Franklin Biotechnology Discovery Fund Class A, C

Transcription

1 Franklin Biotechnology Discovery Fund Class A, C Biotechnology Equity Product Profile Product Details 1 Fund Assets $1,410,540, Fund Inception Date 09/15/1997 Number of Issuers 99 Investment Style Benchmark Lipper Classification Morningstar Category Dividend Frequency Biotechnology NASDAQ Biotechnology Index;S&P 500 Index Health/Biotechnology Funds Health Annually in December Inception Date Class A 09/15/1997 Class C 03/04/2014 CUSIP NASDAQ Symbol Class A FBDIX Class C FBTDX Class A Class C Maximum Sales Charges 5.75% initial sales charge 1.00% contingent deferred sales charge (CDSC) in the first year only Total Annual Operating Expenses With Waiver Without Waiver Class A 1.04% 1.06% Class C 1.79% 1.81% Fund Description The fund seeks capital appreciation by investing at least 80% of its net assets in securities of biotechnology companies and discovery research firms including those involved in fields such as genomics, genetic engineering, and gene therapy, as well as health care, pharmaceuticals and agriculture. Performance Data 2,3 Average Annual Total Returns 4,5 (%) 3 Mths YTD 1 Yr 3 Yrs 5 Yrs 10 Yrs 20 Yrs Since Inception Class A - With Sales Charges Class A - Without Sales Charges Class C - With Sales Charges Class C - Without Sales Charges NASDAQ Biotechnology Index S&P 500 Index % 20% 0% -20% Mths YTD 1 Yr 3 Yrs 5 Yrs 10 Yrs 20 Yrs Since Inception Class A - With Sales Charges Class A - Without Sales Charges NASDAQ Biotechnology Index S&P 500 Index Performance data represents past performance, which does not guarantee future results. Current performance may differ from figures shown. The fund s investment return and principal value will change with market conditions, and you may have a gain or a loss when you sell your shares. Please call Franklin Templeton Investments at (800) DIAL BEN/ or visit franklintempleton.com for the most recent month-end performance. The fund has a fee waiver associated with any investment it makes in a Franklin Templeton money fund and/or other Franklin Templeton fund, contractually guaranteed through 08/31/2018. Fund investment results reflect the fee waiver; without this waiver, the results would have been lower. 1. All holdings are subject to change. Holdings of the same issuers have been combined. 2. Class A: Prior to 08/03/1998, these shares were offered at a lower initial sales charge; thus actual returns may differ. Class C: The fund began offering Class C shares on: Class C. Total returns are calculated as follows: a) For periods prior to the fund s Class C inception date, a restated figure is used based on the fund s oldest share class, Class A performance, excluding the effect of Class A s maximum initial sales charge but including Class C s sales charges and Rule 12b-1 fees as though in effect from the fund s inception; and b) for periods after the fund s Class C inception date, actual Class C performance is used, reflecting all charges and fees applicable to that class. The fund offers other share classes subject to different fees and expenses, which will affect their performance. Please see the prospectus for details. 3. Source for Index: FactSet. Indexes are unmanaged, and one cannot invest directly in an index. They do not reflect any fees, expenses or sales charges. 4. Periods shorter than one year are shown as cumulative total returns. 5. Since inception return for the benchmark is calculated to the fund inception date. Not FDIC Insured May Lose Value No Bank Guarantee

2 Calendar Year Returns (% Without Sales Charges) Class A Class C NASDAQ Biotechnology Index S&P 500 Index Performance data represents past performance, which does not guarantee future results. Current performance may differ from figures shown. The fund s investment return and principal value will change with market conditions, and you may have a gain or a loss when you sell your shares. Please call Franklin Templeton Investments at (800) DIAL BEN/ or visit franklintempleton.com for the most recent month-end performance. If the sales charge had been included, the returns would have been lower. Portfolio Manager Insight 6 Market Review Throughout 2017 s fourth quarter, many investors remained bullish for US equities amid global economic growth momentum, ongoing strength in corporate earnings, upbeat business sentiment and Congressional passage of US tax reform that featured a significant reduction in the corporate tax rate. Another key factor underpinning the record upswing in stocks was the continued 2017 decline in the trade-weighted US dollar s value. Against a backdrop of low volatility and subdued inflation, major US equity indexes repeatedly rallied to new all-time highs, led by strength in consumer discretionary, information technology, financials and materials stocks. All seven other sectors also advanced. In terms of company size, returns for largeand mid-capitalization stocks nearly doubled those in the small-cap universe. By investment style, growth stocks generally outperformed their valueoriented counterparts across all three market-cap tiers. Collectively, US equities topped those of most developed countries except for those along the Pacific Rim. In US-dollar terms, emerging-market stocks had larger returns than those of developed markets, as well as frontier markets, much as they did for 2017 as a whole. Data ranging from the labor market to consumer patterns and confidence suggested the US economy ended 2017 on a strong note despite a mixture of hurricane-induced effects that were evident in vehicle, retail and home sales, as well as in energy markets and non-core inflationary measures. Retail sales climbed to an all-time high, and the housing market regained momentum after almost stalling earlier in Consumer confidence rose to its highest point since the early 2000s, bolstered in part by optimism about the labor market. Solid job creation was accompanied by lackluster wage growth even as the unemployment rate dropped to a 17-year low. Industrial output reached a new cyclical high, and the expansionary pace of manufacturing activity, though decelerating slightly since September, remained near a 13-year peak. Meanwhile, a key non-manufacturing survey, which tracks construction and mining as well as the services sector, rose to its highest level since Against this backdrop, the US Federal Reserve raised shortterm interest rates and maintained its forecast of three rate increases in Performance Review Biotechnology stocks were a rare negative outlier in equity markets during the fourth quarter, having declined overall while most other equities underwent a broad-based rally, including those in the pharmaceuticals industry; this pattern was evident in the portfolio s return profile, too. Poor clinical trial results at select biotechnology companies have been part of the problem recently. Meanwhile, 2017 merger-and-acquisition volume within the industry was not as strong as some investors anticipated, at least compared to the overall health care sector, which has seen robust deal activity. Some of the hardest-hit biotechnology stocks have been perceived buyout targets. For example, shares of cancer-focused biotechnology firm Tesaro was down about 36% over the fourth quarter and 38% in the past 12 months, and was a key detractor from the fund s results versus the benchmark index as we continued to maintain a significantly overweighted position in the company. Since Tesaro put itself up for sale in March, it has been met with lukewarm interest. Its share value declined 27% in November alone, after it reported disappointing third-quarter earnings results and narrower full-year 2017 guidance. Tesaro s immediate competitors, some of which are also fund holdings, also have seen their share prices pressured. Turning to the fund s overall results, its fourth-quarter decline was somewhat worse than the NASDAQ Biotechnology Index s. Stock selection worked against us in both the biotechnology and pharmaceuticals industries. Our biotechnology industry holdings traded lower over the period while in relative terms stock selection proved detrimental versus the index. Aside from Tesaro, the other notable detractors included sharp declines for overweighted positions in Clovis Oncology, Alexion Pharmaceuticals, Celgene, ACADIA Pharmaceuticals, Puma Biotechnology and Incyte, as well as off-index Immune Design. In particular, key detractor Clovis Oncology sold off after a rumored acquisition fell through, and it shares similarities with Tesaro in that both companies are focused on PARP inhibitors a group of pharmacological inhibitors of the enzyme poly ADP ribose polymerase that are developed for multiple indications, though their most important use is in the treatment of cancer. Despite its quarterly losses, our return on Clovis was still up about 56% in the past 12 months based on the strong performance shown by its PARP inhibitor cancer drug Rubraca. The drug was launched in the first quarter of 2017 and showed good adoption rates in the market. The company also announced strong financial performance for the third quarter, which continued a trend of positive quarterly numbers. Clovis has taken steps to further improve the revenue volume of Rubraca as it filed the Supplemental New Drug Application with the US Food and Drug Administration (FDA) for it as a maintenance therapy and second-line treatment for women suffering from ovarian cancer. The application is supported by its Phase III study. In our analysis, both Clovis and Tesaro both of which we view as leaders in the PARP inhibitor space should be the top two companies that will be mentioned when larger pharma companies want to get involved with PARP inhibitors, which holds promise to be a $5 billion market that is just being addressed for the first time. Separately, shares of large-capitalization biotech firm Alexion, which focuses on rare genetic diseases, tumbled roughly 15% despite the firm meeting Wall Street s lofty expectations in certain respects. Overall, we believe the company s third-quarter results were not that bad given that sales of $859 million represented an 8% increase from the prior-year period. In particular, sales of Soliris (a monoclonal antibody that treats two ultra-rare diseases, and which is known as the priciest drug in the world) grew 4% to $756 million. However, its overall sales figure fell $5 million shy of consensus estimates, and Soliris sales would have been stagnant if not for favorable timing of orders that aided the bottom line for the quarter. A significant position in development stage, cancer-focused biopharmaceutical company Puma Biotechnology had been a top 2017 fund contributor until the fourth quarter. Puma appears to have sold off on temporary regulatory setbacks in Europe and as investors took profits following a strong run-up earlier in the year. Puma actually received equity analyst upgrades during the period, and its equity value has roughly tripled in the past 12 months. Puma franklintempleton.com 2

3 received FDA approval for neritinib, or Nerlynx, a tyrosine kinase inhibitor that was recently approved for the extended adjuvant treatment of early-stage, HER2-positive breast cancer in adult patients who have been previously treated with a regimen that includes the drug trastuzumab. This is a $13 billion market, and for Nerlynx even as adjuvant therapy to reach blockbuster status seems possible, especially because its diarrhea side effect is quite manageable compared to similar drugs. Breaking into the European market has proved more difficult than previously assumed, but in the months ahead Puma seems likely to implement a feasible plan to tackle its regulatory issues in the European Union. Incyte stock was down about 19% on rumors of a buyout that did not materialize, but we nonetheless expect further growth and profitability in its immunotherapy niche (a class known as IDO inhibitors), and an eventual recognition that Incyte remains a major acquisition target due primarily to its valuable immunotherapy pipeline. Additionally, the portfolio s lack of a few rallying index component stocks, namely United Therapeutics and Alnylam Pharmaceuticals, further hindered our outcome in the biotechnology industry. And though Biogen aided the fund s absolute returns, our underweighting versus the index was detrimental in relative terms as the stock advanced more than the index as a whole. In the pharmaceuticals industry, much of the underperformance was due to a lack of certain index component stocks that underwent exceptional October December rallies. The largest of these detractors of omission were Mylan and Nektar Therapeutics, the latter of which more than doubled in value on the index. On the upside, several of our overweighted or off-index holdings enjoyed robust gains based largely on company-specific improvements or clinical trial breakthroughs. These significant contributors occurred at the individual security level and helped reduce the degree of underperformance we experienced in both the biotechnology and pharmaceuticals industries. Within biotechnology, a heavily overweighted position in Neurocrine Biosciences was most supportive amid its quarterly gain of nearly 27%. In November, Neurocrine reported solid third-quarter results that easily surpassed consensus estimates in terms of revenues. In particular, quarterly sales of Ingrezza, a medication used to treat the involuntary repetitive movements associated with tardive dyskinesia (a nervous system disorder often caused by long-term use of some psychiatric drugs), roughly quadrupled consensus estimates. While it was still early in the launch phase (the third quarter was Ingrezza s first full quarter on the market), we believe uptake in treating tardive dyskinesia remains strong, due in part to ongoing education and promotional efforts. On the development front, Neurocrine recently initiated a promising Phase II study in children and adolescents with Tourette s syndrome. AnaptysBio was also a solid contributor as its share price skyrocketed nearly 188% during the period. This clinical-stage biotechnology company has been developing novel anti-inflammatory drugs, and just reported positive data from a clinical trial with its eczema candidate. The investment community s excitement about AnaptysBio was due to a big hint that the company s first-in-class IL-33 inhibitor has a shot at becoming an ultraconvenient treatment option for people with atopic dermatitis, the most common type of eczema. At an interval of 57 days after receiving a single dose of ANB020, 10 of 12 patients achieved a 50% or greater improvement. Responses also appeared to be rapid, as nine of the 12 patients had achieved a 50% improvement during the 15-day assessment. AnaptysBio is also developing ANB020 for adults with severe peanut allergies, and another wholly owned psoriasis candidate, ANB019, which wrapped up its first clinical-stage trial just ahead of year-end Other key biotechnology contributors featured an outsized 182% gain for off-index Argenx, which had recent clinical trial success as it focuses on developing antibody-based therapies for the treatment of autoimmune diseases and cancer; as well as smaller rallies for off-index stakes in Fate Therapeutics and Heron Therapeutics. In particular, Heron reported third-quarter results that showed revenues on Sustol were slightly better than expected. Sustol is indicated to prevent nausea and vomiting caused by cancer treatments such as radiation and chemotherapy. It can also treat and prevent nausea and vomiting after surgery. Though still operating at a loss, the company s cash burn continues to trend down, which has taken some of the urgency off of the company s need to raise capital. The other catalyst for Heron was CINVANTI, which received FDA approval in November and is planned for commercial launch in January CINVANTI is an injectable treatment for the prevention of acute and delayed nausea and vomiting associated with initial and repeat courses of highly emetogenic (vomit-inducing) cancer chemotherapy. The fund was further aided by underweightings in Gilead Sciences and Regeneron Pharmaceuticals, both of which sold off sharply, and the absence of poor-performing index component companies such as OPKO Health and Prothena. Many of the fund s pharmaceuticals holdings were also net contributors to relative performance, led by significant double-digit percentage gains for overweighed positions in Revance Therapeutics, Collegium Pharmaceuticals and TherapeuticsMD. In particular, the shares of Collegium soared approximately 76% during the three-month period. Collegium develops and commercializes next-generation abuse-deterrent products that incorporate its patented DETERx platform technology for the treatment of chronic pain and other diseases. In November, the company reported strong third-quarter results with product revenue of US$7.6 million easily surpassing consensus expectations of $5.3 million. Moreover, the FDA approved an expanded label for Xtampza, which we believe should drive a significant growth trajectory in Xtampza s label now includes data demonstrating the superior abusedeterrent benefits of Xtampza when crushed compared to category killer Oxycontin (a similar but more abuse-prone opioid analgesic), providing evidence of differentiation for physicians and prescription-drug insurance payers. The FDA is becoming more engaged on the rising opioid epidemic and recognizes the difference among the various abuse deterrent formulations. Portfolio Positioning The fund is constructed on a bottom-up basis by evaluating individual company fundamentals, estimating fair value for businesses, comparing that estimate to current market valuations and investing in companies we believe have both a positive fundamental outlook and a stock trading at a significant discount to fair value. We have continued to broaden our holdings in small- and micro-capitalization biotechnology stocks, an area in which we have been seeing the most opportunity. We also seek to initiate positions in companies with shares that have lagged and valuations that appear attractive to us. At the end of 2017, we continued to overweight small- and micro-capitalization stocks relative to the fund s benchmark index. Outlook & Strategy Biotechnology stocks generally bounced back in 2017 after becoming largely oversold, in our view, during the US election cycle rhetoric of However, they still struggled to retrace their all-time highs reached in July By some measures, the biotechnology industry in late 2017 was less expensive on a forward price-to-earnings basis than it has been during most periods over the last 20 years. franklintempleton.com 3

4 We believe biotechnology and pharmaceutical industry fundamentals have remained strong despite the recent equity volatility and political uncertainty within the health care sector. Although investor interest in the sector has been challenged at times since late 2016, due mainly to concerns about drug pricing, competition and valuation, the long-term growth prospects for the biotechnology and pharmaceutical industries have not changed. Fundamental improvement was also noticeable on a wider scale. Essentially we saw more new drugs reach the market in 2017 versus 2016, and higher prices. The biotech and pharmaceutical industries have benefited from the resurgence of new drug approvals, including the US Food and Drug Administration s (FDA s) approval of a first-of-its-kind (and potentially game-changing) cancer therapy. Political pressures have occasionally taken the air out of the health care sector s performance over the past year, and may resurface in Uncertainty about the ultimate impact of legislative changes arising from recurring Republican efforts to repeal and replace the Affordable Care Act has at times depressed sentiment and sparked an exodus of investment capital from the health care and biotechnology spaces. Although US President Donald Trump has repeated stated his dissatisfaction with the high price of prescription drugs, his more recent signals suggest that the administration s health care policy may be surprisingly benign. While it is hard not to sympathize with his outrage, it is also tough to pinpoint a solution unless the FDA wants to get into the business of setting prices. Ultimately, we think there is no use in investors panicking about drug price legislation until a credible plan is put forth. Recent reform proposals have focused on initiatives like reducing the personal out of pocket drug costs and exploring value-based pricing models that reimburse drug-makers based on the efficacy of their medicines. These proposals enjoy wide support in the pharmaceutical and biotechnology industries. Meanwhile, a bevy of new medical breakthroughs along with some merger-and-acquisition (M&A) activity have at times re-ignited biotechnology stocks based on fundamentals. We are looking ahead to a potentially long innovation cycle for biotechnology. Innovation within the industry has reached unprecedented levels, in our view. We are particularly interested in the significant advancements in gene therapy, immuno-oncology and bispecific antibodies. We are encouraged by companies that have focused their efforts on new drug discovery platforms and novel compounds. One of the most fascinating new therapies being developed involves genetically altering patients cells so they can fight cancer. The FDA recently approved a therapy that uses this technique to fight acute lymphoblastic leukemia in kids and adults up to 25 years old, a therapy broadly known as CAR- T. During this therapy, white blood cells, or T-cells, are extracted from a patient. Genes that recognize specific cancer cells are inserted into the T-cells using an inactive virus. The genes produce receptors on the surface of the T-cells that are attracted to malignant proteins on the surface of cancer cells. The modified T-cells are grown in a lab for 10 days. The patient undergoes chemotherapy to kill off some white blood cells to help the body accept the modified T-cells. Then the modified T-cells are injected back into the patient, where they multiply, target and kill the cancer cells. Some patients who received the treatment in trials seven years ago remain cancer-free. Beyond the clinical data, looming policy uncertainty further complicates the 2018 outlook for biotechnology M&A deals. Shifting corporate tax rates, uncertainties about health-care policy and the outlook for high prescription-drug prices gave acquirers pause in 2017, and we believe a similar atmosphere may linger into Elsewhere on the regulatory front, we do not anticipate major changes coming from the FDA, which continues to work closely with the biotechnology and pharmaceutical industries and seems more committed than ever to getting important new drugs to patients quickly. There also are several big-picture trends we continue to think support health care and biotechnology. One relates to demographics. The world s populations are aging (particularly in developed markets), and the elderly as a group consume significantly more health care products and services than younger generations. And at the individual company level, we continue to see big research advancements in areas such as gene therapy and cancer, as outlined above. Major waves of innovation are reflecting the exponential leaps in basic research and understanding of human biology that are now bearing fruit. At the same time, while cutting-edge developments are exciting, we remain disciplined and selective in our investment approach. Regardless of the political and regulatory landscape, we will continue with our adherence to the fund s specialized investment mandate and intend to explore opportunities across all market-capitalization sizes in biotechnology, emerging pharmaceutical and life sciences tools companies. In doing so, we will augment our own company-by-company analysis and rigorous stock selection techniques with insight from Franklin s varied and experienced research team. 6. The information provided is not a complete analysis of every material fact regarding any country, market, industry, security or fund. Because market and economic conditions are subject to change, comments, opinions and analyses are rendered as of the date of this material and may change without notice. A portfolio manager s assessment of a particular security, investment or strategy is not intended as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy; it is intended only to provide insight into the fund s portfolio selection process. Holdings are subject to change. Portfolio Characteristics 7,8,9 Portfolio NASDAQ Biotechnology Index Market Capitalization (Millions in USD) 27,075 38,957 Return on Equity -8.96% 6.39% 3-Year Sales Growth 29.98% 26.59% Estimated 3-5 Yr EPS Growth 28.83% 22.50% Price to Earnings (12 Month Forward) 15.73x 15.30x 7. The portfolio characteristics listed are based on the fund s underlying holdings, and do not necessarily reflect the fund s characteristics. Due to data limitations all equity holdings are assumed to be the primary equity issue (usually the ordinary or common shares) of each security s issuing company. This methodology may cause small differences between the portfolio s reported characteristics and the portfolio s actual characteristics. In practice, Franklin Templeton s portfolio managers invest in the class or type of security which they believe is most appropriate at the time of purchase. The market capitalization figures for both the portfolio and the benchmark are at the security level, not aggregated up to the main issuer. Source: Factset. Price ratio calculations for weighted average use harmonic means. Any exceptions to this are noted. Information is historical and may not reflect current or future portfolio characteristics. All holdings are subject to change. 8. Source: FactSet. Price ratio calculations for weighted average use harmonic means. Any exceptions to this are noted. 9. Source for Index: FactSet. Indexes are unmanaged, and one cannot invest directly in an index. They do not reflect any fees, expenses or sales charges. franklintempleton.com 4

5 Portfolio Diversification Top Ten Holdings 10 Equity as a Percent of Total Top Holdings % CELGENE CORP 7.75 ALEXION PHARMACEUTICALS INC 7.57 BIOGEN INC 5.34 VERTEX PHARMACEUTICALS INC 4.35 ILLUMINA INC 4.32 REGENERON PHARMACEUTICALS 4.24 INC NEUROCRINE BIOSCIENCES INC 4.07 INCYTE CORP 3.71 CLOVIS ONCOLOGY INC 3.36 GILEAD SCIENCES INC 3.32 Sector Weightings vs. NASDAQ Biotechnology Index 11,12 Percent of Total Biotechnology Pharmaceuticals Life Sciences Tools & Services Health Care Distributors Health Care Equipment Health Care Technology Health Care Supplies % 5%10% 15% 20%25% 30% 35%40% 45% 50%55% 60% 65%70% 75% 80%85% % 95% Franklin Biotechnology Discovery Fund NASDAQ Biotechnology Index Largest Sector Contributors vs. NASDAQ Biotechnology Index 13 Total Sector Effect (%) Health Care Technology 0.01 Contributors/detractors data shown is for the period from 10/01/2017 to 12/31/2017. Smallest Sector Contributors vs. NASDAQ Biotechnology Index 14 Total Sector Effect (%) Pharmaceuticals Biotechnology Health Care Equipment Health Care Supplies Life Sciences Tools & Services Asset Allocation 15 Percent of Total EQUITY CASH & CASH EQUIVALENTS % 20% 40% 60% 80% 100% 120% 10. Holdings of the same issuers have been combined. Top ten holdings information is historical and may not reflect current or future portfolio characteristics. All holdings are subject to change. The information provided is not a recommendation to purchase, sell, or hold any particular security. The portfolio manager for the fund reserves the right to withhold release of information with respect to holdings that would otherwise be included. 11,15. Information is historical and may not reflect current or future portfolio characteristics. Percentage may not equal 100% due to rounding. All holdings are subject to change. 12. Source for Index: FactSet. Indexes are unmanaged, and one cannot invest directly in an index. They do not reflect any fees, expenses or sales charges. 13,14. Past performance is not an indicator or a guarantee of future performance. Information is historical and may not reflect current or future portfolio characteristics. All holdings are subject to change. Source: FactSet. Important data provider notices and terms available at Total Effect represents the excess return by sector as compared to the index. Performance attribution is calculated in the base currency of the fund. franklintempleton.com 5

6 Supplemental Performance Statistics Supplemental Risk Statistics 16,17 Class A 3 Yrs 5 Yrs 10 Yrs Standard Deviation (%) Tracking Error (%) Information Ratio Beta Sharpe Ratio Performance data represents past performance, which does not guarantee future results. Current performance may differ from figures shown. The fund s investment return and principal value will change with market conditions, and you may have a gain or a loss when you sell your shares. Please call Franklin Templeton Investments at (800) DIAL BEN/ or visit franklintempleton.com for the most recent month-end performance. Investment Philosophy The Franklin Equity Group philosophy holds that companies with the potential for long-term sustainable growth can provide significant opportunities for investors. Market participants can have a short-term perspective and may under appreciate the potential for value created by sustainable growth. We believe that we have the potential to deliver superior risk-adjusted returns by identifying companies with potential for sustainable growth which we believe is not reflected in current prices. Investment Process Within a collaborative environment, our team utilizes fundamental, bottom-up research to focus on companies that we believe have sustainable growth characteristics meeting our criteria of Growth, Quality and Valuation. Growth Quality Valuation Focus on companies with potential to produce Seek companies with strong and improving Consider a range of potential outcomes based on sustainable earnings and cash flow growth Evaluate the long-term market opportunity and competitive positions in attractive markets Identify experienced and talented management an assessment of multiple scenarios Evaluate whether, in our view, security prices fully competitive structure of the industry seeking to identify target leaders and emerging leaders teams as well as financial strength reflected in the capital structure, gross and operating margins, free cash flow generation, and returns on capital reflect the balance of the sustainable growth opportunities relative to the business and financial risks Investment Team Portfolio Manager Years with Firm Years Experience Evan McCulloch, CFA, Director of Research Steve Kornfeld, CFA, Portfolio Manager/Research Analyst Glossary Beta: A measure of the magnitude of a portfolio s past share-price fluctuations in relation to the ups and downs of the overall market (or appropriate market index). The market (or index) is assigned a beta of 1.00, so a portfolio with a beta of 1.20 would have seen its share price rise or fall by 12% when the overall market rose or fell by 10%. Estimated 3-5 Year EPS Growth: An estimated measure of the growth of earnings per share over a forward-looking period. For a portfolio, the value represents a weighted average of the stocks it holds. Historical 3 Yr Sales Growth: The rate at which sales have increased for the fund s underlying holdings over the last three years. Information Ratio: In investing terminology, the ratio of expected return to risk. Usually, this statistical technique is used to measure a manager s performance against a benchmark. This measure explicitly relates the degree by which an investment has beaten the benchmark to the consistency by which the investment has beaten the benchmark. Market Capitalization: A determination of a company s value, calculated by multiplying the total number of company stock shares outstanding by the price per share. Market capitalization is expressed in millions of USD. Price to Earnings (12-mo Trailing): The share price of a stock, divided by its per-share earnings over the past year. For a portfolio, the value represents a weighted average of the stocks it holds. Return on Equity: A measure of a corporation s profitability that reveals how much profit a company generates with the money shareholders have invested. For a portfolio, the value represents a weighted average of the stocks it holds. 16. Beta, Information Ratio and Tracking Error information are measured against the NASDAQ Biotechnology Index. 17. Information Ratio is a way to evaluate a manager s ability to outperform a benchmark in relation to the risk that manager is assuming, with risk defined as deviation from the benchmark. This measure is calculated by dividing the portfolio s excess return (portfolio return less the benchmark return) by the tracking error (derived by taking the standard deviation of the monthly differences between the portfolio return and the benchmark return over time). franklintempleton.com 6

7 Sharpe Ratio: To calculate a Sharpe ratio, an asset s excess returns (its return in excess of the return generated by risk-free assets such as Treasury bills) are divided by the asset s standard deviation. Standard Deviation: A measure of the degree to which a fund s returns varies from the average of its previous returns. The larger the standard deviation, the greater the likelihood (and risk) that a fund s performance will fluctuate from the average return. Tracking Error: Measure of the deviation of the return of a fund compared to the return of a benchmark over a fixed period of time. Expressed as a percentage. The more passively the investment fund is managed, the smaller the tracking error. franklintempleton.com 7

8 What Are The Risks? 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. Important Legal Information Investors should carefully consider a fund s investment goals, risks, 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/ or visit franklintempleton.com. Please carefully read a prospectus before you invest or send money. CFA and Chartered Financial Analyst are trademarks owned by CFA Institute. Standard & Poor s, S&P and S&P 500 are registered trademarks of Standard & Poor s Financial Services LLC. S&P does not sponsor, endorse, sell or promote and S&P index-based product. Important data provider notices and terms available at: Franklin Templeton Distributors, Inc. One Franklin Parkway San Mateo, CA (800) DIAL BEN/ franklintempleton.com 2018 Franklin Templeton Investments. All rights reserved. 402 PP 12/17