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RSX – October Review: First Positive Month After 5 Months Of Declines

Summary RSX grew by 6.4% in October, after 5 consecutive months of losses. The Bank of Russia expects that the inflation rate should decline by half by late 2016. If the prediction of lower inflation is correct, the Bank of Russia will start to cut the interest rates notably. The October Russian share market optimism may evaporate rather quickly if it won’t be supported by a positive oil price development. After five consecutive months of losses, share price of the Market Vectors Russia ETF (NYSEARCA: RSX ) increased in October. During the first half of the month, RSX grew from $15.7 to $17.75. Although it declined to $16.71 during the second half of October, RSX finished the month up by 6.43%. The growth was fueled by slightly higher commodity prices in early October. Although oil and metals prices started to decline again in late October, the share market was supported by an improved economic outlook. The minister of economic development said that Russian GDP should decline by 3.9% in 2015 but it should grow by 0.7% next year. Russia still has trouble with a high level of inflation that stands at 15.7%. But the Bank of Russia expects that the inflation rate will start to decline steeply by early 2016. If this prediction turns out to be right, the Bank of Russia will keep on cutting the interest rates. These expectations helped to support the Ruble exchange rate as well as the Russian share market. Also the situation in Ukraine is calm, there are no major fights anymore. Some significant changes regarding RSX’s composition occurred in October. Sberbank ( OTCPK:SBRCY ) became the biggest holding when the steep growth of the share price lifted the weight of the biggest Russian bank to 8.16%. Also weights of Gazprom ( OTCPK:OGZPY ) and Lukoil ( OTCPK:LUKOY ) increased. Weight of the biggest Russian food retailer, Magnit, declined from 7.31% at the end of September to 6.59% at the end of October. The Top 15 holdings represent 75.34% of RSX’s portfolio. Source: own processing, using data from vaneck.com Russian shares did very well in October. The biggest winner is Yandex (NASDAQ: YNDX ). Shares of the biggest Russian search engine provider rocketed by 50%, as the Q3 results have beaten expectations, the company has increased its 2015 guidance, and it has become the default search engine for Windows 10 in Russia, Ukraine and Turkey. Shares of the two biggest Russian banks, Sberbank and VTB, grew by 24% and 9% respectively. On the other hand, shares of Magnit lost 4.71% of value, as the food retailer announced a decline of net income by 28% y-o-y. Source: own processing, using data from Bloomberg The chart below shows the 10-day moving correlations between RSX and oil prices represented by the United States Oil ETF (NYSEARCA: USO ) and between RSX and the S&P 500. During the first decade of October, RSX grew along with USO; however, after USO began to decline, it didn’t drag RSX down. Similarly, RSX didn’t react to the jump of oil prices in late October. As a result, the correlation between RSX and USO was relatively low during the second half of the month. The correlation between RSX and the S&P 500 was very high and stable from late August to the middle of October, but it has declined rapidly over the last two weeks. It means that as a result, RSX was moving in its own direction over the last decade of October, without taking into account the oil market or the global financial market developments. Source: own processing, using data from Yahoo Finance The volatility of RSX was relatively high during the first half of October, but it declined significantly in the middle of the month and the end of October was relatively calm. On the other hand, as shown by the chart below, the Russian share market is highly volatile and the volatility eruptions are relatively regular. Source: own processing, using data from Yahoo Finance Some of the more interesting news: Yandex reported better than expected Q3 2015 financial results and increased the 2015 guidance. Yandex also announced that it added an online video streaming service to its film and TV recommendation service. An important news came on October 13, when Yandex announced that its search engine will become the default homepage and search engine for Windows 10 in Russia, Ukraine, Turkey, Belarus, Kazakhstan and several other countries in the region. This strategic partnership may help Yandex in its fight with Google (NASDAQ: GOOG ) (NASDAQ: GOOGL ), over market share in Russia. Norilsk Nickel ( OTCPK:NILSY ) announced that since the start of its buyback program, it purchased 1,186,534 ordinary shares for a total amount of approximately $186 million. The company has also announced a successful placement of $1 billion in eurobonds . The 7-year bonds bear an annual interest rate of 6.625%. Norilsk Nickel has also secured a $1.2 billion credit facility from Sberbank. Via an asset swap , Gazprom strengthened its position in the European gas storage and sales segment. It has also expanded its exploration and production activities in the North Sea. Gazprom also started construction of the Ukhta-Torzhok-2 gas pipeline that will feed natural gas to Nord Stream 2. Polyus Gold announced that the Independent Committee of the Board reiterated its opinion that the takeover offer of $2.97 per share offered by Sacturino Limited is too low. Lukoil announced that it discovered a large gas field in the Romanian deep sea offshore. Drilling intersected a 46-meter thick productive interval. The seismic data indicates that the area of the gas field can reach up to 39km 2 and it may contain 30 billion m 3 of natural gas. The voices against the anti-Russian sanctions keep on growing. The President of the European Commission, Jeaun-Claude Juncker declared that Europe must improve its relationship with Russia: We must make efforts towards a practical relationship with Russia. Russia must be treated decently. We can’t let our relationship with Russia be dictated by Washington. Conclusion Some positive macroeconomic news, the stabilized RUB/USD exchange rate and little higher oil prices supported RSX in October. Also the political situation keeps on improving as the situation in Ukraine is calm and some of the EU representatives indicate that the anti-Russian sanctions may end soon. But also stronger oil prices are important for further growth of RSX’s share price. If the oil price keeps on improving, November may be positive for RSX as well. Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

The iShares MSCI Denmark Capped ETF: Happy In EDEN

Denmark’s Krone is considered a ‘safe-haven’ currency. Although a small economy, Denmark is home to several world class companies. The well-established international companies have yet to reach full dividend return potential. Historians often classify long stretches of time as ‘an age’. For example, ‘Ice Age’, ‘Stone Age’, ‘Bronze Age’ and ‘Industrial Age’. Today, it’s as though we’re living in the ‘Information Age’. There seems to be no end to the collection and analyzation of data in every imaginable way. One such collation of data stands out: the World Happiness Report . It’s a landmark survey of the state of national happiness. On a scale of 0 to 10, four countries are virtually tied for first place with an average score between 7.5 and 7.6. They are Switzerland, Iceland, Denmark and Norway. So if your portfolio has you feeling a bit glum, it just so happens that there’s a way to share in the happiness. BlackRock’s iShares MSCI Denmark Capped ETF (BATS: EDEN ), just might cheer you up! Before getting a closer look at Denmark and the fund, it best to make clear why the fund is called ‘capped’. It’s simply means that the fund complies with specific IRS requirements which; …limits the weight of any single component to a maximum of 25% of the Underlying Index. Additionally, the sum of components that individually constitute more than 5% of the weight of the Underlying Index cannot exceed a maximum of 50% of the weight of the Underlying Index in the aggregate… Also, the fund is designed to emulate the Morgan Stanley Capital International [MSCI] Danish Stock Exchange Index, is 99.58% invested in Danish listed companies and is passively managed. (click to enlarge) According to the Official Website of Denmark , the northern European nation has some very unique characteristics. For instance, aside from the mainland peninsula (called Jutland ), Denmark includes 406 islands totaling over 4544 miles of coastline. Its geographic mainland is nearly flat, the highest point being a mere 558 feet above sea level. Surprisingly, the Kingdom of Denmark spans a bit further than one might expect. Greenland , although geographically a part of North America belongs to the Kingdom of Denmark, as well as the Faroe Islands midway between Scotland and Iceland. (These outlying regions of Denmark do have completely autonomous governments.) Closer to home, Denmark’s government is a constitutional monarchy, parliamentary in structure and almost always governed by minority consensus. In fact, no single party has held a majority in the Danish Parliament for well over 100 years! Denmark has been a member of the European Union since 1973. Although the Danes still use the traditional Krone, Denmark participates in the European Union’s ‘Exchange Rate Mechanism II’. ERMII requires that EU members who wish to transition to the Euro, maintain their legacy currency within a fixed band, ±15%, of a central rate. Danmark’s Nationalbank , the central bank of Denmark, has gone to great lengths to keep the Krone within an even narrower ±2.5% range. Because of Denmark’s well managed and stable economy the Danish Krone is considered one of the world’s ‘safe haven’ currencies. So much so, the central bank has kept its base deposit rates below zero to discourage ‘a flood’ of capital inflows which would strengthen the Krone and depress Denmark’s export economy. The point being is that Denmark’s reputation as a financial safe haven is on par with that of Switzerland, or the U.K. or even the U.S. However, if one were trying to think of a single global export product that would immediately bring Denmark to mind, nothing particularly stands out. So then, what makes the Danish economy special? Of the 28 nation European Union, Danes are 6th in per capita GDP; have a real GDP growth rate of 1.1%, below the EU-28 average of 1.4%; Government debt of about 45% of GDP, well below the EU-28 average; an inflation rate half of the EU-28 and a labor productivity well above the EU 28 average. It’s also important to note that although taxes are well above the EU-28 average, so too are government expenditures on social services. In relation to the EU, Denmark has above average wealth, a productive workforce and a high standard of living underwritten by taxes supporting an extensive social services network, including tax supported healthcare and education. Almost 80% of Denmark’s total exports are destined for its top 20 export partners. Chief among those destinations are Denmark’s fellow European Union member nations. Data from Observatory of Economic Complexity It’s similar for import originations; the Lion’s share of imports originating from EU partners. Data from Observatory of Economic Complexity Hence, it seems that Denmark is an integral part of the European Union’s economy and on track towards becoming a Eurozone member. In order to best understand what drives the economy, it’s best to examine the holdings of the iShares Denmark Capped fund, starting with the way iShares allocates investment capital among the various market sectors. Data from iShares The non-cyclical sectors, Health Care and Consumer Staples, tally up to about 41%; the cyclicals, Financials, Materials and Consumer Discretionary compose about 31% and the cyclically sensitive sectors, Industrials, Telecom and IT comprise about 28% of the fund. Lastly, the cash holding are mostly U.S. Dollars and a small portion of Danish Krone. The fund itself is not large with a mere 39 holdings as of the end of October. Hence it isn’t too much trouble to take a look at the holdings of each sector, examining a few common metrics. The fund’s Health Care sector holds 9 companies, most notably the global pharmaceutical giant Novo Nordisk (NYSE: NVO ) tipping the scale at 22.0906% of the fund’s total holding. However, Coloplast ( CLPBY), a provider of specialized gastro-intestinal consumer and hospital products and biotech Genmab ( OTCPK:GMXAY ) are lesser known but top of the line as far as Health Care companies go. In general, the fund’s Health Care sector pulls together a respectable lineup, although the sector’s average dividend yield is a disappointing 0.639% with, however, a dependable average payout ratio of almost 25%. These are solid companies with good fundaments, with the potential for higher distributions. Health Care 34.80% Symbol Fund Weighting Market Cap ( USD Billions ) Yield Payout Ratio Price/ Earnings Price/ Book Beta Primary Business Novo Nordisk NVO 22.0906% $109.95 1.43% 41.30% 30.08 23.90 0.87 Pharmaceuticals Coloplast CLPBY 3.5638% $16.5403 2.44% 106.77% 32.90 17.92 0.50 Personal Health Care Products and Service Genmab GMXAY 2.7752% $5.870 0.00% 0.00% 84.98 14.20 0.99 Co-Development Biotech, Antibody Therapeutics with Glaxo (NYSE: GSK ), Roche (OTCQX: RHHBF ) GN Store Nord OTCPK:GNNDY 1.6894% $3.141 0.69% 21.76% 30.33 3.64 1.04 Hearing Aids, Hands Free Communications; Beltone and ReSound Brands Bavarian Nordic OTCPK:BVNRY 1.3398% $1.131 0.00% 0.00% 40.91 5.67 1.53 Biotech Vaccines for Cancer and Infectious Disease William Demant Holdings OTC:WILLF 1.2814% $4.823 0.00% 0.00% 24.03 5.53 0.74 Holding Company for Hearing Aid Device Manufactures; Diagnostic Instruments ALK-Abello OTCPK:AKABY 0.729% $1.019 0.67% 27.57% 39.86 2.92 0.32 Allergy Treatment, Prevention, Diagnosis Zealand Pharma OTCPK:ZLDPF 0.6916% $0.533 0.00 0.00% NA 21.64 1.01 Biopharmaceuticals Peptides and Cardio-Metabolic AMBU Copenhagen: AMBUb 0.6397% $1.101 0.52% 26.32% 51.58 8.85 0.05 Life Support Devices, Anesthesia Equipment, Monitoring Devices Data from Reuters The Financial Sector is in large part the international Danske Bank ( OTCPK:DNSKY ) at 7.8049% of the fund’s Financial sector and is by far Denmark’s largest bank with a respectable market cap of $27.785 billion in U.S. Dollars. The sector’s average dividend is a reasonable at 2.04% and the average payout ratio of the five dividend paying companies is well sustainable at approximately 43.87%. Financials 15.73% Symbol Fund Weighting Market Cap ( USD Billions ) Yield Payout Ratio Price/ Earnings Price/ Book Beta Primary Business Danske Bank DNSKY 7.8049% $27.785 2.95% 33.55% 30.37 1.24 1.22 International; Nordic Regional Jyske Bank OTC:JYSKY 1.8923% $4.648 0.00% 0.00% 18.33 1.08 1.09 International; North Europe TopDanmark OTCPK:TPDKY 1.5684% $2.801 0.00% 0.00% 15.19 3.62 0.25 Insurance and Pension Funds Sydbank OTCPK:SYANY 1.5644% $2.447 3.17% 47.12% of cash flow 15.28 1.46 0.77 Denmark and Germany TRYG OTC:TGVSF 1.3619% $5.218 4.43% 93.57% 18.77 3.76 0.19 Nordic region Insurance ALM Brand Copenhagen: ALMB 0.836 $0.986 1.30% 22.14 16.61 1.30 1.25 Insurance and Financial Services Spar Nord Bank Copenhagen: SPNO 0.6974% $1.205 2.46% 22.96% of cash flow 10.08 1.13 0.84 Retail and Small Business Data from Reuters The fund’s Industrial Sector accounts for 11 of the fund’s holdings, led by the well know Vestas Wind Systems ( OTCPK:VWSYF ) at almost 5% of the fund. It’s worth noting here that Denmark has an average wind speed of nearly 17 miles per hour; well suited for wind energy generation. Second to Vestas in fund industrial weightings is the shipping giant Moller-Maersk [Copenhagen: MAERSKb] at 4.4241% of B shares and 2.451% of the [Copenhagen: MAERSKa] of class A shares. The sector’s average return, when including the oversized Moller-Maersk 19% class A share dividend, is just over 3% and without it, its 1.43%. Denmark has ample access to the sea and as one might expect, four of its industrial holdings are international freight shipping and transportation companies. Industrials 24.24% Symbol Fund Weighting Market Cap ( USD Billions ) Yield Payout Ratio Price/ Earnings Price/ Book Beta Primary Business Vestas Wind Systems VWSYF 4.9908% $13.130 0.98% 24.32% 24.75 4.56 1.03 Wind Energy Systems, Service and Finance A P Moller Maersk B shares Copenhagen: MAERSKb 4.4241% $31.31 3.00% 16.65% of Cash Flow per Share 19.15 1.04 NA Marine Shipping DSV OTCPK:DSDVY 3.8309% $7.238 0.57% 15.18% 25.75 7.41 0.67 Air, Sea, Land Freight Transportation ISS OTCPK:ISSJY 2.4673% $6.541 2.05 0.00% 19.48 3.26 NA Building/ Factory Maintenance A P Moller Maersk A shares Copenhagen: MAERSKa 2.451% $31.31 19.71% 25.50% 7.57 0.84 1.13 Marine Shipping DFDS Copenhagen: DFDS 1.3245% $1.871 1.75% 38.08% 21.19 2.05 0.32 Shipping and Logistics Flsmidth & CO OTCPK:FLIDY 1.0991% $1.923 3.54% 56.70% 15.30 1.52 1.36 Cement & Mineral Processing Machinery NKT Holdings OTC:NRKBF 1.0559% $1.325 1.08% 311.73% 285.23 1.50 1.53 Industrial Power Cables Rockwool International OTC:RKWBF 0.955% $3.424 1.07% 27.46% 28.09 2.25 0.92 Manufacturer of Stone Wool Insulation Per Aarsleff Copenhagen: PAALB 0.6813% $0.708 0.67% 9.02% 13.35 2.13 0.56 Construction, Pilings and Pipe Solar Copenhagen: SOLARb 0.5605% $0.423 1.72% NA NA 1.78 0.87 HVAC Equipment and Supplies Norden OTC:DPBSF 0.3984% $0.843 0.00% 0.00% NA 0.66 0.69 Shipping Dry Cargo/ Tankers Data from Reuters Denmark’s economy seems to lean towards Health Care, Biotech, Chemicals and Pharmaceuticals in general. So it’s no surprise to find to that the two holdings in the materials sector are ‘bio-materials’ manufacturers. It’s worth a quick mention since they are interesting companies. Novozymes ( OTCPK:NVZMY ) manufactures industrial enzymes, microorganisms ingredients and biopharmaceutical ingredients. The applications range from household cleaning products, food and beverage ingredients, agriculture, feed products, and aquaculture feed products. Chr Hansen ( OTCPK:CRTSF ) is a holding company for its ‘Cultures and Enzymes’, Health and Nutrition and Natural Colors divisions. The sector average dividend yield is 1.855% with an average payout ratio of 40.25%. Materials 7.67% Symbol Fund Weighting Market Cap ( USD Billions ) Yield Payout Ratio Price/ Earnings Price/ Book Beta Primary Business Novozymes NVZMY 4.7194% $12.043 0.95% 33.83 35.71 8.63 0.63 Biotech Chemicals, Enzymes Hansen Holdings CRTSF 2.9513% $7.939 2.76% 50.46 44.79 11.85 0.36 Bioscience: Food, Ag and Pharma The Consumer Discretionary has what might be expected, with one exception: the world renowned speaker and sound reproduction equipment manufacture Bang & Olufsen ( OTCPK:BGOUF ) . Bang and Olufsen sound system and components have long been ‘top-of-the-line’ equipment for home, auto and professional entertainment consumers. For example, these are the sound systems used by Mercedes-Benz ( OTCPK:DDAIY ) , Aston Martin (owned by Ford (NYSE: F )) , Audi ( OTCPK:AUDVF ) and BMW ( OTCPK:BAMXY ) . Perhaps a secret to their success is quality over quantity. The company’s market cap is less than one-quarter billion U.S. Dollars and there’s no dividend. The entire sector’s average dividend is a bit over 2.00% and average payout ratio for the three other holdings is a bit over a well sustainable 48%. Consumer Discretionary 7.38% Symbol Fund Weighting Market Cap ( USD Billions ) Yield Payout Ratio Price/ Earnings Price/ Book Beta Primary Business Pandora OTCPK:PNDZF 5.7066% $14.135 1.15% 35.97 31.91 16.05 2.10 Accessories and Jewelry Matas OTC:MAASF 0.6221% $0.731 4.72% 65.86 14.87 1.99 NA Personal Care, Cosmetics, Vitamins IC GROUP Copenhagen: IC 0.5752% $0.470 2.14% 44.16 20.00 3.51 0.90 Clothing and Sportswear Bang & Olufsen BGOUF 0.4804 $0.285 0.00 0.00 NA 1.05 1.00 Multimedia, Sound Systems Data from Reuters According the official website of Denmark , beer has been part of Danish culture for more than 5000 years. Denmark is proud of its brewing industry. The first brewing guild was established in the 16 century. It is estimated that there are over 200 ‘microbreweries’ as well as world renowned brands such as Tuborg and Carlsberg ( CAGBY) . So again, it’s no surprise that two of the three Consumer Staples are breweries, Carlsberg and Royal Unibrew [Copenhagen: RBREW] both having a global reach for beer as well as soft drinks. The third holding is Schouw ( OTC:SUWCF ) , manufacturer of casual and active wear. The average dividend for Consumer Staples is 2.13% with an approximate payout ratio of 37%. Consumer Staples 6.15% Symbol Fund Weighting Market Cap ( USD Billions ) Yield Payout Ratio Price/ Earnings Price/ Book Beta Primary Business Carlsberg CAGBY 3.8326% $12.738 1.62% 15.98% of Cash Flow 22.53 1.49 1.16 Beer & Soft Drinks Royal Unibrew Copenhagen: RBREW 1.4151 $2.2 2.53% 55.48 21.93 5.40 0.59 Beer & Soft Drinks Schouw & Co. SUWCF 0.9048% $1.337 2.25% 39.42 16.28 1.32 0.70 Diversified Consumer Non-Cyclical Data from Reuters The two remaining sectors include Telecom holding TDC ( OTC:TDCAY ) , a diversified communications and content provider and IT holding Simcorp ( OTC:SICRY ) , specializing in financial industry software solutions. Telecom 2.00% and IT 1.61% Symbol Fund Weighting Market Cap ( USD Billions ) Yield Payout Ratio Price/ Earnings Price/ Book Beta Primary Business TDC (Telecom) TDCAY 2.0068% $4.264 5.63% 11.14% of Cash Flow 12.98 1.12 0.51 Communications and Entertainment Simcorp (IT) SICRY 1.605% $2.038 1.35% 53.84 40.11 27.85 0.57 Financial Industry Software Data from Reuters As for the fund itself, it has been listed since January 2012 and currently trades at a discount of -0.20% to NAV. The fund has a P/E of 23.47 and a price to book multiple of 2.89. The annualized distribution is 3.09% and the trailing 12 month yield is 1.54%. The shares are lightly traded with a 20 day average volume of just over 17,000 shares per day. Since inception the fund has returned 22.64% and over the past 52 weeks 8.83%. (click to enlarge) Denmark is a small country with a relatively small industry. The country is currently ranked 139th by the U.S. EIA and does have a small but active refining industry, hence the potential for Denmark to expand its industrial base sometime in the future. Also note that with untapped oil reserves together with its expanding reliance on wind energy and a decades long national energy conservation program makes Denmark virtually energy independent. Lastly, Danmark’s National Bank has gone to extraordinary efforts to keep its currency on track for Euro adoption. For a nation as small and productive as Denmark, being an integral part of the larger Eurozone economy will be very beneficial. The ETF has had a nice run since inception. The investor might expect some kind of retracement should the European economy slow further. That would be a buying opportunity. For investors with a fair amount of patience, who seek capital appreciation as well as the high potential for increasing sustainable dividend returns and single country focus should make the investors who invest in ‘EDEN’, happy in the long run.

What’s Ailing Biotech?

Summary Concerns about profitability and valuations had already infected US biotechnology stock prices in September. Increased political and media attention on rising drug costs sent the sector deeper into a decline. Evan McCulloch shares his insights on the drug-cost debate, presidential candidate Hillary Clinton’s proposal, and the fallout on the biotech sector at large. Evan McCulloch Senior Vice President, Director of Research Franklin Equity Group® Portfolio Manager, Franklin Biotechnology Discovery Fund (MUTF: FBDIX ) ________________________________________________________ We have seen some turmoil in the biotech sector over the last few weeks. What’s been driving this volatility? There’s been some volatility in the equity market at large, which has resulted in investor skittishness overall and a hypersensitivity to potential fundamental concerns. Specifically for the biotechnology sector, however, the threat of heightened scrutiny of drug prices has reared its head again. It started with an article in The New York Times on September 20 about a small private company called Turing Pharmaceuticals 1 that raised the price of an anti-toxoplasmosis drug it had acquired by 5,000%. This is very unusual for an older drug, so it was a case the media latched on to. The article was followed by a tweet from Democratic presidential candidate Hillary Clinton, indicating she thought some drug prices were excessive and that she had a plan to reduce prescription drug costs. Clinton subsequently announced her plan, which proposed that Medicare leverage its buying power to negotiate directly with drug companies. After that, other politicians jumped on the bandwagon and railed against high drug prices. The House Committee on Oversight and Reform already had been seeking to subpoena documents relating to Valeant Pharmaceuticals’ 2 price increases earlier this year on a pair of cardiovascular drugs, and it then asked to subpoena Turing Pharmaceuticals about the price increase on its drug, which treats parasitic infections. It’s interesting to note that the pricing noise has been around for a while; there have been a series of press articles on the subject going back to July. President Obama has made periodic comments about high drug prices, and Senator Bernie Sanders, who also is vying for the Democratic presidential nomination, released a plan focused on pricing which generated renewed attention. So while this is an issue that bears watching, I think it’s a culmination of sector-specific concerns about drug pricing on top of some broader market issues that has caused recent volatility in share prices. So where could this all be going? Might it result in a reduction in drug prices, in your opinion? For better or for worse, in my view the answer is no. All Clinton did was articulate a plan; it is not legislation. The price of prescription drugs is a popular topic because most people in the United States think drug prices are high, and it’s an issue that resonates well with voters. Again, this is not legislation, and if it were, it would not likely be approved by a Republican-majority Congress. Given that the Republicans seem likely to retain their majority in the House of Representatives after the 2016 election, I don’t believe any legislation can pass until 2018 at the earliest. Even if Clinton’s plan, as we currently understand it, did ultimately pass, in my view the impact would be very manageable for the sector. Most notably, according to our estimates, any cut to drug prices inside the Medicare program would be far less than the recent 15%-20% stock correction in the sector might imply. However, we do expect more market-based reforms. This public shaming process that politicians are employing will likely cause companies to moderate price increases going forward and also empower insurance companies to drive toward higher rebates and more substitution of cheaper drugs. So, we do expect some growth moderation at the margin, but it will probably be imperceptible at a sector level. In the fund, we focus on investing in companies with drugs that deliver strong clinical value and have limited competition, which seeks to mitigate the impact of some of these initiatives. Moving on to the topic of patent protection, do you have any concerns about the exclusivity provisions offered in the Trans-Pacific Partnership ( TPP ), the proposed trade agreement between 12 Pacific Rim countries? No, I don’t have any concerns about it. The TPP proposes that drugs sold outside the United States get eight years of exclusivity. Patents currently don’t protect US drugs overseas. So, granted, eight years is lower than the current 12 years of exclusivity in the United States, but eight years should be compared to virtually no exclusivity right now, as many of the countries covered in that partnership do not honor intellectual property rights. So, this provision would protect pharmaceutical companies for eight years, which would actually be a positive for the sector, in our opinion. What do you think the media is either not covering or may be misreporting about the biotech sector that you think investors should know? The media has focused on gross price increases on drugs, and that is very different from actual price increases or net price increases. In most cases, price increases are moderated through rebates to the payers, but since that’s a negotiated price, the actual price being paid by insurance plans to the drug companies is not transparent to investors or the media. In most cases, when we see a price increase, we know only about one-third to two-thirds of that price increase is realized, so the actual price increases are much lower than what is being reported in the press right now. What is your current outlook for the biotechnology space? I think fundamentals in the biotechnology sector are as strong as ever. In our view, the sector’s new-product pipeline is full, and important new treatments are advancing for cancer, Alzheimer’s dementia, and a whole range of rare genetic diseases. In cancer treatment, interest is very high in using drugs that harness the immune system to fight tumors. A number of new drug discovery technologies, like gene therapy, RNAi (RNA interference) and antisense, allow companies to target rare genetic diseases that were previously untreatable with more traditional drug approaches. For drugs that make it through the clinical trials process, the US Food and Drug Administration is working cooperatively with the sector to bring new drugs to patients, and in most situations has approved drugs that have strong value propositions for patients. Until recently, investor concern was generally constrained to stock valuations, not fundamentals. Although concerns about drug pricing power have arisen, I don’t expect any major change. And with more attractive valuations following this recent correction, we think the outlook for the sector is very positive. To get insights from Franklin Templeton Investments delivered to your inbox, subscribe to the Beyond Bulls & Bears blog. For timely investing tidbits, follow us on Twitter @FTI_US and on LinkedIn . This information is intended for US residents only. Evan McCulloch’s comments, opinions and analyses are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or to adopt any investment strategy. Because market and economic conditions are subject to rapid change, comments, opinions and analyses are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment or strategy. What Are the Risks? F ranklin Biotechnology Discovery Fund All investments involve risks, including possible loss of principal. The fund is a non-diversified fund that concentrates in a single sector, which involves risks such as patent considerations, product liability, government regulatory requirements, and regulatory approval for new drugs and medical products. Biotechnology companies often are small and/or relatively new. Smaller companies can be particularly sensitive to changes in economic conditions and have less certain growth prospects than larger, more established companies and can be volatile, especially over the short term. The fund may also invest in foreign companies, which involve special risks, including currency fluctuations and political uncertainty. These and other risks are described more fully in the fund’s prospectus. Investors should carefully consider a fund’s investment goals, risks, sales charges and expenses before investing. To obtain a summary prospectus and/or prospectus, which contains this and other information, talk to your financial advisor, call us at (800) DIAL BEN®/342-5236 or visit franklintempleton.com. Please carefully read a prospectus before you invest or send money. _________________________________________________________________ 1. As of 9/30/2015, Turing Pharmaceuticals was not a holding of Franklin Biotechnology Discovery Fund. Holdings are subject to change without notice. 2. As of 9/30/2015, Valeant Pharmaceuticals was not a holding of Franklin Biotechnology Discovery Fund. Holdings are subject to change without notice.