Market and sector review
Global equity markets ended October in negative territory, with the earnings reports for Q3 the leading catalyst for market moves. Healthcare struggled over the month, finishing at the bottom of the pile with regard to sector performance. Within healthcare, the best performing subsectors were healthcare distributors, biotechnology and healthcare equipment, while life sciences tools and services, healthcare facilities, healthcare services, managed care and healthcare supplies all underperformed significantly.
October was fairly light in terms of macroeconomic news flow. The US economic picture is unchanged, with the labour market holding well, inflation under control and growth slowing but still in expansionary territory. Similarly, outside the US the economic situation is stable though the largest European economy, Germany, is likely to experience a recession in the coming quarters, while early green shoots are appearing in China, as signalled by the October manufacturing PMI nudging above 50 for the first time in several months.
As indicated above, numerous companies reported their financial results for Q3 in October. As far as healthcare is concerned, the earnings results were pretty dynamic and generated considerable volatility. By and large, life sciences tools and services companies posted financial results in line with consensus, but underwhelming remarks on the pace of recovery in the industry’s underlying markets, especially in China, led investors to contemplate lower growth in 2025 than previously anticipated.
The US economic picture is unchanged, with the labour market holding well, inflation under control and growth slowing but still in expansionary territory.
One common theme that characterised these quarterly results was that of utilisation. Patient volumes remained elevated as illustrated by strong medical devices and facilities results and by elevated medical cost trends for some managed care organisations. Biopharmaceuticals companies’ quarterly earnings were mixed at best, a frustration following what was an upbeat Q2.
Fund performance
The Company’s NAV was up 0.3% in October, ahead of its benchmark, the MSCI All Country World Daily Net Total Return Health Care Index, which was down 0.7% (in sterling terms).
The main positive contributors in October relative to the benchmark were Penumbra, Sandoz Group and UCB.
Penumbra delivered an encouraging set of Q3 financial results late in the month, driven primarily by strong procedural volumes in the US. With more products in the pipeline, optimism for a strong showing in 2025 is building.
Swiss generic company Sandoz Group delivered strong Q3 sales with the company’s biosimilars franchise leading the way. Just as importantly, the company reiterated its FY24 margin targets, allaying some of the fears in the market.
There was no thesis-changing news during the period for UCB, the market continuing to reward the company for the positive momentum in its autoimmune and rare diseases franchises.
Negative contributors in the period under review were Acadia Healthcare, Bruker and Bristol Myers Squibb.
Acadia Healthcare delivered a strong set of Q3 financial results but, unfortunately, tempered enthusiasm with lacklustre guidance for Q4. On the Q3 earnings call the management team pointed to the recent negative press articles adversely impacting referral volumes into the company’s behavioural health facilities. Although hopefully transient, the market appears to be pricing in a greater sense of permanency associated with the challenges.
Life sciences tools and services companies Bruker and Avantor struggled in October, as did their peer group. Specific to Bruker are concerns that China continues to be challenged and the company’s customers in the pharmaceuticals industry remain cautious with their decision-making and, ultimately, spending.
The Trust had no exposure to Bristol Myers Squibb in October, with the current positive share price performance reflecting greater enthusiasm for the company’s recently-launched therapies.
We initiated a position in Danish biotechnology company H Lundbeck, a decision driven primarily by the company’s strong commercial execution in the areas of migraine, agitation associated with Alzheimer’s disease and depression. The company also surprised the market by announcing its intention to acquire US biotechnology company Longboard Pharmaceuticals for a consideration of $2.6bn. If successful, the proposed acquisition would add a highly innovative and complementary product in late-stage development for developmental and epileptic encephalopathies – an area of high unmet medical need. We also exited our position in contract research organisation ICON.
Outlook
The Q3 earnings season was certainly a challenging one, leading to what felt like extreme over-reactions in both directions. Once the dust settles, however, the market can once again focus on the healthcare industry’s strong fundamentals, which are built on high levels of innovation and continuing, elevated levels of demand from patients and consumers.
