Polar Capital Global Healthcare (PCGH) has published its annual results for the year ended 30 September 2024 during which it provided an NAV total return of 14.95%, outperforming its MSCI ACWI Healthcare Index benchmark by 5.07%, which returned 9.88%. PCGH’s discount narrowed slightly during the year, ending the period at 4.82%. The outperformance was driven by strong stock selection across the entire market-capitalisation range, particularly in biotechnology and pharmaceuticals. For the second year in a row, Zealand Pharma was the highest contributor to overall performance attribution, as investor appetite for companies with exposure to the so-called weight loss drugs, and the potential they offer, continued.
Life extension?
The statement says that the board has started considering the future of the company in light of its fixed-life [Unless shareholders instruct otherwise, the board is obligated to put forward a liquidation vote for the trust in 2025/26]. It has started work on potential proposals for a corporate reorganisation in 2025, pre-empting a liquidation vote which needs to be held at the first AGM after 1 March 2025 (which would ordinarily take place in early 2026). [The trust is the best-performing trust in the biotechnology and healthcare sector over the past 10-years. We would be amazed if investors didn’t back an extension to its life, and it may even be that it can expand as part of this process.]
As part of these considerations, the board notes that should any performance fee be payable to the manager, it will crystallise on 1 March 2025, as envisaged at the time of the previous reorganisation in 2017.This crystallisation, in advance of the likely effective date for any reorganisation proposals, will provide shareholders with the opportunity to assess their returns in advance of any proposals being considered. No performance fee has been accrued as at 30 September 2024 (2023: nil) or at the time of writing.
Investment manager’s report
“Over the financial year to 30 September 2024, the Company delivered a Net Asset Value (NAV) per share total return of 14.95%, a 5.07% outperformance of its benchmark, the MSCI All Country World Daily Net Total Return Health Care Index. The absolute performance of the healthcare sector was positive, up 9.88% over the reporting period, although it underperformed the broader market, as tracked by the MSCI All Country World Net Total Return Index, which was up 19.9% (all figures above are in sterling terms).
“The Company’s diversification strategy, coupled with its focus on large capitalisation1 (cap) healthcare companies with robust, medium-term growth outlooks, helps drive the positive risk/return profile of the underlying assets, relative to the more volatile areas of healthcare. Further, the broad investment remit affords the opportunity to invest in growth areas regardless of the economic, political and regulatory environment.
“Importantly, the Company can also invest in earlier-stage, more innovative and disruptive companies that tend to be lower down the market-cap and liquidity scales. This is a key advantage of the Company’s closed-ended structure. Regardless of size, subsector or geography, stock selection is central to the investment process as we look to identify companies where there is a disconnect between valuations and the near and medium-term growth drivers.
“In terms of structure, the majority of the Company’s assets (calculated on a gross basis and referred to as the Growth portfolio) will be invested in companies with a market cap >$5bn at the time of investment, with the balance invested in companies with a market cap <$5bn (a maximum of 20% of gross assets and referred to as the Innovation portfolio).
“At the end of the reporting period, 31 companies in the portfolio were in the Growth portfolio (91.5% of net assets) and 6 were in the Innovation portfolio (7.5%).
“Following a sluggish start, global equity markets posted positive gains throughout most of the Company’s financial year. The main trend that characterised the period was a significant rotation into some of the more economically sensitive areas of the market such as information technology and communication services. The latter was further boosted by investors’ increased appetite towards companies exposed to artificial intelligence (AI).
“The risk-on environment of the first nine months of the year also reflected a more benign macroeconomic picture than initially feared, with falling inflation, resilient growth prospects and improving supply chain dynamics. The three months to the end of September suggested a slower economic environment which boosted more defensive stocks, although most of those relative gains evaporated with the surprise 50 basis point (bp2) cut from the Federal Reserve (Fed) in September and fresh stimulus from China.
“Reflecting on the Company’s overall positive performance, there was strong stock selection across the entire spectrum, partially offset by negative allocation, with the Company’s above-benchmark exposure to small and mid-cap stocks the biggest drag on performance. Within the benchmark, healthcare facilities, healthcare equipment and biopharmaceuticals (biotechnology and pharmaceuticals companies) were especially strong, reflecting an acceleration in utilisation and consumption for the first two subsectors and the start of new product cycles for biopharmaceuticals.
“However, the past 12 months have been more challenging for the healthcare services, managed healthcare and healthcare supplies subsectors. The healthcare services and managed health care subsectors both struggled due to the fear of elevated medical costs, driven by increased utilisation and patient volumes. The sub-par performance for the supplies subsector is more a reflection of a cautious consumer given its index is heavily populated with dental and ophthalmology companies.
“As set out in last year’s annual report, the focus was very much on three key investment themes:
- Innovation: Recent history has witnessed a number of highly significant medical breakthroughs in a broad range of therapeutic categories.
- AI and Machine Learning (ML): Advancements in ML algorithms, greater access to data and the availability of more powerful mobile networks could materially accelerate the pace of change in the healthcare industry.
- Emerging markets: After a challenging period, especially in China, emerging markets should be a source of growth driven by an ever-increasing demand for healthcare products and services.
“The themes summarised above will continue to be relevant as we look forward to the next financial year, especially as reimbursement and access improves for products and technologies that address unmet medical needs, generate efficiencies and improve patient outcomes.
“We explore these themes in more detail below, in the ‘Healthcare: Fundamentals remain strong’ section.
“Over the financial year to the end of September 2024, the Company outperformed its benchmark by 5.07%, achieving a positive return on net assets of 14.95%. This strong performance is particularly notable given the challenging environment, where the healthcare sector notably underperformed the broader market. In dollar terms, global equity markets put a challenging Q3 2023 behind them and entered a sustained rally for the rest of the financial year, a rally that was only interrupted by brief periods of weakness in April and from mid-July to early August.
“As referred to above, the positive performance of the general equity market was largely driven by sectors directly or indirectly linked to the AI theme, such as information technology, communication services and utilities. In contrast, more defensive sectors lagged for the year as the macroeconomic picture turned more upbeat than the markets initially expected.
“From a subsector perspective, biotechnology and pharmaceuticals were the best performers for the Company, bolstered by effective stock selection and positive allocation. Managed healthcare also made a positive contribution, with allocation being a more significant factor than selection. However, stock-picking in healthcare equipment, supplies and facilities was less successful, becoming the main detractor from performance, even though allocation in these areas was favourable.
“From a market-cap point of view, stock selection was positive across the entire market capitalisation spectrum. For mega-cap investments, where the Company was underweight compared to the benchmark, the allocation had a negative impact, but stock-picking was notably strong. Large and mid-cap companies contributed positively, driven entirely by effective stock selection. Meanwhile, in small-cap stocks – where the Company was more exposed than the benchmark – stock selection was robust, but it was not enough to counteract the negative allocation effect.
“On a geographical basis, Europe and North America contributed positively, with the former having good allocation and selection while the latter benefitted from good selection and favourable currency movements. Allocation to Asia Pacific ex-Japan stocks was negative, while selection was only marginally positive. The biggest detractor was Japan, entirely due to stock selection.
“The active management of gearing had a marginally positive contribution to performance after accounting for foreign exchange moves.
“Zealand Pharma is a Danish biotechnology company focused on developing drugs for metabolic and gastrointestinal diseases. During the period, the company reported encouraging clinical data for key assets, with pretelintide, a novel weight-loss medication, garnering the most attention from the investment community as it demonstrated not only robust efficacy but also a relatively benign safety profile and good tolerability. Overall, the stock’s strong performance reflected the continued enthusiasm that surrounds obesity assets and their potential to address a significant, unmet medical need.
“Belgian pharmaceutical company UCB saw its stock price more than double in the past 12 months thanks to the impressive launch of psoriasis drug Bimzelx in the US. There was also increased appreciation of the drug’s wider opportunities in other autoimmune conditions such as hidradenitis suppurativa (a very painful skin disease with limited therapeutic options), and for UCB’s other commercialised assets in epilepsy, osteoporosis and generalised myasthenia gravis (a rare, chronic condition that causes muscle weakness).
“Consistent with a view that the US healthcare systems would continue to experience elevated levels of utilisation, the Company did not hold a position in UnitedHealth Group, the largest provider of healthcare insurance in the US, for the first five months of the fiscal year. During the period, the stock came under pressure as higher medical costs dented the company’s earning power. However, we took a position in UnitedHealth Group in March, taking the view that the healthcare insurer would be able to price its plans appropriately to offset the higher medical expenses and return to more predictable earnings growth. This thesis played out and the stock rebounded through the second half of the fiscal year.
“Swedish Orphan Biovitrum (“SOBI”), a biotechnology company based in Sweden, performed well thanks to good execution, positive clinical data for some of its assets and strong demand for Beyfortus, a prophylactic therapy against respiratory syncytial virus (a seasonal virus mainly affecting babies and elderly individuals). For context, Beyfortus is commercialised in the US by Sanofi which pays SOBI a tiered royalty in the 25-35% range.
“Intuitive Surgical, a leading protagonist in the field of soft- tissue surgical robots, experienced strong returns as the stock inflected with the company’s approval and subsequent launch of its new robot, the DaVinci 5. The initial launch of this new robot surpassed even the more optimistic expectations as the latest product has numerous advantages over the previous version (such as haptic feedback) and represents a leap forward in technology. Such innovation should continue to drive conversion of open surgery and laparoscopic surgery toward robotic approaches and possibly expand the use of robotic surgery beyond the existing procedure types.
“Whilst it did have positive exposure during the period under review to the so called ‘weight loss drugs’, the Company lacked exposure for most of the period to Novo Nordisk, a Danish pharmaceutical business focused on metabolic diseases and, more specifically, obesity. As mentioned earlier, investors’ appreciation for the market opportunity for Novo Nordisk’s weight-loss drug Wegovy (a so-called glucagon-like peptide-1 receptor agonist, or GLP1 for short) and similar assets continued unabated on the back of good commercial success, despite supply of the drug still being a constraint, and compelling new clinical results of the benefits of GLP1s beyond weight loss.
“DexCom, a US company specialising in continuous glucose monitoring (CGM) for the management of diabetes, started the fiscal year strongly, recovering from the fears the novel GLP1 drugs could significantly slow down the funnel of its patients with type-2 diabetes. However, the stock had a precipitous fall when the company announced a weak set of financial results for Q2 2024 coupled with a material cut to its outlook. The driver behind the reset was a poorly executed salesforce restructure which led to both lost patients and a decline in its revenue per patient.
“Legend Biotech’s main asset is Carvykti, a drug co-owned with Johnson & Johnson for the treatment of a type of bone marrow cancer called multiple myeloma. The company experienced manufacturing constraints which meant sales for Carvykti disappointed for a couple of quarters. Additionally, the competitive landscape intensified as Bristol Myers Squibb received approval for its cell therapy drug for multiple myeloma as well as positive clinical data from other, earlier- stage assets emerging.
“Behavioural health provider Acadia Healthcare had a turbulent past 12 months. Despite relatively solid execution in a challenging environment, the company came under significant pressure for legal and regulatory reasons. First, concerns arose regarding a proposed change in how opioid addiction treatments are administered in the US, which could have adversely impacted Acadia’s medication-assisted treatment business. Second, the company is embroiled in various lawsuits and received subpoenas related to its admissions practices, lengths of stay and billing. These legal proceedings could mean the company is liable to pay substantial damages.
“As a leader in dental aligners, Align Technology offers a less invasive and more discrete alternative to traditional teeth- straightening methods. When we initiated a position in the stock, we took a view that consumers around the world were in a healthier economic shape than most estimated and that the demand for clear aligners, which are often considered discretionary purchases, would start to rebound after a period of decline. Albeit sales did experience some growth in the first half of the 2024 calendar year, the company mismanaged its forward-looking guidance by raising its outlook in the first quarter but cutting it in the second, which understandably frustrated the markets. Additionally, data around consumer sentiment and its spending ability worsened, driving down expectations of a full recovery of the clear aligner market.”
