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Worldwide Healthcare changes fee arrangements

Worldwide Healthcare says its net asset value total return was +21.2% over the six months ended 30 September, outperforming the benchmark, the MSCI World Health Care Index measured on a net total return, sterling adjusted basis, which returned +17.3%. The share price, with a total return of +24.4%, also outperformed the benchmark over this period. The discount as at 30 September 2016 was 4.8%. The Board has declared an unchanged first interim dividend of 6.5p per share, for the year to 31 March 2017. They say that this strong performance was, in part, due to the sharp fall in sterling (amounting to 9.6% against the U.S.$ over the period) following the outcome of the EU referendum in the UK held in June.

The Board has announced some amendments to the fee arrangements between the company and Frostrow. Under the new arrangements Frostrow will no longer receive a performance fee and the annual management fee payable to Frostrow will be amended. These new arrangements become effective on 1 April 2017 and further details are provided in note 3 to the Financial Statements. Frostrow will continue to be entitled to receive any performance fee that crystallises during the year ending 31 March 2018 in respect of cumulative outperformance attained by 31 March 2017. The fees payable to OrbiMed remain unchanged.

Sources of both absolute and relative contribution came from all healthcare subsectors with both subsector allocation and stock selection contributing positively. The lone exception was large capitalisation pharmaceuticals. Whilst stock selection resulted in positive absolute contribution, the significant underweight positioning in large capitalisation pharmaceutical stocks resulted in negative alpha generation, reflective of a notable move up in share prices for this group in the period. However, this relative drag was more than offset by other sectors, including biotechnology (allocation), medical devices (allocation and stock selection), and life science tools (stock selection). The top individual contributors, detailed below, are quite representative of this.

MAJOR CONTRIBUTORS TO PERFORMANCE

Investor sentiment for the diagnostic screening company, Exact Sciences, was at an all-time low heading into the reported period. However, the stock significantly re-rated after a series of catalysts created a short squeeze and shifted the fundamentals from very negative to quite positive. First, the company’s main product, Cologuard, a screening test for the early detection of colorectal cancer, received a positive rating decision from the U.S. Preventive Services Task Force. The positive rating was a surprise reversal from the agency’s preliminary decision which was viewed equivocal in terms of its guidance in the primary care market. In addition to the favourable rating change, Cologuard received numerous positive coverage decisions from commercial payers paving a pathway towards reimbursement. Additionally, the company reported better than expected revenues and testing volumes in the second quarter, a record setting performance. Finally, albeit dismissed by the sell side, there was unconfirmed speculation of a potential acquisition by Illumina that drove the stock higher. Overall, the stock tripled in the six-month period, before some profit taking was observed in September.

Boston Scientific develops implantable medical devices, primarily for use in cardiology, electrophysiology, peripheral vascular, neurovascular, endoscopic, urologic, gynaecologic, and pain management procedures. A rapid uptake of several new product launches, share gains in key end markets and overall improvement in US procedure volumes has led to a sizeable earnings upside for the company in the first half of 2016. Moreover, the company settled key litigation with the IRS on attractive terms, thus improving the outlook for the company’s cash balances in future years. This confluence of events led the stock higher by over 25% (in local currency) during the period.

Wright Medical develops joint replacement devices, primarily for shoulder, foot and ankle, trauma and sports medicine procedures, as well as orthobiologic products. After completing the acquisition of Tonier late last year, the company’s integration efforts tracked ahead of schedule, allowing it to recognise greater cost synergies and less revenue inefficiencies than originally anticipated. Additionally, the company launched its key new orthobiologic product, AUGMENT, and physician adoption and retention rates were solid in the period. The net result was impressive earnings outperformance, as seen in second quarter results, both on the sales line and more notably on the adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) line given the sizable incremental margins associated with the higher sales.

Intuitive Surgical develops robotic systems and associated instrument sets for use in a broad array of surgical procedures. Whilst new system placements were tracking roughly in line with analyst expectations, robotic procedure volumes and subsequently the use of instrument sets grew dramatically faster. Moreover, pending competitor launches were delayed further and appeared less robust than originally anticipated. This greatly improved the longer-term outlook for Intuitive. Lastly, visibility improved for the company’s new robotic applications, such as hernia repair, which increased the size of the company’s total addressable procedure market.

Investor sentiment has waxed and waned over the prospects for the Chicago-based global drug giant, Abbvie. Bulls have touted above average growth prospects and rock bottom valuation. Bears have cited earnings concentration risk and a biosimilar overhang. In the six-month period, the bulls have surged ahead as the company has posted better than expected revenues and earnings growth, consummated a high risk, high reward acquisition (in the form of Stemcentryx), and has begun to provide near and long term insight into their strategy on how they plan to stave off biosimilars to their flagship mega-blockbuster, Humira (adalimumab). Humira, now the world’s largest selling pharmaceutical product with sales expected to reach U.S. $16 billion in 2016, is still growing at a double-digit rate. Investor debate over the fate of the putative biosimilar impact to Humira sales by 2020 continues unabated.

MAJOR DETRACTORS FROM PERFORMANCE

The largest detractors from performance in the period reflected mostly idiosyncratic events to individual stocks rather than any common thematic occurrence.

The share price in Ono Pharmaceutical, practically doubled in 2015 and reached an all-time high in April 2016, following the development and launch in Japan of one of the most important cancer drugs in recent memory, Opdivo (nivolumab). Having attained blockbuster status in Japan (sales in excess of U.S. $1 billion) investor concerns arose about the potential for an egregious price cut, prompted by government officials given its unexpected and rapid success, most notably in the treatment of second line lung cancer. Concerns also arose over the uptake of Opdivo when reported patient numbers decelerated during the period. Finally, in August, Ono and its partner, Bristol-Myers Squibb, announced the complete failure of Opdivo in a late stage clinical trial for the treatment of front line lung cancer. The failure of this trial was completely unexpected. Opdivo had already garnered 9 distinct U.S. Food and Drug Administration (FDA) approvals, including two in lung cancer (second line), and had never failed in any previous pivotal clinical trials. Both stocks collapsed in response, with Ono’s share price now half of its 52-week high.

ImmunoGen is a small capitalisation biotechnology company that develops specialised antibody-drug conjugates, or “ADC’s” (complex molecules composed of an antibody linked to a drug, representing a two-in-one approach in fighting diseases). The company’s stock fell on two occasions in the six-month period. First, it announced a revised development programme for its lead ADC, mirvetuximab soravtansine, for the treatment of ovarian cancer after updated Phase I data showed a lower response rate than previously presented. his increased investor angst over the perceived “riskier” development strategy for the compound with a less robust efficacy profile. The stock sank further after the company announced its plan to raise capital by selling convertible notes. The share price fell by over two-thirds (in local currency) and never recovered, finishing the six-month period on a low.

One of the global leaders in the fight against diabetes, Danish-drug maker Novo Nordisk, felt the pinch of U.S. pricing pressure in the reported period. Managed care companies, gate keepers of drug access in the U.S. healthcare system, have been targeting chronic disease states, in which there are multiple competitors, to drive up rebates for drugs they procure for their members. Respiratory, cardiovascular, and now diabetes drugs have all taken hits. After eschewing the threat in 2014 and 2015, management at Novo Nordisk finally capitulated and lowered long term growth guidance, citing U.S. pricing pressure as the culprit, mainly in the area of novel insulins, a key franchise for the company. The share price fell by approximately 20% (in local currency) in the period.

Dynavax Technologies is a niche biotechnology company that uses its proprietary technologies in immune modulation to treat a variety of diseases. The company’s share price drifted lower in the period due to a series of regulatory setbacks which added uncertainty to the perceived approvability of their lead vaccine, Heplisav, a novel vaccine for the prevention of hepatitis B. In April, the company was notified of a three-month extension to the approval deadline by the FDA for Heplisav due to the requirement to submit individual trial data sets, which constituted a major amendment to their filing. Moreover, the FDA subsequently called for an Advisory Committee to review the drug prior to approval, which added additional scrutiny to the application. Its shares weakened even further when FDA did an about-face and announced in September the scheduled Advisory Committee was cancelled, leading investors to believe that this chain of events was evidence that numerous issues were left outstanding in the Heplisav application and that approval was unlikely.

The share price for Allergan has undergone a revolution over the past 5 years as the company has hotly pursued acquisition after acquisition with nearly flawless execution. Its ultimate deal was the proposed combination with industry giant, Pfizer, announced in November 2015. However, the stock fell after both companies announced the termination of the deal in April 2016. The termination was the result of regulation changes by the U.S. Department of Treasury that appeared to specifically target the Allergan-Pfizer inversion transaction. The sharp correction in U.S.-focused specialty pharmaceutical stocks, in general, was also a contributor to the sell-off.

WWH : Worldwide Healthcare changes fee arrangements

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