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Polar Cap Global Healthcare caught out by COVID

Polar Cap Global Healthcare caught out by COVID – Polar Capital Global Healthcare has published results for the year ended 30 September 2020. The NAV return for the period was 14.1%, a bit behind the return on the benchmark index (MSCI ACWI Health Care Index) of 15.9%. As the discount widened, shareholders were left with a return of just 7.8%. The dividend for the period was 2.0p, down from 2.1p for the prior year.

The chairman says that the portfolio’s “overweight exposure in healthcare equipment was the main negative as we entered the crisis. Elective procedures were effectively stopped overnight, to prioritise care for COVID-19 patients, with little visibility over when they would recommence, let alone when they would reach pre-pandemic levels.”

Extract from the managers’ report

Positive contributors to performance for the financial year included Horizon Pharma, Medley, Bio-Rad Laboratories, Align Technology and ArgenX. Horizon Pharma’s performance reflects a very strong launch for one of the company’s lead assets, Tepezza for Thyroid Eye Disease, a condition in which the eye muscles, eyelids, tear glands and fatty tissues behind the eye become inflamed. Despite the COVID-19 pandemic, Tepezza has consistently out-stripped consensus expectations driving material revenue and earnings upgrades. Indeed, Tepezza’s impressive launch moved the management team to increase the drug’s peak sale potential to >$3bn from >$1bn previously. Medley has been a significant, positive contributor and has been held since the company’s IPO in December 2019. Medley runs one of Japan’s largest human resource recruitment systems in the medical and healthcare field but, perhaps more interesting, is the medical platform business which houses the largest telemedicine system in Japan known as CLINICS Telemedicine. Very much in its infancy, and accelerated by COVID-19, it is our view that the demand for telemedicine services in Japan will continue to grow substantially. Life sciences tools and services company, Bio-Rad Laboratories, has continued to execute operationally, driven by top-line momentum in the Life Science segment and steady operating margin progress. The stock also benefited from exposure to COVID-19 testing and from its 34.3% stake in German life sciences tools and services company, Sartorius, which has performed strongly in 2020. Sartorius’ success has stemmed from exposure to the bio-processing market which not only has strong, underlying fundamentals but has also received a short-term boost from demand for COVID-19 related projects.

Align Technology’s strong performance can be attributed to a better-than-expected post COVID-19 recovery as dental practices re-opened, with demand for the company’s clear aligners revitalised. Looking further forward, Align’s digital approach to dental treatment could be a catalyst for market share gains, offering customers the advantage of fewer inpractice visits with their dentist. This is something that has appeal in a COVID-19 world and should be sustainable once COVID-19 related restrictions ease. Belgian biotechnology company ArgenX also had a good year, with the biggest inflection coming after the company disclosed positive data for its lead pipeline asset, efgartigimod. Being investigated for the treatment of generalised Myasthenia Gravis (a chronic and debilitating autoimmune disease that causes severe muscle weakness), the product showed statistical significance with the primary endpoint and delivered fast and deep responses. We expect the company to submit its BLA (Biologics License Application) to the FDA in H2’20 followed by a Japanese filing in early 2021.

Negative contributors to performance for the financial year 2020 included Quotient, UnitedHealth Group, Intuitive Surgical, Bristol Myers Squibb and Smith & Nephew. Before the COVID-19 crisis the Quotient management team had consistently delivered on stated timelines and objectives, but two factors have adversely impacted performance in the last 12 months. Firstly, there have been financing overhangs which have been resolved for the time being. Secondly, COVID-19 related shutdowns delayed field trials for the company’s MosaiQ IH microarray, delays that have now been rectified as sites have re-opened and trials re-started. The Company’s under-weight position in UnitedHealth Group detracted from performance following the stock’s strong recovery during the first financial quarter of the reporting period. The managed healthcare sector was volatile during calendar 2019, with the sector’s fortunes very much tied to the campaign momentum of the more progressive Democratic nominees, namely Elizabeth Warren and Bernie Sanders. As a reminder, that positive campaign momentum compressed the valuation multiples of the managed healthcare sector as it raised the spectre of Medicare-For-All, a Government funded and run insurance programme that would potentially disintermediate the healthcare insurance industry. Once the more moderate Joe Biden started to gain momentum, that valuation pressure eased and the sector started to recover.

Medical device companies Intuitive Surgical and Smith & Nephew also detracted from performance during the reporting period, with both stocks suffering quite markedly during the March sell-off. One of the big challenges the healthcare industry faced during the first wave of the COVID-19 crisis was the cancellation of elective or non-urgent procedures, freeing up much-needed hospital capacity to care for COVID-19 patients. These cancellations impacted the medical device companies, with demand for their products and services materially impacted. Smith & Nephew manufactures hips and knees and was therefore directly exposed. Intuitive Surgical, a leading protagonist in the field of robotic surgery, was similarly affected by the downturn in patient volumes. Intuitive Surgical’s challenges were further compounded as the market started to question the strength of hospitals’ balance sheets and hence their appetite to purchase capital equipment such as Intuitive’s surgical robots. The portfolio was also under-weight in Bristol Myers Squibb during the first half of the 2020 financial year, at a time when the company delivered a steady stream of positive newsflow, primarily from its oncology division, that positively re-rated the stock.”

[Unfortunately for Polar Capital Global Healthcare it sits in a sector where just about every fund is a superstar. Only Syncona has lagged it in NAV terms and it is well ahead of the Polar fund in price terms. Frustratingly for the trust’s shareholders, in a period like this when healthcare stocks are rising and outperforming, the gearing provided by the trust’s zero dividend preference shares should have ensured a decent outcome. The trust is 7.8 percentage points behind its benchmark since the restructuring. The management team have their work cut out to claw that back.]

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