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BBH’s first annual report delivers positive news

BBH’s first annual report delivers positive news- BBH has announced results for the year ended 30 November 2017, over the period the  total return was 19.3%, an outperformance of 4.9% versus the benchmark (the MSCI World Healthcare Total Return Index in GBP). The total return for shareholders was 20.5%. Total dividends for the year were 3.5p. For the financial year ending 30 November 2018, the Board is proposing the total dividend will be 4.0p, 3.5% of the net asset value of 115.43p as at 30 November 2017.

The Board is investigating the possibility of a new placing programme and publishing a prospectus in due course, subject to market conditions. The continued issuance has been possible because the company consistently traded at a premium to NAV over the financial period. The average premium was 2.3% over the financial period.

The manager disclosed the top five and bottom five performers in terms of contribution to NAV in the table below, along with their share price evolution in local currency and sterling over the financial period:

Top 5

Bottom 5

Company

Perf. (local currency)

Perf. (GBP)

Company

Perf. (local currency)

Perf. (GBP)

Align Technology (Dental)

+181.9%

+162.6%

Teva (Specialty Pharma)

-59.5%

-62.3%

Anthem (Managed Care)

+61.9%

+50.7%

Celgene (Biotech)

-15.2%

-21.0%

Intuitive Surgical (Med-Tech)

+89.7%

+76.7%

Mallinckrodt (Specialty Pharma)

-58.9%

-61.7%

Alnylam (Biotech)

+223.6%

+201.4%

Genmark (Diagnostics)

-60.8%

-63.5%

Illumina (Diagnostics)

+80.1%

+67.7%

Shire (Pharma)

-19.6%

-19.6%

The managers reported that the highest returns came from some of the portfolio’s core / largest holdings held on a multi-year time-frame.  Alnylam was the exception here;  the position was exited during September and October because the stock was (and continues to) trade at a valuation that the managers cannot rationalise. Align, Intuitive and Illumina typify the optimisation of essential healthcare processes through the integration of cutting-edge software and hardware in applications that can get better through incremental experience-driven improvements to the package. These are also market opportunities where incumbency offers material protection from a share perspective. When asked what the managers think the future of healthcare might look like, the cite companies like Alnylam as the perfect examples.

Celgene and Genmark are both companies where the managers feel strongly that the market has over-reacted to admittedly disappointing news, leaving them with a valuation scenario that seems to discount an overly bearish outlook and they are happy to hold both. In contrast, Shire, Mallinckrodt and Teva are somewhat different situations.

Mallinckrodt and Teva are in the benighted specialty pharma category and all three stocks were bought as “value” propositions where the managers felt that the market was discounting an overly bearish scenario (Mallinckrodt), or that all of the risks were priced in (Shire and Teva). As noted previously, investors seem to have developed a particular risk aversion to perceived earnings risk, especially around high leverage, product sales concentration and costly treatment in categories such as rare diseases.

Many of the specialty pharma companies include all three elements and thus fell very much out of favour in late 2016 as the Valeant equity story unravelled. Shire too has quite a lot of debt. As ever though, generalisations can be unfair and the managers felt there were some good investment opportunities to be found in the wreckage of this market implosion. However, the apocryphal aphorism that the market can remain irrational longer than one can remain solvent seems apposite in the case of Mallinckrodt. What changed during 2017? Exiting its scheduled generic business looks more challenging and any interim step will compound reliance on its lead product Acthar, limiting near-term strategic options to unlock value, so the managers have moved on.

Teva was a complex situation where it transpired that management (now replaced) did not have a handle on the state of the business and so the managers’ due diligence proved to be unreliable. They also took the view that a dividend cut was priced in, but that was clearly not the case. Here, though, the managers have confidence in the new management team to turn things around and they are hopeful of a decent positive return on the position over the medium-term. Shire is probably somewhere between the two – too cheap if one is objective, but with some understandable questions around management given how the story has evolved following the rejection of the Abbvie bid in late 2014. Nevertheless, the managers still see multiple avenues to a re-rating and are thus happy to hold the shares.

BBH :BBH’s first annual report delivers positive news

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