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Strong outperformance from Polar Capital Global Healthcare

Polar Capital Global Healthcare (PCGH) has released its annual results for the year ended 30 September 2021, during which it has provided NAV and share price total returns of 19.46% and 24.55%, strongly outperforming its benchmark, the MSCI ACWI Health Care Index, which returned 13.40%. Since its restructuring to 30 September 2021, PCGH has provided an Nav total return of 52.28%, just fractionally behind its benchmark, which has returned 53.42% over the same period. The second half of the financial year showed a particularly strong period of relative performance, as mid to larger capitalisation stocks moved back into favour, which was beneficial to PCGH’s strategy of seeking opportunities across the healthcare spectrum. The superior share price return reflects a narrowing of the discount over the year (this ended the year at 9.5%, down from 13.1% at the end of the previous year).

PCGH’s managers say that healthcare facilities, healthcare supplies and life sciences tools and services all performed strongly over the period. The facilities and supplies companies benefitted from returning patient volumes, especially in regions with successful vaccination programmes. The life sciences tools and services sub-sector has been instrumental in not only delivering COVID-19 testing kits but also contributing to the vaccine manufacturing processes. At the other end of the scale, the last 12 months has been a difficult period for the biotechnology and pharmaceuticals sub-sectors. For biotechnology, it has been a challenging period driven by a number of factors including excessive valuations in certain thematic pockets, disappointing clinical data and regulatory setbacks. However, PCGH’s managers say that they remain optimistic, given that the innovation cycle is extremely strong, the sector is wellfunded and consolidation remains a distinct possibility. The pharmaceutical sub-sector continues to innovate and invest substantially in research designed to address unmet medical needs, but short-term growth prospects face the challenges of mature margins and patent expiries between now and the end of the decade.

Performance – manager’s comments on positive contributors

“Positive contributors to performance for the financial year included Biohaven Pharmaceutical, Avantor, Syneos Health, Align Technology and Hill-Rom Holdings.

“Biohaven Pharmaceutical performed strongly during the reporting period thanks to consistent, consensus-beating revenues for migraine drug, Nurtec ODT. As a reminder, the FDA approved the drug for the treatment of acute migraine back in March 2020. Enthusiasm for the asset was boosted further in May 2021 when the FDA approved an additional indication, the preventive treatment of migraine. The approval was based on the results of a Phase III study that revealed that Nurtec ODT reduced migraine days by 30% after just one week of every-other-day treatment. Further, after three months of treatment, approximately half of patients experienced at least a 50% reduction in moderate-to-severe migraine days.

“Avantor, a life sciences tools and services company which distributes chemicals, reagents, and laboratory supplies, benefitted from the general strength of its sub-sector. In addition, the Avantor team has consistently over-delivered on consensus expectations throughout the financial year, leading analysts to upgrade financial estimates with the shares following suit. Further, Avantor announced the purchase of MasterFlex, a business that allows Avantor to enter the fastgrowing bioprocessing market. The deal was well received by investors who saw the acquisition as accretive to the enlarged company’s revenue growth and operating margins. A final catalyst for the stock was its inaugural analyst day, in which Avantor reiterated the guidance for the financial year 2021 and provided attractive long-term targets.

“Syneos Health runs a contract research organisation, an industry that saw an upsurge in demand due to the need to develop COVID-19 pharmaceuticals and vaccines, coupled with a generally buoyant bio-pharmaceutical funding environment. The company’s outperformance was driven by positive momentum in the non-COVID-19-related business, which reassured investors of the sustainability of Syneos Health’s growth trajectory. Finally, the company also announced an acquisition (Synteract) which increases its exposure to the fast-growing and well-capitalised small and mid-capitalisation market. The global COVID-19 pandemic accelerated some of the key drivers of performance for Align Technology, the leading maker of clear aligners for dental treatments. Firstly, consumers have developed a strong preference for fewer in-practice dentist visits, something that is enabled by Align Technology’s digital workflow investments, and secondly, the “Zoom meetings” effect has been a catalyst for consumers to invest in dental aesthetics. The company delivered impressive quarterly financial results throughout the period under review, with revenues often coming in significantly ahead of consensus expectations.

“Hill-Rom Holdings traded just slightly ahead of medical technology peers from September 2020 to mid-July 2021 when speculation started to emerge that Baxter International might be interested in acquiring the company. Eventually the deal was announced on 2nd September 2021, with Baxter International offering a friendly all-cash offer of $156 per share, at a premium of more than 30% to the average price over the previous 20 days.”

Performance – manager’s comments on negative contributors

“The largest detractor to performance for the Company was its lack of holdings in mRNA manufacturer Moderna, a decision driven by what we perceived to be an excessive valuation relative to the opportunity set ahead for the company. The meteoric share-price ascent started in December 2020, when the FDA used emergency use authorisation to allow access to Pfizer/BioNTech’s COVID-19 vaccine, the first vaccine developed using mRNA technology. Using similar technology, the market quickly put upwards pressure on expectations for Moderna’s mRNA vaccine candidate, mRNA-1273, which positively impacted the share price performance.

“Amedisys operates home health facilities and hospices. Unfortunately, the company announced in their Q2’FY21 results that they were facing some near-term challenges due to high levels of staff turnover in the hospice business and to wage inflation for nurses and carers. Although the issues can be attributed to the COVID-19 pandemic, investors felt that the growth prospect and trajectory for 2022 might also be impacted, causing the stock to materially underperform the overall healthcare sector.

“Quotient began to underperform in December 2020, after announcing a regulatory delay in the US for MosaiQ, a fully automated testing platform for blood grouping and transfusion-transmitted infection screening of donated blood. As COVID-19 continued to affect the timelines on its diagnostic development programmes, analysts were prompted to reduce their financial forecasts, which adversely impacted Quotient’s equity value. Although the biotechnology sector put up a strong performance in the first four months of the Company’s financial year, it started to underperform the overall healthcare sector in mid-February 2021, driven, in part, by the prospect of higher real yields and reduced terminal values. Incyte was not immune to the sector weakness, and it further struggled when the FDA approved ruxolitinib cream (opzelura) in mild-tomoderate atopic dermatitis (AD) with a so-called “black-box” warning. This update dampened enthusiasm for the product’s peak sales potential.

“The catalyst for Amgen’s underperformance in the early part of the reporting period was the top-line data for heart failure agent omecamtiv mecarbil. While the trial hit statistical significance for the primary endpoint, that is reducing cardiovascular death or heart failure events, the magnitude was underwhelming and there was no reduction in the secondary endpoint of cardiovascular death. Additionally, the company reported unimpressive financial data and readouts/execution issues from other key trials.”

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