Monthly Commentary
October 2018

​The healthcare sector was a relative outperformer during the sharp market decline in October. The Company’s NAV declined by 5.1% during the month compared to a 4.9% decline for the benchmark (Morgan Stanley Global Healthcare Index). The large pharmaceutical sector was a relative safe haven with the NYSE Pharmaceutical Index declining only 1.2% (in sterling) during the month.  On the other hand, higher-risk, small-cap stocks – especially in the biotechnology sector – suffered a significant decline, with the Russell 2000 Healthcare Index falling 13.1% (in sterling) during October.

The October sell-off seems to have been driven by macroeconomic factors. The reverse in quantitative easing, which looks set to continue, and the prospect of rising interest rates triggered a risk-off response by investors. While stock markets in Europe and emerging markets have been faltering for some time, the decline in the US markets – especially in some of the high growth stocks – had a broader impact across the world. The question now is whether this is merely a correction in the middle of a bull market or is this the beginning of a bear market for equities. Our sense is that it is likely to be the former, but a lot depends on whether a rapid increase in US interest rates could precipitate a recession sooner than currently anticipated.

For healthcare, we think it is worth noting that in the past when the US Federal Reserve has reduced liquidity and manufacturer PMIs and producer prices indices have been at similar levels then healthcare has outperformed. This reflects the defensive growth nature of the healthcare industry and is driven by the larger healthcare and pharmaceutical companies. From an investment perspective, these large companies generally offer the potential of steady earnings growth, strong cash generation and, ultimately, compounding returns for investors – this is the focus of the Company’s portfolio.

Given the market turmoil, share price performance around quarterly earnings announcements has been unpredictable. In general, most of the large companies in the portfolio have delivered results that have been better or in line with expectation showing that fundamentals remain strong. This is the time of year when most large companies complete their budgets for 2019.  Over the next few weeks, a number of healthcare companies will host investor days and may provide initial financial guidance for next year that we think will boost investor sentiment.

In terms of fundamental newsflow during the month, we did have a disappointing announcement from Diurnal Group – a small UK biotechnology holding. The company reported disappointing data from its Phase III trial evaluating the use of its drug candidate, Chronocort, for the treatment of congenital adrenal hyperplasia (CAH). Chronocort failed to show a statistically significant improvement compared to traditional steroid treatment of CAH on the control of sex hormones over a 24-hour period, the primary endpoint of the study. Chronocort does appear to have some secondary benefits and we think the drug could still be approved although it is now likely to be priced at parity to a standard steroid regimen rather than at a premium. Nevertheless, the shares plummeted on the announcement – we are waiting for further details on the clinical data and continue to own the shares.

We made very few changes during the month – we try to avoid the temptation of chasing the market in a period of turmoil. We liked the fundamentals of the companies we owned six weeks ago and a rapid fall in the stock market does not necessarily change that investment opinion. Within the growth portfolio, which comprises the vast majority of the Company’s assets, we have made no changes during the month.

We have made a couple of changes in the innovation portfolio. We reduced our exposure to some of the high risk/reward US stocks and have reduced our positions in Viveve Medical and Autolus Therapeutics and sold our position in iRhythm Technologies. We have participated in the IPO of Renalytix AI – an AIM-listed digital health company that has an interesting technology and business model for the identification of diabetic patients at high risk of developing chronic kidney disease.

Following a period of sustained outperformance since the beginning of 2017, large-cap healthcare is now beginning to outperform small-cap – a trend that we believe could continue. Given the potential and economic uncertainties going into 2019, we think there is a strong case to be made for investing in large healthcare stocks that look set for continued growth, despite the economic environment, with valuations that look attractive on both a relative and absolute basis. 

Dan Mahony & Gareth Powell

Disclaimer

Important Information: This document is provided for the sole use of the intended recipient and is not a financial promotion it shall not and does not constitute an offer or solicitation of an offer to make an investment into any Fund or
Company managed by Polar Capital. It may not be reproduced in any form without the express permission of Polar Capital and is not intended for private investors. This document is only made available to professional clients and eligible counterparties. The law restricts distribution of this document in certain jurisdictions; therefore, it is the responsibility of the reader to inform themselves about and observe any such restrictions. It is the responsibility of any person/s in possession of this document to inform themselves of, and to observe, all applicable laws and regulations of any relevant jurisdiction. Polar Capital Global Healthcare Trust plc and its subsidiary, PCGH ZDP plc are investment companies with investment trust status and as such their shares are excluded from the FCA’s (Financial Conduct Authority’s) restrictions which apply to non-mainstream investment products. The Companies conduct their affairs and intend to continue to do so for the foreseeable future so that the exclusion continues to apply. It is not designed to contain information material to an investor’s decision to invest in Polar Capital Global Healthcare Trust plc or PCGH ZDP plc, Alternative Investment Funds under the Alternative Investment Fund Managers Directive 2011/61/EU (“AIFMD”) managed by Polar Capital LLP the appointed Alternative Investment Manager. In relation to each member state of the EEA (each a “Member State”) which has implemented the AIFMD, this document may only be distributed and shares may only be offered or placed in a Member State to the extent that (1) the Fund is permitted to be marketed to professional investors in the relevant Member State in accordance with AIFMD; or (2) this document may otherwise be lawfully distributed and the shares may otherwise be lawfully offered or placed in that Member State (including at the initiative of the investor). As at the date of this document, the Companies have been approved, notified or registered in accordance with the AIFMD for marketing to professional investors in Ireland only. The Companies have not been approved notified or registered in accordance with the AIFMD for marketing to professional investors in any other member state of the EEA. However, additional such approval may be sought or additional such notification or registration may be made in the future. Therefore this document is only transmitted to an investor in an EEA Member State at such investor’s own initiative. SUCH INFORMATION, INCLUDING RELEVANT RISK FACTORS, IS CONTAINED IN THE COMPANIES OFFERING DOCUMENTS WHICH MUST BE READ BY ANY PROSPECTIVE INVESTOR.

Statements/Opinions/Views: All opinions and estimates constitute the best judgment of Polar Capital as of the date hereof, but are subject to change without notice, and do not necessarily represent the views of Polar Capital. This material does not constitute legal or accounting advice; readers should contact their legal and accounting professionals for such information. All sources are Polar Capital unless otherwise stated.

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Benchmarks: The following benchmark index is used: MSCI All Country World Index/Healthcare. This benchmark is generally considered to be representative of the Healthcare Equity universe. This benchmark is a broad-based index which is used for comparative/illustrative purposes only and has been selected as it is well known and is easily recognizable by investors. Please refer to www.mscibarra.com for further information on this index. Comparisons to benchmarks have limitations as benchmarks volatility and other material characteristics that may differ from the Companies. Security holdings, industry weightings and asset allocation made for the Companies may differ significantly from the benchmark.  Accordingly, investment results and volatility of the Companies may differ from those of the benchmark. The indices noted in this document are unmanaged, unavailable for direct investment, and are not subject to management fees, transaction costs or other types of expenses that the Companies may incur. The performance of the indices reflects reinvestment of dividends and, where applicable, capital gain distributions. Therefore, investors should carefully consider these limitations and differences when evaluating the comparative benchmark data performance. Information regarding indices is included merely to show general trends in the periods indicated and is not intended to imply that the Companies was similar to the indices in composition or risk.

Regulatory Status: Polar Capital LLP is a limited liability partnership number OC314700. It is authorised and regulated by the UK Financial Conduct Authority (“FCA”) and is registered as an investment adviser with the US Securities & Exchange Commission (“SEC”). A list of members is open to inspection at the registered office, 16 Palace Street, London, SW1E 5JD. FCA authorised and regulated managers are expected to write to investors in funds they manage with details of any side letters they have entered into. The FCA considers a side letter to be an arrangement known to the Investment Manager which can reasonably be expected to provide one investor with more materially favourable rights, than those afforded to other investors. These rights may, for example, include enhanced redemption rights, capacity commitments or the provision of portfolio transparency information which are not generally available. The Companies and the Investment Manager are not aware of, or party to, any such arrangement whereby an investor has any preferential redemption rights. However, in exceptional circumstances, such as where an investor seeds a new fund or expresses a wish to invest in the Companies over time, certain investors have been or may be provided with portfolio transparency information and/or capacity commitments which are not generally available. Investors who have any questions concerning side letters or related arrangements should contact the Polar Capital Desk at the Registrar on 0800 876 6889. The Companies are prepared to instruct the custodian of the Companies, upon request, to make available to investors portfolio custody position balance reports monthly in arrears.

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Forecasts: References to future returns are not promises or estimates of actual returns Polar Capital may achieve. Forecasts contained herein are for illustrative purposes only and does not constitute advice or a recommendation. Forecasts are based upon subjective estimates and assumptions about circumstances and events that have not and may not take place. 

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Allocations: The strategy allocation percentages set forth in this document are estimates and actual percentages may vary from time-to-time. The types of investments presented herein will not always have the same comparable risks and returns. Please see the private placement memorandum or prospectus for a description of the investment allocations as well as the risks associated therewith. Please note that the Companies may elect to invest assets in different investment sectors from those depicted herein, which may entail additional and/or different risks. Performance of the Companies is dependent on the Investment Manager’s ability to identify and access appropriate investments, and balance assets to maximize return to the Companies while minimizing its risk. The actual investments in the Companies may or may not be the same or in the same proportion as those shown herein. 

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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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Please remember that past performance of an investment is not necessarily a guide to future performance. The value of an investment and the income from it can fall as well as rise as a result of market and currency fluctuations and you may not get back the amount originally invested. The market value of the shares of PCGH and the shares of PCGH ZDP PLC may not reflect the underlying net asset value of the investments held by Polar Capital Global Healthcare Trust.

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