Q:  What is the history of the fund? A : The Janus Global Life Sciences Fund was launched in early 1999. We currently manage a little over $800 million in assets. Q:  Would you highlight the advantages of investing in the healthcare sector? A : There are actually three key reasons to invest in the healthcare sector. First, healthcare is one of the fastest growing segments of the economy, with healthcare spending growing consistently faster than economic growth. The next factor is based on aging populations globally, which should drive continued growth in healthcare spending, especially in emerging markets. Finally, we believe the pace of innovation in the biotech sector is accelerating, driving breakthroughs in areas such as cancer, Hepatitis C and cystic fibrosis, and creating significant opportunities for investors. Q:  What are the underlying principles of your investment philosophy? A : We seek to uncover the most compelling opportunities across the life sciences spectrum that trade at a significant discount to our estimate of intrinsic value. We believe with its rapid growth and high complexity, the healthcare sector offers fertile opportunities and is particularly well suited for our differentiated research model. Q:  How do you build your investment strategy on the basis of this philosophy? A : In terms of our investment process, we seek to maintain balance among three different kinds of investment opportunities. Since we find opportunities in all of these spaces, we think that they help to diversify and balance out risk in the portfolio. “Core growth companies” make up about half of the portfolio. These are companies that we believe have dominant franchises with superior products and services, strong management teams, efficient use of capital and sustainable free cash flow generation. We feel such businesses have a strong position today which should grow stronger in the future. A good example is a large pharmacy benefit management organization that has grown faster than the market, especially with a recent acquisition. The company has grown and consistently gained market share while generating high free cash flows and returns on invested capital. The next category of companies is “emerging growth companies” where we think a new product cycle or significant pipeline opportunity can drive accelerating revenue and earnings growth. Such a company could be already profitable, or it could be a development stage company where a single new product can drive profitability for the first time. Emerging growth companies generally comprise about 20% to 30% of the portfolio. Finally, the third type of company would be an “opportunistic investment”, where the stock may be suffering from short-term issues or market misperceptions that we believe should resolve over time. Companies of this type may be going through restructurings or spinoffs, they may have hidden assets, or they might have recently missed expectations. A good example here would be health maintenance organizations (HMOs), which we believe have been unduly punished by concerns over healthcare reform. This portion accounts for 20% to 30% of the portfolio. As far as diversification is concerned, we take a balanced approach across geographies, market capitalizations and the subsectors within healthcare. Our goal is to pick what we believe are the most compelling risk-reward opportunities within each of the subsectors within healthcare, including pharmaceuticals, biotechnology, healthcare services, and medical devices. For every stock we are interested in, including development stage biotechnology companies, we build a detailed financial model and use a discounted cash flow approach to identify stocks trading at a significant discount to our estimate of intrinsic value. In addition, we take a global approach through significant investments outside of the U.S. in countries like Brazil, India, Israel and China. Q:  What is your research process? A : Our research process begins with monitoring companies that have $300 million in market cap or upwards, which leaves us with about 800 stocks that fit that description within the healthcare universe. While scanning these stocks, we build a detailed financial model on each company that we are interested in. Our research includes meeting physicians, attending medical conferences, analyzing new clinical data and tracking prescription trends. We have also developed a proprietary database that we feel helps get us a better prediction of revenues. The core objective of this fundamental research is to gain insights into new therapies or treatments that are going to make a difference for patients, which in turn will lead us to the companies that are developing these products. We have two key themes that we are looking for when building our portfolio. First, we are driven by our interest in finding products that are going to address high unmet medical needs. We believe that if a company has a product addressing such critical needs, it is going to do well and get reimbursed even in a difficult environment. The second theme is based on companies that make the healthcare system more efficient. In our view, these businesses are also positioned to do well in any environment. Q:  Would you use some examples to shed more light on your research process? A : Let me give an example for Hepatitis C, which currently affects 3% of the world’s population, or 170 million people. Until recently there were no direct acting therapies, so the only possibility was a treatment which required weekly injections for a year. While the treatment boosted the immune system, it also caused significant flu-like side effects and only provided a 40% chance of being cured. Not surprisingly, very few patients opted for that treatment. Consequently, we looked at a biotechnology firm that produced the first direct acting anti-viral, in what was a rapid uptake in the market about a year ago. However, that drug had some flaws too in that it was not that easy to take and it caused more side effects. This led us to another biotechnology company that had developed what we believed to be the most promising agent for this disease. It was a convenient daily pill that promised high potency, a high barrier to resistance, good tolerability, and could also work in all of the varieties of Hepatitis C. We considered this as a nearly ideal agent. We felt that as these new therapies became available, many patients would opt for this type of treatment, expanding the market significantly. Naturally, if patients could be cured in a short period of time, there could be tremendous savings for the healthcare system. In 2011, the company that produced this new drug was acquired. Although the acquiring company had a dominant position in HIV therapies, they did not have a second franchise that was as attractive. Based on our understanding of Hepatitis C and the market opportunity, we saw the takeover as a good deal because the acquiring company could now combine this agent with the drugs that they already had in-house, helping the company position itself as a leader in Hepatitis C treatments. Another example that I would like to use is cancer, which is obviously a huge unmet need and the number two cause of death in the world. About seven years ago, a pharmaceutical company came out with a drug that blocks tumors from recruiting a blood supply. They initially revealed that the drug had a survival benefit for colorectal cancer, the third leading cancer-related cause of death in the United States. However, we spent several weeks working hard to understand how the drug worked and other areas in which it was being tested. As part of our exhaustive research efforts, we talked to over a dozen oncology thought leaders. We built a detailed financial model, which incorporated our understanding that beyond colorectal cancer, this drug was also being tested for a variety of other cancer types, from lung and breast to brain cancer. Based on the mechanism of action, we believed that the drug could be more of a broad based anti-tumor agent for all solid tumors. We built these scenarios by estimating the sales potential for this drug and comparing our estimates to what the consensus of the 20 analysts covering the company were. We were convinced that the potential for this drug was not fully appreciated by the marketplace. Years later, the drug became one of the best-selling cancer drugs in the world. Q:  How do you build your portfolio? A : The fund generally contains between 50 and 70 holdings. Since each of our analysts covers about 30 stocks that are assigned different ratings, our portfolio comprises the best ideas of the analyst team, with 80% to 90% of the portfolio holdings rated buy or strong buy. As far as individual position size is concerned, we look at two key parameters – conviction and risk. Thus, the names where we have the highest conviction and believe the risk is the lowest will be the top names in the portfolio. We also incorporate a “Value at Risk” framework as we analyze the maximum potential downside from a single event that could affect a particular stock. We manage position sizes in such a way that even in a worst case scenario the impact to the portfolio should be less than 100 basis points. For example, if one out of a company’s two key products is in development and we think that the product could fail bringing the stock down by 50%, we will not own more than 2% position in the name. Similarly, if we think a stock could fall 70%, we will not have more than a 1.4% position. We are constantly assessing and managing the position size. A good example of this process would be Targacept, a developer of a drug for refractory depression whose data looked extremely promising in ph II, causing a run-up in the stock which prompted us to take some profits. However, the drug ultimately was not successful in the final phase of testing, which led to a significant share price correction. While we did take a loss on the security, our value-at-risk approach helped to mitigate the downside. Our official benchmark is the S&P 500 Index. Additionally, we use the MSCI World Health Care Index as our secondary benchmark. Q:  What is your sell discipline? A : There are four key reasons that cause us to sell. First, we sell if our original thesis proves to be right and a stock appreciates to the point where we see little upside to our target. This is our favorite kind of sale. Less favorably, if our original thesis did not prove to be correct, we usually end up selling at a loss. A third reason to sell is if a security starts to exceed the risk parameters that we have set in place. Finally, we often sell to upgrade the quality of the portfolio, where we might be selling a good idea for what we believe is a great one. Q:  What risks do you focus on and how do you contain them? A : Our objective is to achieve above-market returns with less volatility and risk. For us, one of the ways to manage risk is through a diversified approach to subsectors, market caps, geographies and types of investment opportunities. We are quite concerned with company-specific risks. For instance, trying to address high unmet medical needs with innovative products is essentially a risky endeavor, so we try to manage risk in the portfolio in case of product development failure. However, when a product is successful the upside can be significant. Although we tend to hedge currencies, we generally try to stay currency neutral. Our mandate is to be fully invested so we do not hold a large cash position, but if the environment appears to be risky we would most likely move to less volatile stocks.