Worldwide Healthcare Trust has announced results covering the 12 months ended 31 March 2021. It was a great year for the trust, especially given the backdrop of COVID-19. The NAV total return for the period was 30.0%, well-ahead of the return on the trust’s benchmark (MSCI World Health Care Index) of 16.0%. The shares did move from trading on a small premium to trading on a small discount but shareholders still saw a total return of 27.4% for the year. The statement also notes that these returns were achieved despite a headwind from currency movements. The dollar fell against the pound by 11.3% over the period.
The dividend fell from 25p to 22p but this is only a small part of investors’ returns from this stock.
The popularity of the trust saw it expand by issuing a whopping £38.6m worth of new shares over the year. A further £27.9m has been issued since 31 March. A new prospectus is being published to facilitate the issue of up to 20m new shares.
The manager is building up a sizeable performance fee. At the end of the period, the amount accrued was £31.7m. This will only be paid out if the fund is still ahead of its benchmark to the same extent at 31 March 2022.
Extract from the managers’ report
“For the financial year, the largest sub-sector contribution came from biotechnology stocks, contributing over +800 basis points of both absolute and excess return. This contribution can be further divided into contribution from small/mid-capitalisation companies (70%) and large capitalisation (30%). This followed an unprecedented year of drug discovery and development from the biotechnology sector in 2020, coupled with positive investor sentiment that spilled over from the industry’s impressive response to the COVID-19 pandemic.
Another large contribution came from emerging market stocks, contributing over +650 basis points of both absolute and excess return. These large returns were a function of both allocation and stock selection. Our two-pronged approach proved very successful in the financial year. First, we identified and selectively invested in blue-chip leaders across various healthcare sub-sectors in China which enabled the Company to capitalize on the many macro-growth trends. Second, we focused on the exploding initial public offering (IPO) trend in biotechnology and healthcare stocks in China which created a multitude of new investment opportunities.
Notable contribution also came from pharmaceuticals, specifically specialty pharmaceuticals, with nearly +350 basis points of absolute return, which in turn contributed over +275 basis points of excess return. A final sub-sector of import was life science tools which contributed over +550 basis points of absolute return and over +200 basis points of excess return. Again, these returns were a function of both allocation and stock selection.
CONTRIBUTION BY SUB-SECTOR
We are global investors. Our universe of coverage spans not only all healthcare sub-sectors, but all geographies, from the US to the UK, Europe, Japan, and Emerging Markets. We have an important overweight in biotechnology stocks, especially small/mid-capitalisation and the preponderance of them are located in the US. This is also partially true of some other sub-sectors, such as managed care and life science tools companies. It follows, then, that contribution follows this distribution, at least directionally.
KEY CONTRIBUTORS TO PERFORMANCE
A key investment strategy for the Company is to seek out innovation. The healthcare industry is the midst of a golden era of innovation that is generating a metamorphosis of how medicines are created, how physicians practice, and how patients are treated. The largest contributors to performance for the financial year are very emblematic of that mantra. Perhaps more interesting, each of the companies below represent a different sub-sector: diagnostics, specialty pharmaceuticals, emerging biotechnology, large biotechnology, and emerging markets.
Natera is a diagnostics company that is an industry leader in non-invasive prenatal testing (NIPT) and other genetic testing. NIPT is a simple blood draw that allows pregnant mothers to discover any fetal genetic disorders or conditions early on during gestation. Natera’s share price posted strong performance over the year as the company’s core NIPT business demonstrated continued strong volume growth and received expanded clinical guidance. In August 2020, the American College of Obstetricians and Gynecologists (ACOG) issued a new set of guidelines, recommending that prenatal screenings be offered to all pregnant women regardless of age or risk factors. This guidance expanded upon ACOG’s prior guidance that recommended NIPT screening to only pregnant women ages 35 and older, or those with known risk factors. Additionally, the company has received numerous positive clinical and regulatory updates for use of their other proprietary diagnostic blood test, “Signatera”. Signatera is used in cancer patients that have undergone surgery. This diagnostic test predicts likelihood of recurrence or not, thereby informing next treatment options for both doctor and patient. The test is also effective to detect minimal residual disease (MRD) in multiple indications, including colorectal cancer and immunotherapy response monitoring. The company’s first mover advantage in this massive market has resulted in strong performance for the year.
Horizon Therapeutics a specialty pharmaceutical company focused on rare diseases, was the Company’s second highest contributor during the financial year, after the stock more than tripled. This share price momentum was driven by the phenomenal uptake of Tepezza (teprotumumab), the first and only FDA approved medicine for the treatment of thyroid eye disease (TED), a rare, debilitating, vision-threatening condition characterised by inflammation and tissue expansion behind the eye. Tepezza, which was launched in January 2020, quickly became the treatment of choice for active, moderate-to-severe TED. As a result, the product achieved near blockbuster status in only its first full year on the market. This represents one of the best first year drug launches in pharmaceutical history. Horizon management also raised peak sales guidance from U.S.$1 billion to over U.S.$3 billion. We expect Tepezza to become a mega-blockbuster product.
Alexion Pharmaceuticals is a large-capitalisation biotechnology company whose lead franchise consists of complement inhibitors for a variety of orphan haematological and neurological indications. Despite demonstrating consistent earnings growth, the company’s stock had traded sideways at “value” prices for the past few years. Investor concerns centred on upcoming biosimilar and branded competition to the company’s lead products, Soliris (eculizumab) and Ultomiris (ravulizumab). These medicines target a disease called paroxysmal nocturnal hemoglobinuria (PNH), a chronic, progressive, debilitating, and life-threatening ultra-rare blood disorder characterized by complement-mediated hemolysis (destruction of red blood cells). PNH can strike men and women of all races, backgrounds, and ages without warning, with an average age of onset in the early 30s. The company executed a number of business development transactions to diversify their business, but they were not well-received by the market. As long-term investors in the company, we disagreed. Our patience was rewarded in December 2020 when AstraZeneca announced it was acquiring Alexion for U.S.$39 billion with a combination of cash and stock, representing an impressive 45% premium to Alexion’s share price.
Mirati is a San Diego based biotechnology company developing next generation targeted therapies for various forms of cancer. Their lead program targets the “KRAS” gene which acts as an on/off switch for cell growth. When functioning normally, it regulates cellular growth, however when mutated, cells grow and spread out of control. These cells often develop into some of the deadliest cancers. The stock re-rated higher in the financial year after the company disclosed additional data on their lead candidate, adagrasib, advanced it in clinical development, and a competitor published target-validating data for KRAS. We believe Mirati will be one of the first companies to tap into this significant market with high unmet medical need.
Burning Rock Biotech is the industry leader in providing individualized cancer treatment guidance for the patients through genomics based molecular diagnostics. The company provides testing services both at its central lab and through collaborations with hospitals. Given our bullish view, we participated in the company’s U.S. IPO in June 2020. The share price of the company surged on the first trading day given strong demand for the stock, emblematic of investors’ confidence in the company’s leadership in China. The stock was volatile after management provided conservative guidance on earnings visibility, due to pandemic related uncertainty. However, the share price eventually rebounded over the second half of the financial year with the advent of a fast recovery of it’s testing business in China.
KEY DETRACTORS FROM PERFORMANCE
With overall performance strong for the financial year, notable positive contributors far outnumbered negative detractors in the period. The ratio of individual positions that returned over +100 basis points versus detracting over -100 basis points was 7:1, respectively. Lowering the bar to ±75 basis points and that ratio moves to 14:1. With that said, we detail the 5 largest detractors to performance for the financial year below.
With pandemic-induced lockdowns increasing public demand for all things digital, healthcare services were no exception. eHealth, an insurance broker that specialises in enrolling individuals in Medicare Advantage insurance, is one of the market leaders in a robust market trend from in-person broker assistance to sophisticated telephonic and digital enrolment. Exuberance for their services was evident in the share price gains early in the financial year. However, the company reported higher than expected levels of plan “churn” in their second quarter report in July 2020. The market reacted negatively to this news and the share price gapped down, as churn is a key input to the lifetime value metric which eHealth uses to book revenues for insurance plan sales. Further, the company’s fourth quarter results fell below expectations, pressuring the share price further. Whilst the company has since identified various areas of operational improvement, the outlook remains cloudy and a full recovery will be lengthy.
Headquartered in Boston, Vertex Pharmaceuticals is a large biotechnology company focused on the treatment of rare, life-threatening diseases. The hallmark of the company is certainly one of innovation as the company has revolutionized the treatment of cystic fibrosis with the launch of new products that, for the first time, treat the underlying cause of this devastating disease. However, a constant risk in the pursuit of new and novel medicines is failure. Whilst the stock re-rated higher in late 2019 and early 2020, shares of Vertex gapped lower in October 2020 following the discontinuation of a key pipeline product (VX-814) in development for the treatment of a rare but serious pulmonary disease called alpha-1 antitrypsin deficiency. Following this high-profile pipeline failure, investors have grown concerned over Vertex’s commercial concentration in cystic fibrosis and perceived lack of later-stage clinical prospects to drive future growth. Despite these concerns, we note Vertex’s cystic fibrosis portfolio continues to grow commercially, and the company’s mid?stage pipeline remains robust and diversified across several therapeutic areas.
Another unmistakable leader in innovation is Biogen. The Cambridge, Massachusetts large capitalisation biotechnology company is focused on neuroscience, with key franchises in multiple sclerosis and spinal muscular atrophy (a genetic disorder characterised by atrophy of skeletal muscles). Unfortunately, the company lost two key patent cases this past year for their lead product for the treatment of multiple sclerosis, Tecfidera (dimethyl fumarate), allowing generics to enter the market and removing upside to consensus estimates. Despite the setback, Biogen’s innovation engine has created a new potential growth driver in the treatment of Alzheimer’s disease. Aducanumab is the company’s experimental – yet controversial – antibody for this debilitating disease. Despite a mixed Phase 3 dataset, aducanumab received a glowing positive review by FDA officials in a briefing document released prior to an external advisory committee meeting in November 2020. However, the committee overwhelmingly voted against approval just days later. The FDA has since delayed the approval action date for aducanumab to June 2021. Continued uncertainty about the likelihood of approval caused the share price to languish.
A core strategy for the Company is to seek the best of the blue-chip healthcare companies in emerging markets, such as China. Shenzen Hepalink Pharmaceutical is a leading pharmaceuticals manufacturer. The company started as an active pharmaceutical ingredient (API) supplier of heparin to the global market and became the world’s largest supplier of heparin with over 40% revenue share by 2018. The company went on to expand its offerings with additional products and geographies, including Europe. We participated in the company’s dual listing on the Hong Kong stock exchange in July 2020. Despite positive news flow for its U.S. operations, including API approval by the FDA, the share price has been weak due to; (1) sector weakness for China healthcare in the autumn of 2020, (2) slow business recovery in the U.S., and (3) currency headwinds against Hepalink’s dollar denominated revenue.
Another China-based blue-chip company and innovation leader is Shanghai Kindly Medical Instruments, a leading cardiovascular interventional device manufacture with a diversified product portfolio. They are leaders in support devices for percutaneous coronary intervention such as inflation device, introducer set, and angiography guidewires. The company ranks either first or second across multiple cardiovascular intervention segments but, are also players in orthopedic and neuro-intervention medical device products. We participated in Kindly’s IPO in 2019 as a cornerstone investor. Unfortunately, share price performance was weak in 2020 due to the COVID-19 pandemic when outpatient visits and elective surgeries were postponed or cancelled, which affected the sales of interventional devices.”
WWH : Worldwide Healthcare expands on benchmark beating returns