3Q14 PORTFOLIO COMMENTARY Janus Global Life Sciences Fund Investment Environment Strong returns in biotechnology led to gains for the sector, while broader indices declined in the third quarter. Quarterly financial results for leading biotechnology companies were strong and positive data for a small-cap company, Puma Biotechnology, highlighted the potential for the sector with its stock nearly quadrupling in one day. There were also a number of buyouts at significant premiums to spur investor interest in companies addressing high, unmet medical needs. Hospitals also performed well on stronger earnings, reflecting increased demand as more previously uninsured Americans enter the health care system through the Affordable Care Act. Health insurance companies, benefiting from the same dynamic as hospitals, also aided the sector’s returns. Performance Discussion The Fund outperformed its primary benchmark, the S&P 500 Index, and its secondary benchmark, the MSCI World Health Care Index, for the quarter. We seek to invest in growth companies worldwide that are addressing high, unmet medical needs and providing efficient and cost-effective health care solutions. We believe the health care sector, with its rapid growth and high complexity, offers abundant opportunities for differentiated research. We believe understanding both the science and the business behind new therapies is critical. Our significant overweight and holdings in biotechnology drove the Fund’s relative performance. Puma led the way after its breast-cancer drug, neratinib, showed an impressive benefit in adjuvant breast cancer (treatments given after surgery to increase the chance of long-term disease-free survival) in a late-stage clinical trial. In the previous quarter, Puma was among our top detractors after a disappointing data release on a competitive drug raised questions about one of the approval pathways for neratinib. While we continue to see significant potential for the drug in adjuvant breast cancer, we took some profits after the stock’s strong gains. Also in biotechnology, the Fund’s largest holding, Gilead Sciences, also recorded robust gains. An arbitration panel rejected Roche Holding’s patent infringement claims related to Gilead’s key hepatitis C drug, Sovaldi. Since its launch earlier this year, the drug has become the largest selling product in the history of the pharmaceutical industry. We think the launch of a Sovaldi combination pill in the fourth quarter could be another bellwether for the industry. This combination would provide the first true one-pill, once-aday treatment for the majority of hepatitis C patients. Pharmacyclics, another top contributor, appreciated after management announced the Food and Drug Administration (FDA) had approved its cancer drug Imbruvica for expanded use among chronic lymphocytic leukemia (CLL) patients, which should further support sales growth. Also noteworthy, there were no adverse safety updates in the drug’s label. We consider Imbruvica a highly effective and well-tolerated oral maintenance treatment for CLL, a relatively common form of leukemia. We continue to believe the market potential for the drug is underappreciated. Mallinckrodt also aided returns on continued merger and acquisition (M&A) activity among specialty pharmaceutical companies. We believe the company’s acquisition of Questcor Pharmaceuticals, which was completed in August, will generate higher Page 1 of 5 Portfolio Manager: Andry Acker, CFA Executive Summary • Strong returns in biotechnology led to gains for the sector, while broader indices declined in the third quarter. • Our significant overweight and holdings in biotechnology drove the Fund’s relative performance. • Puma Biotechnology and Gilead Sciences led our individual contributors. • In many cases, stock gains have been driven by fundamental improvements, such as profit growth, innovative drugs advancing and more insured patients gaining access to health care. Janus Global Life Sciences Fund 3Q14 PORTFOLIO COMMENTARY earnings and cash flow than the market anticipates. We believe Questcor’s key drug Acthar, indicated for multiple sclerosis, rheumatoid arthritis and keratitis, will be a strong contributor for Mallinckrodt for many years to come. Detractors were led by NPS Pharmaceuticals, which traded lower after a mixed FDA panel narrowly recommended approval of the company’s hormone replacement therapy Natpara. Given the mixed panel, which questioned the clinical benefits of the drug, there could a brief delay in the drug’s approval. However, we believe approval is still likely due to the high, unmet medical need and the launch could occur by early next year. We continue to like the company longer term based on growth prospects for both Natpara and its injectable therapy Gattex for short bowel syndrome. GW Pharmaceuticals, a top contributor in the second quarter, also weighed on performance due to profit taking and investor concerns that market expectations for its drug Epidiolex (a marijuana derivative) may have gotten too high. The stock rose significantly during the second quarter after the company reported early clinical success for the drug in children suffering from several treatment-resistant epilepsy syndromes. The drug showed compelling efficacy in patients whose seizures did not respond to several other medicines. We continue to see significant potential for Epidiolex as well as some of the company’s other pipeline candidates. Repros Therapeutics, another top detractor, suffered when an FDA panel said that doctors were prescribing testosterone drugs too broadly and advised the agency to limit the use of such drugs to a specific patient population. This could effectively limit the size of the market and extend the regulatory timelines for FDA approval of new drugs in this category. We sold our position in Repros, which is seeking marketing approval of its testosterone replacement drug, Androxal, due to heightened regulatory risks. In medical technology, Endologix also weighed on performance. The medical device company, which makes stent grafts for aortic aneurysms, declined late in the period when it modestly lowered its revenue guidance for its third quarter and full year. There were also concerns over competitive products that are undergoing trials. We believe the stock’s decline more than compensated for these worries. Based on our belief in the longterm potential for Endologix’s new pipeline devices, we added to our position on the stock’s weakness. For detailed performance information or to download a Fact Sheet, please visit www.janus.com/funds Outlook In many cases, stock gains have been driven by fundamental improvements, such as profit growth, innovative drugs advancing and more insured patients gaining access to health care. There are areas that have become more fully valued, such as some small-cap biotechnology companies due to recent merger and acquisition activity. Caution is warranted in these areas because development products that face setbacks can lead to significant share price corrections. Among our major investment themes, we continue to see an acceleration of innovation. There were 29 drug approvals in the first nine months of this year, more than all of last year, and more should be coming. Particularly noteworthy during the period were advances in immuno-oncology, an innovative approach to cancer research that seeks to harness the body’s immune system to fight tumor cells. Approval of Merck’s Keytruda in September may be a watershed event for this new class of treatments, which could lead to cures for patients with cancers previously considered incurable. Roche Holding’s acquisition of U.S. biotechnology company Intermune in August for over $8 billion showed that M&A activity continues to be a strong force in the sector. Mitigating this somewhat, the U.S. Treasury took steps during the quarter to discourage tax inversions (re-incorporating a company overseas in order to reduce the tax burden on income earned abroad), which could reduce some of the benefits on those types of mergers. However, low interest rates, high cash balances, and excess industry capacity are still incentives for companies to rationalize assets via acquisitions rather than add sales people and build manufacturing facilities. We remain focused on companies with significant growth potential and strong drug pipelines, which could be attractive to potential acquirers. Another major theme is the Affordable Care Act, which has helped over 10 million previously uninsured Americans obtain health insurance through Medicaid or health insurance exchanges over the past year. This should continue to be a significant tailwind for hospital companies, which have provided essentially free care to the uninsured until the advent of health care reform. In states that embraced an expansion of Medicaid eligibility, there has been a 50% reduction in utilization by uninsured patients. This has resulted in improved volumes and improved profitability for the hospitals. Health insurance companies have also benefited from increased enrollments and have been surprised at the low attrition of the previously uninsured. We anticipate another uptick in demand as the Page 2 of 5 Janus Global Life Sciences Fund 3Q14 PORTFOLIO COMMENTARY second year of enrollment opens on Nov. 15 and continues through Feb. 15. During the period, we sold two positions in companies that had been acquired at significant premiums. Among new purchases was a pharmaceutical company with promising prospects for its immuno-oncology drugs. We also added a company to our emerging growth segment of the portfolio based on our belief it may have a viable drug for hepatitis C, one of the biggest and most attractive markets in the pharmaceutical universe. Both companies fit our focus on companies addressing high, unmet medical needs. Top Contributors and Detractors for the Quarter Ended 9/30/14 Top Contributors Ending Weight (%) Contribution (%) Top Detractors Ending Weight (%) Contribution (%) Puma Biotechnology, Inc. 0.85 2.14 NPS Pharmaceuticals, Inc. 1.27 -0.39 Gilead Sciences, Inc. 3.55 1.07 GW Pharmaceuticals PLC (ADR) 0.70 -0.26 Pharmacyclics, Inc. 2.42 0.72 Repros Therapeutics, Inc. 0.00 -0.26 Mallinckrodt PLC 2.70 0.45 Endologix, Inc. 0.53 -0.25 Medivation, Inc. 1.66 0.45 Biostime International Holdings, Ltd. 0.51 -0.24 The holdings identified in this table, in compliance with Janus policy, do not represent all of the securities purchased, held or sold during the period. To obtain a list showing every holding as a percentage of the portfolio at the end of the most recent publicly available disclosure period, contact 877.33JANUS (52687) or visit janus.com/advisor/mutual-funds. Top Contributors Top Detractors Puma Biotechnology: The development-stage biotechnology company develops novel therapeutics for the treatment of various forms of cancer. Puma focuses on inlicensing drug candidates that are undergoing or have already completed initial clinical testing for the treatment of cancer and then seeks to further develop those drug candidates for commercial use. We believe its oral breast cancer drug, neratinib, has significant sales potential in breast cancer and other tumor types. NPS Pharmaceuticals: The biotechnology company is focused on the development of treatment options for patients with serious unmet conditions in the areas of rare gastrointestinal and endocrine disorders. We believe the company’s injectable therapy, Gattex, for short bowel syndrome (an inability to absorb food nutrients due to severe disease or surgical removal of a significant portion of the small intestines) could drive robust sales growth. Additionally, we see significant growth potential for NPS’ injectable therapy, Natpara, for hypoparathyroidism, a rare endocrine disorder characterized by insufficient levels of the human parathyroid hormone, the body’s principal regulator of calcium and phosphorus. A bioengineered replica of the hormone, Natpara is being developed as a replacement therapy for the underlying cause of the disorder. NPS expects to file with the FDA later this year and hopes to receive approval in 2014. Finally, we appreciate significant annual royalty income the company receives from Amgen’s Sensipar drug, which is used in the treatment of secondary HPT in patients with chronic kidney disease. Gilead Sciences: A research-based biotechnology company, Gilead’s primary areas of focus include human immunodeficiency virus (HIV)/AIDS; liver diseases, such as hepatitis B and C; and oncology. The launch of its hepatitis C drug, Sovaldi, in the first quarter of 2014 was the largest in the industry’s history and rapidly became the top-selling drug in the U.S. We consider Gilead’s once-a-day oral regimen a groundbreaking change in a field in which less than 5% of patients had been treated because the prior standard of care (weekly injections that caused flu-like symptoms) were so poorly tolerated. The potential market size is significant since approximately 3% of the world’s population (170 million people) is believed to be infected, including over four million in the U.S. As treatment moves to an all-oral, well-tolerated therapy, the market should expand significantly, and we believe Gilead is poised to be a leader GW Pharmaceuticals: The UK-based company researches and develops cannabinoid (marijuana derivative) prescription medicines for the treatment of cancer pain, multiple sclerosis and neuropathic pain. We appreciate the growth potential for GW’s product candidate, Epidiolex, for a range Page 3 of 5 Janus Global Life Sciences Fund 3Q14 PORTFOLIO COMMENTARY Top Contributors (continued) Top Detractors (continued) in this wave of therapies. We anticipate the launch of a combination therapy, including Sovaldi, in the second half of the year to be even larger since it will address a higher percentage of the market. We also value the company’s dominant HIV drug franchise (85% market share), which continued to grow double digits with high margins. of epilepsies in which current anti-epileptic drugs have been unsuccessful at adequately controlling seizures. We also see potential in the company’s other pipeline candidates. Pharmacyclics: This biotechnology company is focused on discovering and developing innovative small-molecule drugs for the treatment of cancer and immune mediated diseases. The company's pharmaceutical drug development candidates are synthetic small-molecules designed to target key biochemical pathways involved in human diseases with critical, unmet needs. We are particularly excited about the recent launch of Pharmacyclics’ cancer drug, Imbruvica, a well-tolerated and highly effective maintenance treatment for chronic lymphocytic leukemia (CLL), a relatively common form of leukemia. Mallinckrodt: Mallinckrodt develops and manufactures specialty pharmaceutical products and medical imaging agents. We believe the company’s acquisition of Questcor will generate higher earnings and cash flow than the market anticipates, given the potential long duration of Questcor’s specialty drug and Mallinckrodt’s low Irish tax structure as well as its ability to raise low-cost debt. Medivation: The biopharmaceutical company is focused on the rapid development of small-molecule drugs to treat serious diseases for which there are limited treatment options. Medivation has developed a promising prostate cancer drug with Astellas Pharma called Xtandi, which we think could grow significantly. The drug has been approved by the FDA for men with metastatic castration-resistant prostate cancer after they fail other chemotherapy and more recently for patients who have not yet undergone chemotherapy. We believe, based on our market surveys, the drug’s differentiation from existing therapies is more substantial than is currently perceived by the market due to its strong efficacy, ease of use, and safety profile. All of these attributes should allow use in the much larger earlierstage prostate cancer market. Repros Therapeutics: We sold our position in the clinical stage pharmaceutical company due to our concerns about the regulatory pathway for the company’s lead drug Androxal, an oral therapy designed to restore normal testosterone levels to men with hypogonadism, a condition characterized by low levels of the hormone. Endologix: The company manufactures minimally invasive treatments for vascular diseases, including a catheter-based stent graft to treat abdominal aortic aneurysms, the 13thleading cause of death in the U.S. We believe Endologix has differentiated technology that has allowed it to take market share from larger competitors. Additionally, we think its robust development pipeline will allow it to continue increasing market share while also growing their addressable market. Biostime International Holdings: Biostime is a leading infant milk formula company in China, focused on the superpremium segment of the market. The company markets a fully-imported product to mother/baby stores and selected on- and offline distribution channels. We appreciate the company’s market share gains despite a challenging nearterm environment in which large multinational brands are responding to its success. Longer term, we believe that the brand value Biostime has created will persist and that promotional practices will ease, yielding higher net pricing and gross profits. The company’s balance sheet is strong, and can be deployed efficiently to create value through the acquisition of products in adjacent markets, and by driving organic growth through the successful launch of new products in new categories. Page 4 of 5 Janus Global Life Sciences Fund 3Q14 PORTFOLIO COMMENTARY Please consider the charges, risks, expenses and investment objectives carefully before investing. For a prospectus or, if available, a summary prospectus containing this and other information, please call Janus at 877.33JANUS (52687) or download the file from janus.com/info. Read it carefully before you invest or send money. Past performance is no guarantee of future results. Call 877.33JANUS (52687) or visit janus.com/advisor/mutual-funds for current month-end performance. Discussion is based on performance of the Fund's "parent" share class (typically that with the longest history). As of 9/30/14 the top ten portfolio holdings of Janus Global Life Sciences Fund are: Gilead Sciences, Inc. (3.36%), Valeant Pharmaceuticals International, Inc. (U.S. Shares) (2.68%), Celgene Corp. (2.57%), Mallinckrodt PLC (2.56%), Johnson & Johnson (2.52%), Biogen Idec, Inc. (2.42%), Aetna, Inc. (2.37%), Pharmacyclics, Inc. (2.30%), Roche Holding A.G. (2.25%) and Actavis, Inc. (1.93%). There are no assurances that any Janus portfolio currently holds these securities or other securities mentioned in this commentary. The opinions are as of 9/30/14 and are subject to change at any time due to changes in market or economic conditions. Janus may have a business relationship with certain entities discussed. The comments should not be construed as a recommendation of individual holdings or market sectors, but as an illustration of broader themes. Security contribution to performance is measured by using an algorithm that multiplies the daily performance of each security with the previous day’s ending weight in the portfolio and is gross of advisory fees. Fixed income securities and certain equity securities, such as private placements and some share classes of equity securities, are excluded. A Fund’s performance may be affected by risks that include those associated with nondiversification, non-investment grade debt securities, highyield/high-risk securities, undervalued or overlooked companies, investments in specific industries or countries and potential conflicts of interest. Additional risks to a Fund may also include, but are not limited to, those associated with investing in foreign securities, emerging markets, initial public offerings, real estate investment trusts (REITs), derivatives, short sales, commodity-linked investments and companies with relatively small market capitalizations. Each Fund has different risks. 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An index is unmanaged and not available for direct investment; therefore its performance does not reflect the expenses associated with the active management of an actual portfolio. Funds distributed by Janus Distributors LLC C-0914-72654 01-15-15 188-15-16676 10/14 Page 5 of 5