BB Healthcare managers reflect on the two key debates in the healthcare space – BB Healthcare (BBH) has published its final results for the year to 30 November 2021. During the period under review, its share price total return was 22.5% while its NAV total return was 24.6%, compared with a 10.3% return from its benchmark, the MSCI World Healthcare Index.
BBH targets an annual dividend of 3.5% of preceding year end NAV, paid out in two equal instalments. The company paid a final dividend of 2.50p in respect of the year ended 30 November 2020, on 30 April 2021 and an interim dividend of 3.015p in respect of the financial year ended 30 November 2021 was paid on 3 September 2021. A final dividend of 3.015p has been proposed in respect of the financial year ended 30 November 2021 and, if approved at the forthcoming AGM, this will be paid to shareholders in April 2022.
Regarding the financial year ending 30 November 2022; the board is proposing a total dividend of 6.47p per, composed of interim and final dividends of 3.235p, to be paid in August / September 2022 and March / April 2023 respectively, subject to shareholder approval.
Extract from manager’s report- Paul Major and Brett Darke
Performance summary – macro musings
The financial year ended 30 November 2021 was a very challenging period for active investment managers, especially in healthcare. From calendar Q4 2020, generalist investors eschewed defensive growth sectors such as healthcare in favour of pro-cyclical, pro-consumer and latterly pro-inflation assets as the “great re-opening” got underway. Value outperformed growth in the early part of 2021.
The COVID-19 pandemic is sadly not yet over, but investor psyche moved on long ago and the overwhelming view is that we can live with this virus and largely return to normality: the MSCI World Index rose >23% during this period and the FTSE All-Share Index >17%. The former broke new all-time highs several times during 2021 and the latter index is currently trading close to its all-time highs from early 2020.
One could devote many pages to a quantitative discussion of the meretricious aspects of such a dynamic, but it would serve little purpose. The past is another country that, like many others currently, one cannot visit. Suffice to say that, for now at least, the price of earnings growth has been rebased upward. Amidst this rumbustious revivification, investors should not forget that, whatever market wisdom suggests, it still feels far from “normal” on the streets and we are not behaving in the same way as we were pre-COVID-19.
In some respects, the reluctance to embrace healthcare during this market recovery phase was understandable; the industry will necessarily be among the last to remove all vestiges of physical and temporal distancing, so activity levels returning to pre-pandemic norms in the shorter-term was always looking like a challenging assumption, as we highlighted in a number of monthly factsheets. All other factors being equal, it feels appropriate then that the MSCI World Healthcare Index would lag the overall return of its parent Index, delivering 16.3% during the year in review.
Performance summary – healthcare highlights
To our minds, there were two main debates in healthcare during the year, both relating to the pandemic. The first revolved around the sustainable demand outlook for vaccines, COVID-19 treatments and diagnostics, and the second over the volume of elective procedures that could be sustained in the short-to-medium term given ongoing infection control precautions and enduring consumer willingness to defer elective treatment.
As several countries have gone as far as to offer booster #2 (i.e. a fourth dose of vaccine) and more and more countries jab ever younger children despite a lack of robust evidence that it has a positive risk/benefit, vaccine demand in the developed world is proving more resilient than we could have imagined. Even in light of this, valuations of COVID-19 vaccine suppliers seemed stretched to us because history shows that vaccine pricing always comes under sustained pressure within a few yearsand it is unsurprising to have seen them falling back in recent months.
With regard to COVID-19 treatments, the debate has largely moved on from antibodies to anti-virals. With the second-generation drugs such as Pfizer’s Paxlovid (Gilead’s Veklury being the first generation), it does appear we now have the weapons in our armamentarium to take the case fatality rate for COVID-19 down to levels below that for influenza and richer countries will stockpile these treatments. Diagnostic testing volumes have peaked and, with the approval of ever-more providers, prices have come down. We would judge that the market has done a good job at assessing the value proposition around testing.
This leaves the second point of elective procedure volumes as the ongoing conundrum. Broadly speaking, we feel that we judged this situation correctly; the market was too optimistic initially about a return to pre-pandemic procedure volumes and, especially for the lower acuity procedures such as orthopaedics, many companies have disappointed relative to their own early recovery expectations.
Overall, this weighed on sentiment. Nonetheless, the valuations of some of these companies at the low acuity end of the procedure spectrum continued to rise during the year: former holding Intuitive Surgical, for example, rose 35% in sterling terms to achieve further record valuation on forward-looking metrics despite 2022 and 2023 revenue estimates simply returning to pre-pandemic levels; we have struggled to rationalise these outliers.
Healthcare actually kept broad pace with the rise of the wider market until the late summer, when it was hit harder in the early September sell-off. Healthcare began to recover with the broader market in early October but the healthcare rally ran out of steam in early November and then reversed. Indeed, the last three months accounted for more than half of the sector’s yearly underperformance versus the wider market.
Outlook
If the last two years have taught us anything, it is that everything changes very quickly in such a febrile environment. Sadly, we are not so naive as to imagine this situation will normalise (whatever that means) in the short-term and so we will refrain from offering a sub-sector outlook as in previous years. We recommend that investors rely upon the detailed and discursive monthly factsheets for an up-to-date view on the outlook.
Regarding recent trading, the period from end November 2021 to 15 February 2022 has seen a continuation of the very difficult environment that we saw in October and November, with a very macro-led environment due to inflationary and geo-political factors and attended volatility, especially for Small and Mid-cap companies. Indeed, January 2022 saw the second-worst month performance-wise for the MSCI World Healthcare Index since the inception of the Company and indeed the fourth worst month in the last 20 years, despite no material deterioration in the medium-to-longer term outlook for the sector.
Nonetheless, over this period, the Company’s net asset value has declined 2.5%, as compared to 3.1% for the MSCI World Healthcare Index. The wider MSCI World Index has declined 3.5%. We have increased the gearing ratio to enhance gross exposure and benefit from the likely recovery of Small and Mid-cap healthcare valuations, which have become significantly depressed in recent months and we remain optimistic for the year ahead. More details can be found in the December and January factsheets.
BBH : BB Healthcare managers reflect on the two key debates in the healthcare space