Market and sector review
Global stock markets rose in March, making the first quarter of 2024 the best for the S&P 500 Index since 2019. Energy, utilities, materials and financials led the gains, while consumer discretionary and information technology lagged after strong performances in January and February. Healthcare slightly underperformed the overall market. Within healthcare, information technology, managed care, pharmaceuticals, and life sciences tools and services saw muted returns compared to healthcare facilities, services and supplies, which had a strong month.
The Company’s NAV was up 3.4% in February, ahead of the benchmark (MSCI All Country World Daily Net Total Return Health Care Index) which was up 2.4% for the month (both figures in sterling terms).
Macroeconomic data from the US painted a similar picture to February’s, with robust economic growth, employment holding up well and inflation running slightly ahead of expectations. However, the main surprise was the weakness in consumer spending, which was attributed to seasonality. In short, the investment community left its view on the path of the economy unchanged and still assumes the Federal Reserve will start easing its monetary policy in the coming months.
The upcoming reporting season is shaping up to be extremely interesting given how polarised positioning seems to be. Expectations for high levels of utilisation remain, with investors appearing to be heavily exposed to subsectors that benefit from medical volumes, such as facilities and healthcare equipment and supplies.
Looking at the near future, healthcare companies will start to disclose their results for 1Q24 in mid-April. The upcoming reporting season is shaping up to be extremely interesting given how polarised positioning seems to be. Expectations for high levels of utilisation remain, with investors appearing to be heavily exposed to subsectors that benefit from medical volumes, such as facilities and healthcare equipment and supplies. On the flipside, managed care remains in the shade as most anticipate profitability to be hit by higher medical costs. Finally, the debate is still very much wide open on when life sciences tools and services will rebound from the issues weighing on the industry over the past year, such as customer inventory destocking, China end-market softness and reduced biopharmaceutical funding.
Fund activity
The main positive contributors in March relative to the benchmark were DexCom, ConvaTec Group and Galderma Group.
A big overhang for DexCom’s equity story was the threat of Roche launching its own continuous glucose monitoring (CGM), however investors’ fears were allayed when Roche’s CGM was presented at a conference, as the device does not look competitive when compared with DexCom’s G7. Additionally, the company received approval for Stelo, an over-the-counter CGM which expands DexCom’s addressable market to patients with Type 2 diabetes who do not use insulin.
As for ConvaTec Group, the full-year results were the catalyst for a rally in the shares. After a strong finish to 2023, the company gave robust guidance for 2024 and reiterated its mid-term margin outlook.
Galderma Group, a company specialising in dermatological products with an interesting asset in the pipeline to treat atopic dermatitis and prurigo nodularis (a condition causing a severe itch of the skin), launched its IPO. It performed well on its first day of trading given an attractive valuation for a business expected to grow its revenues by double digits in the coming years.
Negative contributors were Novo Nordisk, Acadia Healthcare and Medley.
Novo Nordisk performed well on the back of continued enthusiasm around the obesity opportunity as laid out during its Capital Market Day. Acadia Healthcare sold off after its management team gave mixed messages around its Q1 performance at a broker conference, despite keeping the full-year guidance unchanged. There was no news concerning Medley, with the stock caught in the general weakness in Japanese healthcare and perhaps also on the back of the increased likelihood that the Bank of Japan will increase interest rates.
During the month, we initiated positions in Align Technology, Penumbra and UnitedHealth Group.
We see the valuation for Align Technology, a company specialising in products for orthodontic and restorative dental treatments, as offering an attractive entry point. Recent data suggests the underlying market for Align Technology is picking up and thus the guidance the company gave for mid-single digit revenue growth in 2024 may well prove to be conservative.
Penumbra offers innovative solutions to remove clots from blood vessels. We believe the significant selloff after disappointing Q4 results and a ‘light’ outlook is overdone and that consensus underestimates the operating leverage and the earning power of the business.
We also started a holding in the largest US managed care organisation, UnitedHealth Group, given its relative discount to the S&P 500 Index and a more sanguine view than the market on some of the concerns that have kept its shares under pressure.
Finally, we also participated in the IPO of Galderma Group as mentioned above. To fund these additions, we sold positions in Abbott Laboratories, EssilorLuxottica, Shockwave Medical and IQVIA Holdings.
Outlook
Despite strong underlying factors like innovation and the increased use of healthcare products and services, the healthcare industry has so far this year underperformed the broader market. We believe these positive trends, along with attractive prices across different company sizes, underpin our conviction that the healthcare sector is primed for a period of significant growth.
