April was a difficult month for global equity markets. Economically sensitive areas of the market were the most affected, with small-cap stocks and less defensive sectors such as real estate, information technology and consumer discretionary all performing poorly. Healthcare’s returns during the month were, by and large, in line with the overall market. Within healthcare, the most resilient areas were distributors, managed care and pharmaceuticals, while biotechnology, healthcare facilities, healthcare supplies and equipment were all weak.
The Company’s NAV was down 4.0% in April, behind the benchmark (MSCI All Country World Daily Net Total Return Health Care Index) which was down 3.0% for the month (both figures in sterling terms).
Once again, the global macroeconomic situation was at the forefront of investors’ minds. As in previous months, inflation data from the US continues to run ahead of expectations, but the biggest surprise was the first quarter GDP growth statistics, which came in significantly below consensus and showed a pronounced sequential slowdown. Also, consumer confidence deteriorated despite a robust labour market. If these trends persist, the Federal Reserve will have failed to achieve the soft landing many had expected at the start of the year. Instead, the debate around stagflation is becoming more prevalent, a scenario that would strongly favour large-cap, defensive stocks
April marked the start of reporting season for Q1 2024. Starting with managed care, some companies talked to a moderation of the high Medicare utilisation they had experienced previously, disclosing medical loss ratios (a measure of the percentage of premia spent to provide care to members) in line with or better than consensus. However, they also reiterated their confidence in their ability to navigate a less benign interest rate environment. Unsurprisingly, the market reacted positively to these comments.
Most pharmaceutical companies that reported during the month had a good start to the year (historically the first quarter tends to be weak for the subsector), but investors’ reaction to the numbers were mixed. While medical device companies reported strong revenue growth and earnings, results were generally not rewarded by investors, whose expectations were elevated. Finally, the life sciences tools and services industry had more challenging Q1 results as it continues to grapple with customer destocking and soft demand for equipment. However, companies generally reiterated their outlook for the year, which was enough to offer temporary relief.
Fund activity
The main positive contributors in April relative to the benchmark were UCB, Swedish Orphan Biovitrum and Johnson & Johnson. UCB's strong performance primarily reflects ongoing enthusiasm for recently launched psoriasis drug Bimzlex which appears to be enjoying a strong launch in the US. Swedish Orphan Biovitrum delivered a solid set of 1Q24 financials and also received a positive opinion from the European regulator for key pipeline asset efanesoctocog alfa for the treatment of haemophilia A. The Trust had no exposure to Johnson & Johnson during the period under review, with the stock struggling after an underwhelming 1Q24 financial update.
Negative contributors in the period under review were Bio-Rad Laboratories, AstraZeneca and Novo Nordisk. There was no operational news from Bio-Rad Laboratories during April, although the company did announce that COO Andrew Last is set to retire in September. In isolation, this is probably not that newsworthy but the update follows a number of other senior resignations in recent months. The Fund had no exposure to AstraZeneca, a stock that performed well following an upbeat set of 1Q24 financial results and positive clinical trial news flow. The Trust had no exposure to Novo Nordisk during April, a stock that continues to outperform, driven by enthusiasm for the company’s obesity assets.
Utilisation remains elevated, a positive dynamic for medical device companies and facilities alike, but it is sequential momentum that will likely be the key driver for the remainder of 2024.
During the month we added positions in Amgen and Bruker. US-based biotechnology company Amgen has a rich stream of news flow over the next months which, if positive, could expand the company’s multiple. The company has mid- to late-stage assets in areas such as immunology and rare diseases but it is the phase two data expected in late 2024 for the company’s obesity asset, AMG-133, that is grabbing the most attention. Bruker, a manufacturer of high-performance scientific instruments and analytical and diagnostic solutions, was added because of its attractive valuation, underappreciated ability to drive operational leverage and strong growth outlook supported by best-in-class technology, a substantial order backlog and resilient end markets. To fund these additions, we sold positions in Coloplast, Galderma Group and Humana.
Outlook
While we continue to believe the fundamentals for the industry remain very strong, there is much to ponder as we think about the remainder of 2024. Utilisation remains elevated, a positive dynamic for medical device companies and facilities alike, but it is sequential momentum that will likely be the key driver for the remainder of 2024. Focussing on the same theme, elevated levels of utilisation have been a challenge for managed care companies, especially those with exposure to US seniors. Importantly, however, the recent earnings season has highlighted that different companies have focussed on different objectives, i.e. membership share gains versus pricing for margin. It is that differential approach that could yield interesting investment opportunities.
Last, but not least, emerging markets continue to be an important source of long-term growth given the growth potential of their end markets. India has been particularly buoyant of late, but it is out-of-favour China that perhaps offers the greatest source of upside.
