Fidelity Select Pharmaceuticals Portfolio

Transcription

1 Fidelity Select Pharmaceuticals Key Takeaways On April 1, 2017, the fund's industry benchmark changed from the S&P Custom Pharmaceuticals Index to the MSCI North America IMI + ADR Custom Pharmaceuticals 25/50 Linked Index. Due to new international benchmark guidelines, S&P Dow Jones Indices stopped offering its brand on custom benchmarks, effective March 31, Fidelity believes that the new MSCI index will continue to provide shareholders with meaningful performance comparisons. For the semiannual reporting period ending August 31, 2017, the fund gained 5.49%, trailing the combined 7.01% result of the S&P Custom Pharmaceuticals Index for the first month of the period and the MSCI North America IMI + ADR Custom Pharmaceuticals 25/50 Linked Index for the last five months. The fund performed nearly in line with the S&P 500 index. Investors' waning concern surrounding potential drug-pricing regulation and attractive valuations boosted pharmaceutical stocks during the six-month period. Stock picking primarily led to the fund's underperformance relative to the MSCI index. A large underweighting in Danish multinational pharmaceutical company Novo Nordisk detracted most from relative performance, as this stock rose 39%. At period end, the portfolio managers believed drug prices remained under pressure largely due to supply chain issues rather than government interference. Thus, they have avoided companies they think are particularly vulnerable to these issues, such as diabetes and older rheumatology products, as well as undifferentiated portfolios of older therapies. On July 1, 2017, Karim Suwwan de Felipe became Co- Manager of the fund, joining Lead Manager Asher Anolic. MARKET RECAP The U.S. equity bellwether S&P 500 index returned 5.65% for the six months ending August 31, Following a strong start to 2017, equity markets leveled off in March amid fading optimism for President Trump's pro-business agenda and stalled efforts by Congress to repeal and replace the Affordable Care Act (ACA). Upward momentum soon returned and continued until the index cooled off in August, when geopolitical tension escalated and uncertainty grew regarding the future of health care, tax reform and the debt ceiling. In a stark reversal from 2016, growth-oriented stocks handily topped their value counterparts. Among sectors, information technology (+15%) was a standout, surging as a handful of major index constituents posted strong returns. Health care (+9%) also topped the broader market, climbing from April to period end following renewed efforts to reconsider the ACA. Conversely, financials (+1%) lagged because sentiment regarding the potential for reduced regulation and lower taxes faded as the White House turned its attention to other initiatives. Rising interest rates held back real estate (+4%). Investors' general preference for risk assets, coupled with increased competition, hampered consumer staples (+1%) and telecommunication services (-5%). Lastly, lower oil prices sent energy (-10%) to the bottom of the sector performance rankings. Not FDIC Insured May Lose Value No Bank Guarantee

2 Q&A Asher Anolic Lead Manager Karim Suwwan de Felipe Co-Manager An interview with Lead Manager Asher Anolic and Co- Manager Karim Suwwan de Felipe Fund Facts Trading Symbol: FPHAX Start Date: June 18, 2001 Size (in millions): $ Investment Approach Fidelity Select Pharmaceuticals is an industrybased, equity-focused strategy that seeks to outperform its benchmark through active management. We look to identify companies where the market misprices the duration or the sustainability of cash flows as well as the growth rates of these cash flows. The fund favors stocks with above-average long-term growth expectations at below-average valuations. Stock selection and idea generation come from fundamental, bottom-up research, evaluating drug portfolios and pipelines. We use internal and external resources to further validate ideas, including calls with company management, meetings with stakeholders, and discussions with Fidelity analysts, industry experts and consultants. Sector and industry strategies could be used by investors as alternatives to individual stocks for either tactical- or strategic-allocation purposes. Q: Asher, how did the fund and industry perform for the six months ending August 31, 2017 A.A. The fund gained 5.49%, underperforming the combined 7.01% result of the S&P Custom Pharmaceuticals Index for the first month of the period and the MSCI North America IMI + ADR Custom Pharmaceuticals 25/50 Linked Index for the last five months. The fund performed nearly in line with the broadmarket S&P 500 Index. During the same time frame, the fund lagged the 10.09% average return of the peer group. After a period of underperformance linked to politically driven concerns over drug pricing, investors' worry over government intervention lessened this period. The Affordable Care Act (ACA), or "Obamacare," did not diminish drug company profits, even though repeal/replace efforts led to concerns that volume losses could hurt growth prospects. Further, rhetoric from the current administration on drug pricing did not translate into restrictive legislative proposals, instead echoing the pharmaceutical industry's claim that the underlying cause of rising drug prices is due more to middlemen than the manufacturers themselves. All of this, combined with increasingly attractive relative valuations, made the industry ripe for a rebound. The fund and industry faced a more challenging backdrop for the trailing 12 months, as the fund produced only a modest gain, underperforming the combined MSCI industry benchmark, the broad equity market and our peer group average by wider margins. Q: What was behind the fund's performance versus the combined industry benchmark the past six months A.A. Unfavorable stock picks primarily caused the fund's underperformance relative to the MSCI index. Specifically, a large underweighting in Danish multinational pharmaceutical company Novo Nordisk was our biggest relative detractor, as this index component rose 39%. 2 For definitions, fund risks and other important information, please see the Definitions and Important Information section of this Q&A.

3 Shrinking concern around drug pricing led to a sharp revaluation in shares of some companies, including Novo. We continue to watch this position closely, as positive clinical data in a trial of Novo's oral diabetes drug could temporarily raise its stock price, even though we tend to think a positive result mostly is priced into the shares. We remained underweighted in Novo Nordisk at period end, mainly because we think the company may see significant pricing pressure across its insulin offerings in both the U.S. and Europe. In our opinion, this is a structural issue, driven more by the competitive landscape than by government regulation, which could persist well into the next decade. I'll also note the fund's foreign holdings detracted overall, despite the tailwind of a generally weaker U.S. dollar. Q: What other factors hurt the fund's return versus the benchmark A.A. The fund suffered from its underexposure or lack of ownership in a number of lower-quality index components that fared well, even in the absence of good data or improving fundamentals. Such was the case with our decision not to invest in Intersect ENT, a company with a steroid-eluting stent technology that can be used in chronic ear/nose/throat (ENT) obstructions. The company had a series of mishaps in 2016, which it somewhat righted in 2017 with the Food and Drug Administration's (FDA) approval of a next-generation product. As a result, the stock rose 127% for the six-month period. We do not believe the addressable market for the company's product is as large as many investors appear to think it is, and we chose not to own the stock. Nektar Therapeutics (+61%), which we underweighted, surprised us with positive data from an abuse-deterrent opioid product and has an emerging antibody platform, which also showed promising initial data. I confess to initially underestimating the company's scientific skill set. We added to this position on price pullbacks and by August 31, built an overweighted position in Nektar. Elsewhere, GlaxoSmithKline (GSK) a large overweighting, detracted from performance and frustrated us the past six months. We knew the company was set to face generic competition on its key asthma drug, Advair. Yet we believed approval for its generic competitors would be challenging and that GSK's earnings revisions would move higher. While both of these things happened this period, GSK shares declined slightly, due partly to growing worry about the sustained growth of its HIV business. Investors also were concerned that the company's incoming CEO does not have a background in pharmaceuticals. While we share the concern over the HIV franchise, we believe that this risk is more than priced in. Further, we continue to be fans of GSK's consumer health franchise for its long-term durable-growth characteristics. We also think the incoming CEO, with her background in consumer health, is uniquely positioned to add value in an area of the market that avoids concern over drug prices. While we pared our position in GSK, it remained one of the fund's largest holdings at period end. Q: Turning to you, Karim, what contributed most this period K.S. It helped to underweight several names exposed to generic-drug price trends, including sizable index component Teva Pharmaceutical Industries (-50%). We increased our exposure in Teva by period end, however, due to optimism about a new CEO coming on board and its attractive valuation. It also helped to own generics maker Akorn, whose stock popped in April when Germany-based Fresenius acquired the company. Elsewhere, Eli Lilly added value. A lot of the firm's nearterm earnings growth has come from a single diabetes asset: Trulicity, where we believe sales growth will slow. In addition, a lot of Lilly's valuation comes from its pipeline assets, with which we were underwhelmed. In particular, we weren't overly optimistic about the potential for its breast-cancer drug given recent data. Q: Asher, what is your outlook at period end A.A. We are cautiously optimistic, with drug-pricing rhetoric moderating against the backdrop of increasingly attractive valuations relative to the rest of the market. We believe that drug prices remain under pressure, but due to market forces through the supply chain, rather than government interference. We've positioned the fund to reflect this view. For more detail, see Karim's thoughts on the fund's positioning later on. Note to Shareholders: The Board of Trustees has agreed to present a proposal to shareholders to eliminate each sector/industry fund's fundamental "invests primarily" policy and to modify the fundamental concentration policy for certain funds. If the proposals are approved, expected in the fourth quarter, the changes will take place on or about January 1, 2018 (or the first day of the month following shareholder approval), and will not impact how the funds are managed. 3 For definitions, fund risks and other important information, please see the Definitions and Important Information section of this Q&A.

4 LARGEST CONTRIBUTORS VS. BENCHMARK Karim Suwwan de Felipe on the fund's positioning: "As of period end, the fund is underweighted in stocks of companies with large exposures to areas of the market we think will come under pricing pressure. These include companies with diabetes drugs and older rheumatology products, as well as firms with undifferentiated portfolios made up of older therapies. "We also are reducing exposure to areas of the supply chain we believe may come under pressure with health care reform. We have been avoiding companies with undifferentiated products in specialty pharma that offer only modest advantages over 'gold-standard' generics, yet command high prices and have high likelihood of facing near-term competition. We believe several of these companies will have trouble with the longevity of their portfolios over the coming years. "At the same time, innovation that significantly improves the standard of patient care continue to be rewarded with attractive pricing, and we do not see this changing in the near- to medium term. Our process tends to favor companies with longduration assets, particularly those with durable competitive advantages and intellectual property, that are mispriced due to near-term challenges we think will be resolved. These companies form the bulk of our larger positions. "In terms of relative positioning, our mid-sized investments tend to focus on firms displacing current technology or standard of care with innovative therapies that have high commercial value and reduce costs. We also look for off-theradar ideas, including major company upheavals where interesting assets may be overlooked, as well as non-obvious ways to invest in promising therapeutics. Structurally, we believe that innovative companies with reasonable valuations will outperform companies with older portfolios that will struggle to grow under a more difficult environment in health care." Holding Teva Pharmaceutical Industries Ltd. sponsored ADR Market Segment Average Relative Relative Contribution (basis points)* Pharmaceuticals -0.84% 44 Akorn, Inc. Pharmaceuticals -0.09% 42 Vertex Pharmaceuticals, Inc. Biotechnology 0.65% 39 MyoKardia, Inc. Pharmaceuticals -0.07% 37 Eli Lilly & Co. Pharmaceuticals -4.30% 36 * 1 basis point = 0.01%. LARGEST DETRACTORS VS. BENCHMARK Holding Novo Nordisk A/S Series B sponsored ADR Market Segment Average Relative Relative Contribution (basis points)* Pharmaceuticals -3.85% -121 Intersect ENT, Inc. Pharmaceuticals -0.50% -37 Nektar Therapeutics Pharmaceuticals -0.16% -36 GlaxoSmithKline PLC sponsored ADR Corcept Therapeutics, Inc. * 1 basis point = 0.01%. Pharmaceuticals 4.09% -35 Pharmaceuticals -0.63% For definitions, fund risks and other important information, please see the Definitions and Important Information section of this Q&A.

5 10 LARGEST HOLDINGS Holding Market Segment Six Months Ago Johnson & Johnson Pharmaceuticals 12.87% 5.37% Sanofi SA sponsored ADR Pharmaceuticals 8.75% 7.88% Allergan PLC Pharmaceuticals 8.13% 5.77% GlaxoSmithKline PLC sponsored ADR Pharmaceuticals 7.43% 7.96% Pfizer, Inc. Pharmaceuticals 6.27% 4.10% Novartis AG sponsored ADR Pharmaceuticals 5.39% 4.24% Merck & Co., Inc. Pharmaceuticals 4.61% 3.92% Bristol-Myers Squibb Co. Pharmaceuticals 4.51% 5.65% AstraZeneca PLC sponsored ADR Pharmaceuticals 3.50% 4.92% Amgen, Inc. Biotechnology 2.67% 2.19% 10 Largest Holdings as a % of Net Assets 64.15% 54.95% Total Number of Holdings The 10 largest holdings are as of the end of the reporting period, and may not be representative of the fund's current or future investments. Holdings do not include money market investments. MARKET-SEGMENT DIVERSIFICATION Market Segment Six Months Ago Pharmaceuticals 82.64% 77.07% Biotechnology 9.47% 15.09% Managed Health Care 3.16% 2.48% Health Care Equipment 2.53% 2.30% Household Products 0.80% 0.25% Specialty Chemicals 0.69% 0.52% Personal Products 0.01% 0.01% ASSET ALLOCATION Asset Class Six Months Ago Domestic Equities 61.76% 61.12% International Equities 37.55% 38.01% Developed Markets 36.45% 36.21% Emerging Markets 1.10% 1.80% Tax-Advantaged Domiciles 0.00% 0.00% Bonds 0.00% 0.00% Cash & Net Other Assets 0.69% 0.87% Net Other Assets can include fund receivables, fund payables, and offsets to other derivative positions, as well as certain assets that do not fall into any of the portfolio composition categories. Depending on the extent to which the fund invests in derivatives and the number of positions that are held for future settlement, Net Other Assets can be a negative number. "Tax-Advantaged Domiciles" represent countries whose tax policies may be favorable for company incorporation. 5 For definitions, fund risks and other important information, please see the Definitions and Important Information section of this Q&A.

6 FISCAL PERFORMANCE SUMMARY: Periods ending August 31, Month Cumulative YTD 1 3 Annualized 5 10 / LOF 1 Select Pharmaceuticals Gross Expense Ratio: 0.80% % 12.11% 0.83% 2.53% 12.78% 10.62% S&P 500 Index 5.65% 11.93% 16.23% 9.54% 14.34% 7.61% MSCI North America IMI + ADR Custom Pharmaceuticals 25/50 Linked Index 7.01% 13.90% 4.32% 2.17% 12.34% 9.81% Morningstar Fund Health 10.09% 21.99% 16.56% 8.53% 17.50% 11.98% % Rank in Morningstar Category (1% = Best) % 93% 92% 71% # of Funds in Morningstar Category Life of Fund (LOF) if performance is less than 10 years. Fund inception date: 06/18/ This expense ratio is from the prospectus in effect as of the date shown above and generally is based on amounts incurred during that fiscal year. Past performance is no guarantee of future results. Investment return and principal value of an investment will fluctuate; therefore, you may have a gain or loss when you sell your shares. Current performance may be higher or lower than the performance stated. Performance shown is that of the fund's Retail Class shares (if multiclass). You may own another share class of the fund with a different expense structure and, thus, have different returns. To learn more or to obtain the most recent month-end or other share-class performance, visit fidelity.com/performance, institutional.fidelity.com, or 401k.com. Total returns are historical and include change in share value and reinvestment of dividends and capital gains, if any. Cumulative total returns are reported as of the period indicated. Please see the last page(s) of this Q&A document for most-recent calendarquarter performance. 6 For definitions, fund risks and other important information, please see the Definitions and Important Information section of this Q&A.

7 Definitions and Important Information Unless otherwise disclosed to you, in providing this information, Fidelity is not undertaking to provide impartial investment advice, act as an impartial adviser, or to give advice in a fiduciary capacity. FUND RISKS The value of the fund's domestic and foreign investments will vary from day to day in response to many factors. Stock values fluctuate in response to issuer, political, regulatory, market, or economic developments. You may have a gain or loss when you sell your shares. Investments in foreign securities, especially those in emerging markets, involve risks in addition to those of U.S. investments, including increased political and economic risk, as well as exposure to currency fluctuations. Because FMR concentrates the fund's investments in a particular industry, the fund's performance could depend heavily on the performance of that industry and could be more volatile than the performance of less concentrated funds and the market as a whole. The fund is considered non-diversified and can invest a greater portion of assets in securities of individual issuers than a diversified fund; thus changes in the market value of a single investment could cause greater fluctuations in share price than would occur in a more diversified fund. The pharmaceuticals industry can be significantly affected by government approval of products and services, government regulation and reimbursement rates, patent expirations, and intense competition. IMPORTANT FUND INFORMATION Relative positioning data presented in this commentary is based on the fund's primary benchmark (index) unless a secondary benchmark is provided to assess performance. Effective 4/1/17, the fund's industry benchmark will change from the S&P Custom Pharmaceuticals Index to the MSCI North America IMI + ADR Custom Pharmaceuticals 25/50 Index. Effective 7/1/17, Asher Anolic transitioned to lead portfolio manager and Karim Suwwan de Felipe was added as co-portfolio manager of the fund. The Board of Trustees unanimously approved a proposal to shareholders for trustee election that would combine oversight of Fidelity's sector funds with Fidelity's broader equity and high income funds under a single Board of Trustees. If approved, the unified Board would be effective on or about 3/1/18. INDICES It is not possible to invest directly in an index. All indices represented are unmanaged. All indices include reinvestment of dividends and interest income unless otherwise noted. S&P 500 is a market-capitalization-weighted index of 500 common stocks chosen for market size, liquidity, and industry group representation to represent U.S. equity performance. MSCI North America IMI + ADR Custom Pharmaceuticals 25/50 Linked Index is a float-adjusted market-capitalization- weighted index designed to measure the performance of companies engaged in the research, development or production of pharmaceuticals, including veterinary drugs. The index is composed of securities in the large-, mid- and small-cap size segments of the United States and Canada markets, as well as the American Depositary Receipts (ADRs) of companies from other developed foreign markets. The index is capped using the MSCI 25/50 methodology on a quarterly basis. Index returns shown for periods prior to April 1, 2017, are returns of the S&P Custom Pharmaceuticals Index; returns shown for periods prior to January 1, 2010, are returns of the MSCI US Investable Market Pharmaceuticals Index. MARKET-SEGMENT WEIGHTS Market-segment weights illustrate examples of sectors or industries in which the fund may invest, and may not be representative of the fund's current or future investments. Should not be construed or used as a recommendation for any sector or industry. RANKING INFORMATION 2017 Morningstar, Inc. All rights reserved. The Morningstar information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or redistributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Fidelity does not review the Morningstar data and, for mutual fund performance, you should check the fund's current prospectus for the most up-to-date information concerning applicable loads, fees and expenses. % Rank in Morningstar Category is the fund's total-return percentile rank relative to all funds that have the same Morningstar Category. The highest (or most favorable) percentile rank is 1 and the lowest (or least favorable) percentile rank is 100. The top-performing fund in a category will always receive a rank of 1%. % Rank in Morningstar Category is based on total returns which include reinvested dividends and capital gains, if any, and exclude sales charges. Multiple share classes of a fund have a common portfolio but impose different expense structures. RELATIVE WEIGHTS Relative weights represents the % of fund assets in a particular market segment, asset class or credit quality relative to the benchmark. A positive number represents an overweight, and a negative number is an underweight. The fund's benchmark is listed immediately under the fund name in the Performance Summary. 7

8 Manager Facts Asher Anolic is a research analyst at Fidelity Management & Research Company (FMRCo), the investment advisor for Fidelity's family of mutual funds. Fidelity Investments is a leading provider of investment management, retirement planning, portfolio guidance, brokerage, benefits outsourcing and other financial products and services to more than 20 million individuals, institutions and financial intermediaries. In this role, Mr. Anolic covers global pharmaceuticals and manages Fidelity Select Pharmaceuticals (since 2013). Prior to assuming his current research responsibilities in 2012, Mr. Anolic covered global consumer staples from 2010 to 2012 and regional banks from 2008 to Before joining Fidelity in 2008, Mr. Anolic was a summer intern at Bear Stearns in 2007, director at Thomson Financial from 2002 to 2006, and an analyst at Herzog, Heine, Geduld, Inc. (Merrill Lynch) from 2000 to He has been in the financial services industry since Mr. Anolic earned his bachelor of arts degree in political science from Vassar College and his master of business administration degree from the Johnson Graduate School of Management at Cornell University. Karim Suwwan de Felipe is a research analyst and portfolio manager at Fidelity Management & Research Company (FMR Co.), the investment advisor for Fidelity's family of mutual funds. Fidelity Investments is a leading provider of investment management, retirement planning, portfolio guidance, brokerage, benefits outsourcing and other financial products and services to more than 20 million individuals, institutions and financial intermediaries. In this role, Mr. Suwwan de Felipe is responsible for covering and providing recommendations on stocks in the global pharmaceutical sector. Additionally, he co-manages Fidelity Select Pharmaceuticals. Prior to joining Fidelity in 2010, Mr. Suwwan de Felipe was a senior research associate at Citi Investment Research and Analysis. As a member of the biotechnology research team at Citi, he helped formulate recommendations on large and mid-cap biotechnology equities. Previously, Mr. Suwwan de Felipe conducted molecular biology research at CuraGen Corporation, a biotechnology company in Connecticut, and at Yale University's Department of Therapeutic Radiology. Mr. Suwwan de Felipe earned his bachelor of science degree in molecular biophysics and biochemistry from Yale University, and his doctorate degree with distinction in cellular, molecular, and biophysical studies from Columbia University's College of Physicians and Surgeons. 8 For definitions, fund risks and other important information, please see the Definitions and Important Information section of this Q&A.

9 PERFORMANCE SUMMARY: Quarter ending September 30, Annualized 5 10 / LOF 1 Select Pharmaceuticals Gross Expense Ratio: 0.80% % 2.04% 12.12% 10.37% 1 Life of Fund (LOF) if performance is less than 10 years. Fund inception date: 06/18/ This expense ratio is from the prospectus in effect as of the date shown above and generally is based on amounts incurred during that fiscal year. Past performance is no guarantee of future results. Investment return and principal value of an investment will fluctuate; therefore, you may have a gain or loss when you sell your shares. Current performance may be higher or lower than the performance stated. Performance shown is that of the fund's Retail Class shares (if multiclass). You may own another share class of the fund with a different expense structure and, thus, have different returns. To learn more or to obtain the most recent month-end or other share-class performance, visit fidelity.com/performance, institutional.fidelity.com, or 401k.com. Total returns are historical and include change in share value and reinvestment of dividends and capital gains, if any. Cumulative total returns are reported as of the period indicated. Before investing in any mutual fund, please carefully consider the investment objectives, risks, charges, and expenses. For this and other information, call or write Fidelity for a free prospectus or, if available, a summary prospectus. Read it carefully before you invest. Past performance is no guarantee of future results. Views expressed are through the end of the period stated and do not necessarily represent the views of Fidelity. Views are subject to change at any time based upon market or other conditions and Fidelity disclaims any responsibility to update such views. These views may not be relied on as investment advice and, because investment decisions for a Fidelity fund are based on numerous factors, may not be relied on as an indication of trading intent on behalf of any Fidelity fund. The securities mentioned are not necessarily holdings invested in by the portfolio manager(s) or FMR LLC. References to specific company securities should not be construed as recommendations or investment advice. Diversification does not ensure a profit or guarantee against a loss. Information included on this page is as of the most recent calendar quarter. S&P 500 is a registered service mark of Standard & Poor's Financial Services LLC. Other third-party marks appearing herein are the property of their respective owners. All other marks appearing herein are registered or unregistered trademarks or service marks of FMR LLC or an affiliated company. Fidelity Brokerage Services LLC, Member NYSE, SIPC., 900 Salem Street, Smithfield, RI Fidelity Investments Institutional Services Company, Inc., 500 Salem Street, Smithfield, RI FMR LLC. All rights reserved. Not NCUA or NCUSIF insured. May lose value. No credit union guarantee