Morningstar

Franklin Biotechnology Discv I(acc)USD

Analyst Report
Morningstar's Take
|13/10/2023
by Katie Rushkewicz Reichart
Franklin Biotechnology Discovery has an experienced team at the helm, but it needs to distinguish itself.

The lean team is well-credentialed. Lead manager Evan McCulloch began his career more than three decades ago and spent most of it investing in healthcare and biotech companies. Comanagers Wendy Lam and Akiva Felt bring technical expertise to the table. Lam holds a doctorate in biology from MIT, and Felt holds a master's degree in biotech from Columbia. Each has roughly a decade of investing experience. The explosion of biotech IPOs at certain points in the market cycle can up the number of companies on the radar, leaving more stones to be overturned. For instance, the Nasdaq Biotechnology Index included 191 stocks in September 2018, rising to 373 by December 2021. That figure dropped back down to 262 by September 2023, as the IPO market cooled off and it became clear some firms had gone public prematurely. Despite a rocky couple of years for the industry, the managers think valuations industrywide haven't quite reset.

The process is reasonable and research-based. The managers break down each company's drug portfolio and pipeline and analyze each drug's merits in terms of addressable market and likelihood of regulatory approval. That's intricate work, but it is standard practice among other biotech investors, and to do it well requires a lot of time and resources. The portfolio does skew down the market-cap spectrum relative to the benchmark, which presents more opportunity but also potentially more risk given that smaller-cap companies are usually earlier in their life cycle.

Execution has been mixed over the long run. The strategy has lagged the Nasdaq Biotechnology Index since McCulloch's 1997 start through September, including on a risk-adjusted basis. Stock-picking hasn't stood out relative to the benchmark, with sluggish results for the trailing three-, five-, 10-, and 15-year periods. The strategy has looked a bit better in 2023, posting a 0.9% gain to the benchmark's 6.1% loss, helped by stock-picking and some acquisitions, including Seagen SGEN (acquired by Pfizer), but time will tell if it develops into a competitive edge.
 
Morningstar Medalist Rating™Experienced team but not yet a standout.
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Morningstar Pillars
PeopleAverage
ParentAverage
ProcessAverage
 
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