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Franklin Biotechnology Discovery Fund Franklin Templeton Investment Funds Franklin Biotechnology Discovery Fund News Franklin Biotechnology Discovery comment - Mar 11 Tuesday, 14 June 2011 Fund Manager Comment FTIF Franklin Biotechnology Discovery Fund returned net 4.80% (in U.S. dollars) for the quarter ended 31 March 2011, while its benchmark, the NASDAQ Biotechnology Index, returned 7.28%, also in U.S. dollars. Market Review The Standard & Poor's 500 Index (S&P 500) and Dow Jones Industrial Average (Dow) completed their best quarter since 1998 after climbing through January and February as upbeat fourth-quarter financial results supported a general atmosphere of economic optimism. However, equities endured extreme volatility in March, with international events that included geopolitical turmoil in the Middle East and North Africa (MENA) region, sovereign debt worries and credit downgrades in Europe, and the multiple crises triggered by Japan's earthquake and tsunami. The S&P 500, Dow and NASDAQ Composite Index returned 5.92%, 7.07% and 5.05%, respectively, for the first quarter of 2011. Led by energy and industrials stocks, each of the S&P 500's 10 major sector groups rose in value over the quarter. According to Russell indexes, returns for small-capitalization stocks topped those of mid- and large-cap companies; in terms of style, growth stocks held a clear advantage over their value counterparts in the small- and mid-cap categories, whereas value stocks fared best in the large-cap universe. Performance Review and Contributors to Performance Although the pharmaceuticals industry was the leading source of underperformance for the quarter, several pharmaceutical stocks were top contributors to relative fund returns. Jazz Pharmaceuticals' fourth-quarter profits got a lift from sales of its narcolepsy drug Xyrem-news that boosted the company's stock. Fourth-quarter profits doubled for Israeli generic drugmaker Teva Pharmaceuticals, benefiting its stock. Depomed received Food and Drug Administration (FDA) approval for its drug Gralise to treat shingles pain, lifting its stock. In contrast, a position in Salix Pharmaceuticals declined sharply following news that its drug Xifaxin would not be approved by the FDA for the treatment of irritable bowel syndrome. Two of the fund's biotechnology holdings had a positive impact on relative performance during the quarter as a result of acquisition activity. Genzyme was purchased by French global drug giant Sanofi-Aventis. Core holding Gilead Sciences acquired Calistoga Pharmaceuticals to expand into cancer-fighting drugs-a strategy that could bode well for Gilead's future growth. Additional positive contributions were delivered by Achillion Pharmaceuticals, Gentium and ArQule. The fund was impacted negatively by several biotech holdings, including Chelsea Therapeutics International, Vertex Pharmaceuticals, Pharmasset, Celgene and Onyx Pharmaceuticals. Shares of Chelsea Therapeutics, which is not a component of the benchmark, declined following reports that a late-stage trial of its hypotension drug Northera was not meeting its main goal. Shares of Vertex Pharmaceuticals, on the other hand, advanced on news that its cystic fibrosis drug significantly improved lung function in a late-stage trial. The fund's position generated positive absolute returns, but an underweighting pressured relative results. Likewise, promising preliminary data on an oral hepatitis C therapy developed by Pharmasset was good news for its stock, yet an underweighting in the fund resulted in a negative contribution. Acquisition charges for Abraxis BioScience pressured Celgene's fourth-quarter profits, lowering its stock. Additionally, concerns that Celgene's key blood-cancer treatment, Revlimid, could cause malignancies further pressured the stock. Onyx's shares fell following reports of a fourth-quarter loss due to higher research costs. Outlook We believe the requirements that U.S. health care reform has placed on health care companies had the greatest impact on the industry in 2010 but may still be significant in 2011. Two particularly challenging mandates include the rebate of 50% of drug costs to seniors who fall within a coverage gap known as the "donut hole." The other mandate is an excise tax where drug manufacturers contribute their pro-rata share of a US$2.5 billion tax on the industry. The financial impact that these mandates may have on the biotechnology industry will vary by company. The advanced warning of these 2 changes has allowed many companies to offset the costs with price increases and expense reductions. In addition, many companies forewarned investors when they issued guidance during the fourth-quarter 2010 earnings season. Therefore, we believe these reforms are not likely to place additional downside pressure on stock prices, and we do not expect any new health care legislation to be implemented this year. We do expect additional pressures on the biotech industry coming from pricing reforms in Europe and a more conservative and restrictive FDA. On the positive side, there is the potential for merger and acquisition activity, particularly with large-cap biotechs acquiring mid- and small-cap companies during a time when valuations remain compelling, as was the case with Gilead Sciences mentioned above. We will continue to monitor the biotech landscape and macroeconomic conditions as they evolve to take advantage of what we consider attractively valued stocks of established biotech companies, along with promising small- and mid-cap biotechnology firms.   Franklin Biotechnology Discovery comment - Jun 10 Monday, 23 August 2010 Fund Manager Comment FTIF Franklin Biotechnology Discovery Fund Second Quarter 2010 FTIF Franklin Biotechnology Discovery Fund returned net -13.39% (in U.S. dollars) for the quarter ended 30 June 2010, faring better than the NASDAQ Biotechnology Index, which returned -14.81%, also in dollars. Good news from U.S. corporate earnings and robust manufacturing activity was pushed to the background during 2010's second quarter as worries about sovereign debt and conflicting economic data caused investors to seek lower-risk investments following the market's recent peak (reached on April 23). From that milestone, volatility spiked and equities deteriorated through the end of June. As investors sought clarity while sorting through unresolved economic, fiscal and regulatory issues, the S&P 500 Index, Dow Jones Industrial Average and NASDAQ Composite Index returned -11.43%, -9.36% and -11.84%, respectively, for the second quarter of 2010. Declines were broad-based as all 10 of the S&P 500 sector groups fell in value. Stocks of companies sensitive to economic and commodity-price changes, including materials, financials, energy and industrials, led the declines by sector, while relative resilience in utilities, telecommunication services and consumer staples allowed for their smaller losses than the overall index. According to Russell capitalization-based indexes, large-cap stocks ended the three-month period with slightly larger losses than small and mid caps. In terms of investment style, value stocks edged out growth stocks in the large- and mid-cap segments, while small-cap growth stocks held a narrow advantage over their small-cap value counterparts. The fund's pharmaceutical industry exposure led to the majority of above-index performance in the second quarter. Top-performing pharma holdings included Salix Pharmaceuticals, which specializes in drugs that treat gastrointestinal disorders; Ardea Biosciences, which develops therapies for cancer and HIV; and Cardiome Pharma, a life sciences company focused on the prevention of cardiovascular disease. The biotechnology industry, where the majority of the fund's investments are present, also contributed on a relative basis through positions in Genzyme, Gentium and InterMune, among others. Genzyme, which focuses on genetic disorders, recently received FDA approval for its signature drug Lumizyme in the treatment of Pompe Disease. Gentium, which specializes in the development and manufacturing of defibrotide, reported that the company had a positive cash flow at the end of its fiscal first quarter and expects revenues to be in line with forecasts for 2010. The fund's underexposure to InterMune versus the index helped boost the total relative effect it had on performance. InterMune's shares dropped after the FDA decided not to approve a lung treatment the company had in clinical trials. In terms of negative relative performance in the second quarter, stock selection in the life sciences tools and services industry undermined fund results. In particular, a position in Illumina advanced on an absolute basis but was detracted due to its underweighting. Illumina, which provides a line of products for genetic sequencing, rose on reports of a jump in first-quarter sales. The majority of remaining underperformance for the fund was from individual holdings in the biotechnology industry. Detractors included Dendreon, Onyx Pharmaceuticals, BioSpecifics Technologies, Talecris Biotherapeutics Holdings, Curis, ArQule and Celgene. Outlook In our outlook for the large-cap biotech landscape, we believe investors have been underestimating the impact of U.S. healthcare reform set to ramp up in 2011, and we think European reimbursement cuts may continue to spread. As a result, we expect that 2011 earnings estimates for large-cap biotechs both in the U.S. and Europe could continue to be revised downward. On the other hand, many individual stocks are currently trading at all-time low valuations. Thus, we believe these negatives are largely priced into the stocks. With regard to mid-cap biotechs, we believe the fundamentals are strong, with a number of companies in high-growth mode due to recent product launches. Many of these companies also have lower exposure to the European market and offer products for orphan indications (used to treat rare diseases and conditions), which are exempt from many of the typical price pressures. Furthermore, if the economic recovery unfolds positively, these stocks are likely to benefit; however, we consider current valuations to be on the high side. The environment in 2010 has been more supportive of small-cap biotech companies with the thawing of the capital markets. In addition, the FDA has staffed up, which should improve timeliness in the review and approval of new compounds and trials that are the core business of these smaller companies. We continue to find opportunities in small and micro-cap biotechs, particularly those whose stock we deem significantly undervalued. We will continue to monitor the biotech landscape and macroeconomic conditions that continue to evolve in order to take advantage of attractively valued stocks of established biotech companies, along with promising small- and mid-cap biotechnology firms.   Franklin Biotechnology Discovery comment - Mar 06 Monday, 28 August 2006 Fund Manager Comment The Franklin Biotechnology Discovery Fund advanced a net 6.64% (in U.S. dollars) in the first quarter, compared to a 6.44% increase for the fund's benchmark, the NASDAQ Biotechnology Index. The sector was buoyed by strong positive returns in January and February, but returns were less impressive in March. While the Food and Drug Agency (FDA) continues to be conservative in its approval process we did expect Cephalon's Sparlon and Encysive's Thelin to be approved during the quarter. However, it now appears the FDA will require additional clinical trials from both manufacturers. With several more important drugs awaiting final approval, we will keep a close eye on the FDA in the coming months. Top-performing stocks in March were Xenoport, Kosan Biosciences and Celgene. Xenoport rose in anticipation of a possible strategic relationship involving the company's lead pipeline compound XP13512 for restless legs syndrome. Kosan Biosciences moved up following a workforce reduction and restructuring announcement, while Celgene continued to perform well as anecdotal reports suggested that the company's launch of Revlimid had fared well. Encysive Pharmaceuticals, Viropharma and Cephalon were the worst-performing stocks in March. Approval of Encysive's Thelin was delayed by an FDA request for additional data. Viropharma declined due to an easing of regulatory requirements for a generic version of its most important compound, Vancocin. While Cephalon was hurt following an FDA advisory committee's recommendation against approval for Sparlon due to concerns about one severe skin rash case called Stevens Johnson Syndrome. Outlook While we expect the volume of clinical trial results to slow down through the summer, we still maintain a positive outlook for the sector due to the large number of products advancing through trials and the sector's strong financial position. We also believe that opportunities are greater for small- and mid-cap biotechnology companies, and we have modestly drawn down our weighting to large-cap names as a result. Click here for original article   Franklin Biotechnology Discovery comment - Sep 05 Friday, 18 November 2005 Fund Manager Comment PERFORMANCE Franklin Biotechnology Discovery Fund made a net return of +0.12% (in U.S. dollars) in September, compared with a gain of +1.27% for the fund's benchmark, the NASDAQ Biotechnology Index. Over the third quarter as a whole, the fund returned a net +11.66%, compared with +13.68% for the benchmark. BIOTECHNOLOGY SECTOR UPDATE The biotechnology sector's flat performance in September was in line with similar modest returns for the broader market indices. Although September is normally a slow period for the sector, there were number of significant announcements by biotechnology companies, particularly of important clinical data. Positive news during September: Fears of widespread Avian flu have increased interest in biotechnology companies marketing or developing direct antivirals and vaccines against the H5N1 flu strains. An FDA Advisory panel recommended approval for Celgene's Revlimid for myodysplastic syndromes (MDS). An FDA Advisory panel recommended approval for OSI Pharmaceuticals' Tarceva for pancreatic cancer. An FDA Advisory panel recommended approval for Nektar Therapeutics' Exubera inhaled insulin. Biogen IDEC announced a restructuring that will significantly reduce operating expenses. Novartis launched a bid to takeover Chiron at a significant premium. Corgentech acquired privately-held AlgoRx. The good news was balanced with some negative events: Cypress Biosciences' milnacipran failed to show a statistically significant benefit in a phase III trial in fibromyalgia. Development of Incyte Pharmaceuticals' Reverset was delayed due to an FDA request for an additional phase II study prior to advancing to phase III. A phase III trial studying Genentech's Avastin in ovarian cancer was halted due to lack of efficacy. Nuvelo discontinued development of ARC183 due to pharmacokinetic issues with the drug. QLT's VIO trial, studying Visudyne in Occult AMD did not show a benefit. Supergen's Dacogen received an approvable letter from the FDA, delaying launch by several months. TOP-PERFORMING STOCKS OVER THE PAST MONTH Gilead Sciences was the biggest contributor to performance in September. Gilead's stock rebounded following a decline in previous months. Also, the potential for substantial Tamiflu pandemic planning sales increased in light of rising concerns about the avian H5N1 flu. Cubist Pharmaceuticals was the second-largest contributor to performance. Cubist's stock continues to benefit from the announcement of positive top-line results from a phase III study seeking to expand Cubicin's label indication to endocarditis and bacteremia. The full dataset will be presented in December. Furthermore, Cubist filed an application in September for inclusion of this data in Cubicin's label, earlier than expected. WORST-PERFORMING STOCKS OVER THE PAST MONTH Genentech was the largest detractor from performance in September. Genentech's stock fell for a number of a reasons. First, there have been anecdotal reports of off-label use of intravitreal Avastin for age-related macular degeneration. This could diminish the sales potential of Genentech's Lucentis. Further, the company reported negative results from a clinical trial studying Avastin in ovarian cancer. Lastly, Genentech's "Cabilly" patents were being reexamined by the US Patent Office. If these patents are ruled invalid, Genentech would lose a significant royalty stream. Cypress Biosciences was weak in September due to the announcement of negative results from a phase III trial involving milnacipran, a drug destined for the treatment of fibromyalgia. The trial narrowly missed statistical significance but showed a strong signal of efficacy. Thus, development of the drug continues.   Franklin Biotechnology Discovery comment - Jul 05 Wednesday, 14 September 2005 Fund Manager Comment PERFORMANCE The Franklin Biotechnology Discovery Fund advanced a net 12.48% ('A' class shares, in U.S. dollars) in July, compared to an 11.96% increase for the fund's benchmark, the NASDAQ Biotechnology Index. BIOTECHNOLOGY SECTOR UPDATE July was a spectacular month for the biotechnology sector in terms of stock price performance. The sector was led by strong earnings reports by several of the large-cap biotechnology companies. Also, good news items outnumbered the bad, and investors were drawn to the small-cap companies as potential acquisition candidates following Pfizer's acquisition of Vicuron in June. Positive news during July: Amgen, Genentech, Gilead Sciences and Genzyme reported strong quarterly results Genentech presented highly positive phase III data on Lucentis in Age-Related Macular Degeneration Biogen IDEC and Protein Design Labs announced a development collaboration on three antibodies in phase II development UCB Pharma announced positive phase III data for Cimzia in Crohn's disease Invitrogen acquired Biosource International Millennium Pharmaceuticals divested Integrilin to improve focus on Velcade and the clinical pipeline MGI Pharma acquired Guilford Pharmaceuticals Negative news during July: Genzyme reported mixed data from its D-COR trial studying mortality and morbidity outcomes with Renagel Incyte Pharmaceuticals announced mixed data on its phase II HIV drug Reverset The U.S. Food & Drug Administration (FDA) requested an additional study for Adolor's Entereg Critical Therapeutics reported disappointing phase II data on Zyflo for Acne TOP PERFORMING STOCKS OVER THE PAST MONTH Amgen was the biggest contributor to performance during July. Amgen was our largest position and appreciated approximately 32% during the month. Amgen's advance was largely in response to strong second quarter operating results. In terms of absolute performance, Kosan Biosciences and Supergen were the top performing stocks in the portfolio. Kosan Biosciences rose following positive data presented on KOS-953 in June and off a low valuation. Supergen shares advanced in anticipation of FDA approval of most important pipeline compound Dacogen. WORST PERFORMING STOCKS OVER THE PAST MONTH Sepracor was the largest detractor from performance, with shares declining approximately 13% during the month. We believe that Sepracor's decline was largely related to FDA approval of a competing agent to Lunesta for the treatment of Insomnia. In terms of absolute performance, Affymetrix was the worst performing stock in the portfolio. Affymetrix reported disappointing second quarter results. Fortunately, Affymetrix was a small position in the portfolio, muting the overall impact.   Franklin Biotechnology Discovery comment - Jun 05 Tuesday, 16 August 2005 Fund Manager Comment PERFORMANCE Franklin Biotechnology Discovery Fund advanced a net +3.71% (in US dollars) in June compared to a +1.80% return for the fund's benchmark, the NASDAQ Biotechnology Index. Over the second quarter as a whole, Franklin Biotechnology Discovery Fund returned a net +10.70%, compared with +6.12% for the benchmark. BIOTECHNOLOGY SECTOR UPDATE June was a good month for the biotechnology sector in terms of stock price performance. The sector was buoyed by the strong performance of the NASDAQ composite and positive news flow overall. As can be seen below, good news items outnumbered the bad, and small-cap names began to drive performance, whereas in prior months large caps had led the way. Pfizer's acquisition of Vicuron was a major contributor to small-cap strength as investors positioned for further M&A activity. Positive news during June Pfizer acquires Vicuron for $1.9 billion in cash. Cubist Pharmaceuticals reported positive data from a phase III trial studying Cubicin in endocarditis. Genentech acquired Biogen IDEC's Oceanside manufacturing facility. Alkermes signed a co-development agreement with Cephalon on Vivitrex, their drug for alcohol dependence. Cypress Biosciences received a license a drug for obstructive sleep apnea from Organon. Salix Pharmaceuticals acquired Inkine Pharmaceuticals. Transkaryotic Therapies reported positive phase III data for I2S in Hunter's Syndrome. Novartis inlicensed Anadys' ANA975 for hepatitis B and C. The good news was balanced by some negative events: Myogen's Enoximone was shown to have no effect in phase III trials for congestive heart failure. An FDA Advisory Committee recommended against approval of Chiron's Pulminiq. C* hiron lowered guidance for 2005 flu vaccine production. Two additional cases of PML in patients on Biogen IDEC's Tysabri were reported. TOP PERFORMING STOCKS OVER THE PAST MONTH Two of the top-performing stocks in the fund in May were Vicuron and Cubist Pharmaceuticals. Vicuron was acquired by Pfizer for a substantial premium. Vicuron's two lead programs, anidulafungin and dalbavancin, are a good strategic fit within Pfizer's anti-infectives business and enhance Pfizer's near-term growth, as both products are currently under Food and Drug Administration (FDA) review. Cubist Pharmaceuticals' shares advanced in response to positive results from a phase III trial studying Cubicin in endocarditis and bacteremia. Cubicin is already approved for complicated skin and soft tissue infections, but positive results in these additional infections will expand Cubicin's market potential. WORST PERFORMING STOCKS OVER THE PAST MONTH Biogen IDEC was one of the worst performing stocks in June. Its stock slid for three reasons. First, details of its agreement with Genentech for a second generation Rituxan were disclosed in Securities and Exchange Commission (SEC) filings. The royalty rate was lower than previously estimated. Second, a new competitor for Avonex in Europe was discovered. Third, two additional cases of PML were reported through the FDA's adverse event reporting system. These cases have not been confirmed nor have they been acknowledged by the company.   Franklin Biotechnology Discovery comment - Mar 05 Friday, 29 April 2005 Fund Manager Comment PERFORMANCE The Franklin Biotechnology Discovery Fund declined 3.33% in March compared to a 6.29% decrease for the fund's benchmark, the NASDAQ Biotechnology Index. BIOTECHNOLOGY SECTOR UPDATE We believe that a number of factors contributed to the sector's decline. First and foremost, it was a huge shock that Biogen IDEC's Tysabri was withdrawn from the market in February. This action reinforced concerns about increasing conservatism by the FDA. Prior to Tysabri (and Vioxx), very few approved drugs had been withdrawn and approval was largely viewed as a positive assessment of a product's safety profile. The sector was also burdened with a number of negative clinical outcomes, as highlighted below. Positive news during February: Genentech's Avastin demonstrated a survival benefit in non-small call lung cancer Celgene's Revlimid phase III trial in multiple myeloma was halted early due to a significant benefit in time-to-disease progression ISTA Pharmaceuticals' Xibrom approved for ocular inflammation Onyx Pharmaceuticals announced positive data from a phase III trial studying BAY 43-006 in renal cell cardinoma Keryx announced a Special Protocol Assessment (SPA) for its phase III trial for KRX-101 in diabetic nephropathy Amylin Pharmaceuticals' Symlin was approved for the treatment of diabetes Sepracor's Xopenex MDI was approved for asthma Cotherix announced positive data from a phase III study for Ventavis in pulmonary hypertension Adolor announced positive data for Entereg in a phase II trial in Opioid-Induced Bowel Dysfunction On the other hand, the good news was balanced with some negative events: Biogen IDEC announced a 3rd case of PML was discovered in a Tysabri patient, further reducing the commercial opportunity of Tysabri, if ever re-introduced to the market Corgentech announced disappointing phase III results for edifologide in CABG Waters Corp preannounced an EPS shortfall for first quarter results The Medicines Company announced a halt to Clevelox development due to unexpected side effects Ligand Pharmaceuticals announced disappointing phase III results for Targretin in lung cancer Pain Therapeutics announced mixed data from a phase III trial for Oxytrex for the treatment of back pain Guilford Pharmaceuticals suspended development of Aquavan due to adverse events ICOS announced negative phase II results for IC485 in COPD Cell Therapeutic's Xyotax failed to produce a survival benefit in a phase III trial in lung cancer TOP PERFORMING STOCKS OVER THE PAST MONTH The best performing stocks in the fund in March were Celgene and Genentech. Celgene advanced due to the announcement of positive results at an interim analysis of their phase III trial studying Revlimid in multiple myeloma. Because the trial was stopped early, one can assume that the results are very positive. Further, this accelerates the potential time to launch for Revlimid and solidifies the company's regulatory strategy. Genentech advanced due to positive phase III results for Avastin in non-small cell lung cancer and disappointing results from a competing drug in the same indication. WORST PERFROMING STOCKS OVER THE PAST MONTH The worst performing stocks in the fund in February were Cytokinetics and Xcyte Therapies. Both are small companies and small positions in the fund that declined due to poor liquidity in a weak environment for microcap biotechnology stocks.   Franklin Biotechnology Discovery comment - Feb 05 Wednesday, 23 March 2005 Fund Manager Comment Performance The Franklin Biotechnology Discovery Fund declined 6.62% in February compared to a 4.28% decrease for the fund's benchmark, the NASDAQ Biotechnology Index. BIOTECHNOLOGY SECTOR UPDATE The biotechnology sector declined during the month of February but nearly all of the negative performance occurred on the last day of the month. On February 28th, Biogen IDEC and Elan announced that they would voluntarily suspend all sales and clinical trials of, Tysabri, their recently launched drug for multiple sclerosis. The withdrawal was the result of two patients diagnosed with progressive multifocal leukoencephalopathy (PML), a rare but extremely aggressive disease of the central nervous system caused by activation of the JC virus in the brain. Based on Tysabri's mechanism and the otherwise rarity of the disease, it was immediately assumed these cases could be attributed to Tysabri. The withdrawal had a dramatic impact on revenues and earnings estimates for both companies involved, and thus, resulted in steep declines in the two stocks. This, in turn, resulted in a broad selloff in the sector as investors feared that two withdrawals in such a short period of time, Tysabri and Vioxx, might result in a more conservative FDA going forward. Positive news during February: Vicuron reported very positive phase III results demonstrating superiority of their compound anidulafungin over the current standard of care, fluconazole, in serious candida fungal infections Gilead Sciences' Truvada was approved in Europe Neurocrine Biosciences announced positive data in a phase III trial studying Indiplon MR in chronic insomnia Encysive reported positive phase III data for Thelin in pulmonary hypertension On the other hand, the good news was balanced with some negative events: · * Tysabri, a recently launched drug for MS, was voluntarily suspended by co-development partners Biogen IDEC and Elan Discovery Labs received an approvable letter for Surfaxin citing manufacturing issues and delaying approval by approximately 12 months Inspire Pharmaceuticals reported negative results from a phase III trial looking at diquafosol in chronic dry eye TOP PERFORMING STOCKS OVER THE PAST MONTH The best performing stocks in the fund in January were Tercica, Serono and Vicuron. Tercica rebounded following the completion of a secondary offering and the filing of a new drug application (NDA) for their lead compound Increlex for IGF-1 growth deficiency in children. Serono reacted positively to the withdrawal of Tysabri because Serono's outlook improves as competitive pressure eases on their high-dose interferon Rebif, which is used in the treatment of multiple sclerosis. Lastly, Vicuron advanced on positive data from a phase III trial studying their antifungal anidulafungin in invasive candidiasis/candidemia and on the receipt of a priority review from the FDA on dalbavancin. WORST PERFROMING STOCKS OVER THE PAST MONTH The worst performing stocks in the fund in February were Elan, Biogen IDEC and Inspire Pharmaceuticals. Elan and Inspire were small positions in the fund and declined for reasons cited above. Biogen IDEC, however, was the second largest position in the fund as our analysis suggested that Tysabri would ultimately become the most widely prescribed drug for MS. Unfortunately, a rare but serious side effect associated with long-term use of Tysabri in combination with Avonex significantly altered the competitive profile for the drug, and minimized what could have been a major advance for MS physicians and their patients.   Franklin Biotechnology Discovery comment - Sep 04 Thursday, 18 November 2004 Fund Manager Comment Performance The Franklin Biotechnology Discovery Fund advanced 4.2% compared to a 3.3% increase for the fund's benchmark, the NASDAQ Biotechnology Index. BIOTECHNOLOGY SECTOR UPDATE The sector moved directionally with the overall market during September, but was assisted by positive newsflow, as highlighted below. Positive news during September: Atherogenics announced controversial but positive data from a phase II trial studying it's lead compound, AGI-1067 in the treatment of atherosclerosis The Medicines Company's drug Angiomax was approved in Europe Tarceva, a drug being jointly developed by Genentech and OSI Pharmaceuticals, showed a small but important survival benefit in a phase III trial in pancreatic cancer Protein Design Labs signed a co-development agreement with Roche for its Asthma drug daclizumab Neurocrine Biosciences announced positive phase III data for Indiplon MR in insomnia Human Genome Sciences and Protein Design Labs both announced positive data for their early stage oncology compounds On the other hand, the good news was balanced with some negative events: BioMarin lowered revenue guidance due to a shortfall in Orapred sales Reimbursement concerns continued to be an overhang on Amgen's stock TOP PERFORMING STOCKS OVER THE PAST MONTH The top performing stock in the fund during September was Atherogenics. On September 27th, Atherogenics announced positive, preliminary data from a phase II trial evaluating AGI-1067 in atherosclerosis. AGI-1067 reduced plaque volume by an average of 3.8%, which was a statistically significant decrease relative to the baseline measurement. While this data has highly scrutinized, the takeaway is that the drug appears to have an effect on the regression of atherosclerotic plaque, which may translate into a reduction in cardiac events in an ongoing phase III trial. WORST PERFROMING STOCKS OVER THE PAST MONTH One of the worst performing stocks in the fund during September was BioMarin Pharmaceuticals. The company announced that Orapred sales would be lower than expected due to excess inventory in the distribution channel.   Franklin Biotechnology Discovery comment - Aug 04 Tuesday, 21 September 2004 Fund Manager Comment Performance The Franklin Biotechnology Discovery Fund advanced 3.5% in August compared to a .7% increase for the fund's benchmark, the NASDAQ Biotechnology Index. BIOTECHNOLOGY SECTOR UPDATE The sector moved directionally with the overall market during August, but outperformed due to positive newsflow, as highlighted below. Positive news during August: An FDA advisory committee provided a positive review of the safety and efficacy data of Eyetech's Macugen Vicuron reported positive data from 3 phase III trials studying their antibiotic dalbavancin in skin and skin structure infections Gilead's Truvada, a 2 drug combination pill of Viread and Emtriva, received FDA approval ahead of expectations Preliminary results from a head-to-head study of Gilead's Truvada vs. GSK's Combivir are better than expected Rigel reported positive results from a proof-of-concept phase II trial using R112 in allergic rhinitis Medarex received a special protocol assessment from the FDA to study MDX-010 in metastatic melanoma Lilly advanced Alkermes' formulation of inhaled insulin into phase III pivotal trials On the other hand, the good news was balanced with some negative events: Medimmune reported disappointing data in 2 phase II trials studying Vitaxin in Rheumatoid Arthritis and Psoriasis Chiron announced a delay in the delivery in its flu vaccine supply, resulting in a reduction in earnings estimates BioMarin CEO Fred Price resigned Top Performing Stocks Over The Past Month One of the best performing stocks in the fund was Avanir Pharmaceuticals. Avanir's stock advanced strongly on the release of positive phase III data studying their drug, Neurodex, in the treatment of pseudobulbar affect (PBA). PBA is a secondary condition in patients with ALS and Multiple Sclerosis characterized as inappropriate and uncontrollable emotional outbursts. With positive data in 2 phase III trials, Neurodex is likely to be approved, and launched sometime in 2005. Another strong performer was Vicuron, which, as highlighted above, also presented positive phase III data. Given dalbavancin's long-half life, there was uncertainty about the safety profile of the drug. However, the phase III results revealed no safety issues and this drug also appears poised for approval and launch in 2005. Worst Performing Stocks Over The Past Month Ligand Pharmaceuticals and Nektar Pharmaceuticals were the worst performing stocks in the fund in August. Ligand's stock fell due to the company's announcement that Deloitte and Touche had resigned as the company's auditor. Although no details were disclosed, investors feared the worst and the stock dropped under heavy selling pressure. Fortunately, the stock was a small position in the fund and has rebounded since the announcement. Nektar Pharmaceuticals' stock reacted to a news article in the UK citing concerns from European regulatory authorities over its ongoing review of the company's product, Exubera. We viewed the drop as an overreaction to the announcement and added to our position. Subsequently, the stock has rebounded significantly.   Franklin Biotechnology Discovery comment - Jun 04 Friday, 13 August 2004 Fund Manager Comment Performance The Franklin Biotechnology Discovery Fund declined -1.7% in June compared to a -0.4% decrease for the fund's benchmark, the NASDAQ Biotechnology Index. BIOTECHNOLOGY SECTOR UPDATE The sector, as a whole, traded sideways during the month, largely due to a lack of catalysts following several major medical meetings in early June. Individual stocks, on the other hand, tended to be quite volatile based on company-specific events. These events were: · Imclone's Erbitux was approved in Europe and had positive data for treatment of Head & Neck cancer. · Phase II data studying Biogen IDEC's Rituxan in rheumatoid arthritis was published in the New England Journal of Medicine. · QLT acquired Atrix Labs. · Preliminary data from Genzyme's DX-88 phase II trial in hereditary edema was positive. · BioMarin presented positive data from a phase III trial studying Aryplase in MPS IV · The U.S. Food and Drug Administration (FDA) approved Imclone's BB36 manufacturing facility. On the other hand, the good news was balanced with some negative events: · Kosan Biosciences announced that it was halting development of KOS-862 in colorectal cancer due to toxicities · OSI Pharmaceutical's Aptosyn failed in a phase III trial in lung cancer Top Performing Stocks Over The Past Month One of the best performing stocks in the fund, once again, was Pharmion. Pharmion's lead compound, Vidaza, was approved by the FDA in May for the treatment of MDS, a group of blood disorders called myodysplastic syndromes. The stock continued to perform well as pricing was higher than expectations and feedback from physicians regarding the product has been highly positive. Worst Performing Stocks Over The Past Month Several stocks in the fund have declined in an absence of a change in fundamentals. Atherogenics has declined, as the company has not yet signed a partner for its lead compound, AGI-1067. MGI Pharma has pulled back in anticipation of potential business development activities. Lastly, Abgenix has fallen after the company presented positive data at the ASCO meeting in ABX-EGF. Although the data supported further development, it failed to differentiate the drug from competing compounds such as Erbitux.   Franklin Biotechnology Discovery comment - Sep 03 Thursday, 20 November 2003 Fund Manager Comment The subfund declined 0.86% (in US dollars) in September compared to a 2.7% decrease for the NASDAQ Biotechnology index. September was a month of continued progress and a return to the medical meeting season for Biotechnology. Clinical results were generally a mix of positive and negative news. Positive clinical data were announced from Adolor, and Genta and Kosan. The flow of secondary offerings continued into September. Strong balance sheets help companies take their products further through development, allowing them to license them to marketing partners at later stages for better terms. In addition, a number of private companies have filed for their initial public offerings. The best performing stocks in September were Adolor and Salix Pharmaceuticals. Adolor released positive Phase III data for the treatment of post-operative ileus. The fund manager's look forward to additional Phase III clinical results and a potential filing with the Food & Drug Administration (FDA) in 2004.   Franklin Biotechnology Discovery comment - Apr 03 Thursday, 22 May 2003 Fund Manager Comment The biotechnology sector had another strong month in April. The fund manager's believe that the sector's gains were largely due to upbeat first quarter earnings reports, particularly from the large-cap companies. Amgen, Gilead Sciences, Biogen, Genentech and Medimmune all beat consensus estimates and all provided very positive outlooks for the remainder of the year. Additionally, Genzyme received FDA approvals for two drugs, providing further evidence of an improving regulatory environment. The best-performing stock was Salix Pharmaceuticals. The fund manager's had recently been adding to this position as delays in the regulatory process for one of its products had depressed its stock to very attractive levels. The top performing large-cap stock was Biogen. Although sales of Biogen's recently-launched Amevive continue to be disappointing, the company exceeded analyst's first-quarter estimates due to lower-than-expected expenses. In addition, Biogen had the lowest valuation among large-cap biotechnology stocks.   Franklin Biotechnology Discovery comment - Dec 02 Monday, 10 February 2003 Fund Manager Comment The biotechnology sector essentially gave back November's gains in December as the medical meeting season came to an end and the broader market weakened. However, the regulatory environment seems to be slowly improving and 2003 should see a number of biological drugs get back on track in the regulatory process. Fund performance continues to be driven by large caps. Strong stocks in December included Amgen, Medimmune and Invitrogen. Amgen had a number of successful events in the quarter, while Medimuune made it through a successful advisory committee meeting. Invitrogen held a successful analyst meeting and surprised Wall Street with earnings guidance upside. Varian Medical continues to be a strong performer thanks to its excellent long-term financial performance. The worst performing stock was Genta. This was a top performer in November but gave back its gains as it sold into the positive news at the American Society of Haematology meetings.

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