Monthly Commentary
December 2020

​Global equity markets finished the year strongly, with the broader markets modestly outperforming the healthcare sector. Following the encouraging updates from the COVID-19 vaccines in November, the positive momentum continued into December with the market focussing more on stimulus measures, especially in the US. Looking at the healthcare subsectors, healthcare facilities and supplies performed strongly whereas the distributors and managed subsector lagged. December also witnessed more enthusiasm for small and mid-caps with the Russell 2000 Index up nearly 9% for the month (+45% for FY20). The Company’s NAV increased 0.1% in December, which was behind the benchmark (Morgan Stanley Global Healthcare Index) which was up 1.1%.

Following the positive Phase III data released in early November, the US FDA gave Emergency Use Authorisation to both Pfizer/BioNTech and Moderna’s COVID-19 vaccines in December. The UK’s Medicines and Healthcare products Regulatory Agency (the MHRA) also approved the AstraZeneca/Oxford University vaccine, authorising two full doses with the second dose to be administered 4-12 weeks after the first. The challenge for healthcare systems globally now is one of distribution given the Pfizer and Moderna vaccines require super-chilled storage (-70o C and -20oC, respectively). As a reminder, the AstraZeneca vaccine can be stored and transported at normal refrigerated temperatures of 2oC to 8oC, offering potential advantages, especially in some emerging markets. As mentioned above, expectations for a stimulus package further buoyed the markets in December with Congress approving a $900bn package designed to deliver financial aid to millions of families and businesses. The package was paired with a $1.4trn spending bill to fund the federal government until September 2021.

Outside COVID-19 updates, one of the biggest surprises during the reporting period was AstraZeneca’s decision to enter into a definitive agreement to acquire US biotechnology company, Alexion. Through a combination of debt and equity the total consideration on announcement was $39bn. Prima facie, the deal makes financial sense (double-digit core EPS accretion for the first three years), adds much-needed cashflow to invest in the burgeoning pipeline and offers AstraZeneca the opportunity to start growing its dividend again. To be comfortable with the deal, however, the market will want assurance that Alexion does not depress AstraZeneca’s best-in-class revenue growth profile. That comfort might not be immediately available given biosimilar competition to Alexion’s key franchise is several years away and AstraZeneca’s ability to generate sales synergies will also take time to bear fruit.

Koninklijke Philips also announced an acquisition in December, looking to spend $2.8bn on NASDAQ-listed BioTelemetry, a provider of cardiac diagnostics and monitoring solutions used to identify heart rhythm disorders. Philips’ management is hoping that BioTelemetry’s industry-leading position will strengthen Philips’ presence in the large and growing ambulatory home monitoring market. Looking at the financials, the acquisition is expected to be accretive to sales growth and adjusted EBITA margins and is expected to generate a ROIC that exceeds WACC in year five.

December was also a busy month in terms of investor events with Agilent Technologies, Alnylam Pharmaceuticals, Bio-Rad Laboratories, Centene Corporation, Eli Lilly & Co, Koninklijke Philips, Swedish Orphan Biovitrum (SOBI) and Syneos Health all hosting events, many of which included forward-looking statements. With the possible exception of Centene and SOBI, all offered guidance that either met or exceeded consensus expectations. Eli Lilly & Co.’s comments were especially comforting given some of the near-term pressures facing the pharmaceuticals industry, pressures that include price competition to secure formulary access and a declining commercial mix in the US due to rising unemployment.

Positive contributors from active positions were AdaptHealth, Siemens Healthineers and Chugai Pharmaceuticals. The performance of home-health provider AdaptHealth reflects not just strong industry dynamics but also a reward for an acquisition that looks like it will accelerate near and medium-term growth. Siemens Healthineers’ strength reflects greater appreciation for the quality of its imaging business and soon-to-be-acquired radiation oncology business via Varian Medical Systems, coupled with near-term tailwinds for its diagnostics unit. Chugai Pharmaceuticals has recovered from a marked derating heading into the US elections in November, presumably as the market worried about the potential implications of a Democratic blue wave.

Negative contributors from active positions were Quotient, Medley and Sartorius. Quotient lagged after announcing a regulatory delay in the US which, while disappointing, does not change the planned commercial timelines for its key products. There was no material news flow for Medley with weakness likely driven by profit taking as the market shifted to the opening-up trade driven by the positive Phase III COVID-19 vaccine data. With regards Sartorius, the success of the Pfizer and Moderna vaccines disappointed some given that the utility of the company’s technologies is more geared to traditional vaccines such as the one from AstraZeneca/Oxford University.

A few changes were made to the portfolio in December via the additions of Alnylam Pharmaceuticals, Cytokinetics, Encompass Health, PRAH Health Sciences and SOBI. Alnylam Pharmaceuticals has a leading platform using a technology that silences or disables the production of genes that cause specific disease. Cytokinetics, a US-based biotech company, is developing an exciting cardiovascular medicine in mid-stage clinical trials which, if successful, should generate significant upside for the stock. Encompass Health is exploring strategic alternatives for its home health/hospice business, a decision that has the potential to unlock significant value to shareholders.  PRAH Health Sciences was added to the portfolio to reflect our positive view on the outsourcing of clinical trials, especially among biotechnology companies that enjoyed a very strong year of financing in 2020. SOBI suffered a marked derating in October following disappointing Phase III data for Avatrombopag, a drug for the treatment of chemotherapy-induced thrombocytopenia (abnormally low levels of blood platelets). With a rich stream of news flow expected in 2021, the risk/reward looks compelling at these levels.

The purchases were funded by sales of Danish pharmaceutical company Novo Nordisk and biotechnology companies Argenx and Exelixis. Novo Nordisk remains a high-quality participant in the field of diabetes but competitive news flow, including that from Eli Lilly, could temper near-term enthusiasm. We took profits in Argenx, and Exelixis was sold due to concerns around the strength of its pipeline relative to patent expiry of its key revenue generating product Cabometyx.

2020 was an extraordinary year for so many, with the human and financial suffering from COVID-19 almost impossible to comprehend. However, the authorisations to start administering the COVID-19 vaccines late in the year capped a remarkable journey of bravery, determination, innovation, co-operation and cutting-edge science. That progress is the basis of optimism as we look at 2021 and beyond. The healthcare industry continues to push scientific boundaries, an important observation, but the upbeat investor days in December also offer a timely reminder that pushing those scientific boundaries can translate into commercial success and exciting investment opportunities.

James Douglas & Gareth Powell

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Launched in 2010, Polar Capital Global Healthcare Trust plc (“PCGH”) has grown to become a leading European investor with a multi-cycle track record. Managed by a team of dedicated healthcare specialists, the PCGH aims to maximise long-term capital growth by investing in a diversified portfolio of healthcare companies from around the world. The managers’ core belief in rigorous fundamental analysis, and being unconstrained by not following a benchmark, enables PCGH to deliver global equity market outperformance through exposure to a universe of over 3,000 companies.

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