stemline Therapeutics. Shares of the biotechnology company focused on cancer therapeutics lost more than half of their value in the fourth quarter. The company reported disappointing third-quarter financial results, which caused concern amongst investors who shied away from the stock after it surged 90% in the third quarter. We maintained our overweight position in Stemline as we believe it has a promising pipeline and is reasonably valued.
  • Elsewhere, a large overweight to Aegerion Pharmaceuticals was a drag on performance, as shares of the biopharmaceutical company focused on lipid disorders ended a volatile fourth quarter lower, despite reporting better-than-expected financial results from the third quarter. Investors sold shares of Aegerion after company management alluded that Wall Street was not factoring in enough operational expenses or the seasonality of its Juxtapid drug, as many patients decided to delay taking the drug until the beginning of 2014.
  • Timely trading of ARIAD Pharmaceuticals helped, as shares of the cancer-drug developer lost over half their value in early October after the company disclosed a higher-than-expected rate of circulatory blockages among patients using its leukemia drug, Iclusig®. The U.S. Food and Drug Administration placed a partial clinical hold on the drug, but the company will continue testing on a subset of patients shown to be at lower risk for blood clots. Our decision to increase our position in ARIAD following its decline proved beneficial, as shares began to rebound in the second half of the quarter.

End-Of-Quarter Positioning

  • We continue to be optimistic about the longer-term opportunity in biotechnology, where we believe advances in basic research and diagnostics tools, improved access to capital, and increased outsourcing of research and development by large pharmaceuticals companies provide tailwinds to the industry and drug development.
  • At quarter-end, we selectively overweighted large-cap companies, owing to reasonable valuations, new product cycles and undervalued drug pipelines. As the larger pharmaceuticals companies go through patent expirations, the larger biotechnology companies have become more-attractive acquisition targets. We also have positioned the fund to take advantage of select small- and mid-cap stocks that we believe have promising science.
  • The fund continued to emphasize a combination of attractively valued, cash-generative large-cap businesses with sound capital allocation practices, as well as several smaller- and mid-cap companies with emerging portfolios of drugs.

Finally, we remain committed to a disciplined investment process in pursuit of strong long-term results for our shareholders.

Fund Manager(s)

More Information
Rajiv Kaul since 10/12/2005

Strategy & Objective

Objective

Seeks capital appreciation.

Strategy

Investing primarily in companies engaged in the research, development, manufacture, and distribution of various biotechnological products, services, and processes and companies that benefit significantly from scientific and technological advances in biotechnology. Normally investing at least 80% of assets in securities of companies principally engaged in these activities. Normally investing primarily in common stocks.

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