Market backdrop

As Figure 1 shows, MSCI ACWI Healthcare Index (PCGH’s benchmark) peaked at the end of August and has since given back the ground it gained over the summer. Nevertheless, the index has shown incremental progress since the end of February 2024 (the data that we used in our last note), and (as discussed from page 9) PCGH’s NAV has outperformed over that period.

Biotechnology, as represented by the NASDAQ Biotechnology Index, has outperformed the wider healthcare sector recently.

Figure 3: NASDAQ Biotechnology versus US 10-year government bond yields

Source: Bloomberg, Marten & Co

Looking at the five-year chart in Figure 3 above, the initial period was most likely dominated by the impact of COVID, which the managers suggest sucked in much speculative and short-term investment. However, for much of the past few years, the chief macroeconomic influence has likely been the direction of interest rates, and the realisation that fast-rising inflation would need to be countered by higher rates. This was thought to be one of the factors behind the biotechnology sell-off. Investors appeared to become cautious about funding loss-making and cash-consumptive businesses, despite the advances being made in science that were opening up new potential revenue streams. From then on, the chart suggests that the biotechnology sector has tended to move in an inverse relationship with prospective interest rates. Rates are falling once again, but if Trump’s plans for tariffs turn out to be inflationary, perhaps not as fast as some had hoped.

Trump’s healthcare policy is yet to be fully articulated

China’s attempts to stimulate its economy may yet bear fruit to the benefit of that market. However, following his election victory, eyes are currently on Trump’s plans for the world’s largest healthcare market. That should become clearer as we approach his inauguration, but in the short term, markets seem to be betting on a rollback of entitlements to Medicaid. Measures such as that would be easier for Trump to achieve this time around, given that he seems on course to have control of all branches of government.

There was already talk of price cuts

The Democrat campaign had already flagged its plans to cut the cost of prescription drugs in a continuation of measures introduced as part of the Inflation Reduction Act, so this should have been priced into valuations.

Much will depend on who ends up in charge of healthcare within Trump’s cabinet. One idea is that Robert F. Kennedy Junior could have a leading role, which could lead to the abandonment of vaccination programmes, for example.

PCGH’s managers caution against obsessing over the impact of politics on the sector, and instead suggest a focus on the themes that we outlined in our last note – healthcare delivery disruption, innovation, M&A, growth in demand from emerging markets, the trend to outsourcing, and (unless irrational actors determine otherwise, and even then, only in one market) the growth of preventative medicine through areas such as vaccines.

In summary, the managers believe that the sector’s fundamentals are good, and valuations are attractive. That underpins their long-term buy base for the trust.

Asset allocation

Big shifts in underlying portfolio, including larger underweight exposure to the US

There has been a considerable reshaping of PCGH’s portfolio over the course of 2024. It has become more concentrated, as the number of positions in the portfolio has fallen from 42 at the end of December 2023 to 37 at the end of September 2024. The active share has fallen to 67.3% versus 80.5% at end December 2023, and the proportion in mega caps ($100bn+) has risen from 28% to 37%, while the exposure to large caps ($10bn–$100bn) has fallen to 39% from 46%. Following the repayment of the ZDPs in June, PCGH has no gearing in place.

Geographically, the most significant change from December 2023 is a marked increase in the underweight exposure to the United States (from -9.6% relative to -21.4%). The portfolio’s exposure to Swiss pharmaceuticals has risen and what had been a neutral weighting to Switzerland now represents the largest overweight exposure.

The portfolio still has an underweight exposure to large-cap pharmaceuticals, but this is not as marked as it was at the end of December. Correspondingly, the portfolio’s overweight exposure to biotech is not as large as it was in December 2023.

Top 10 holdings

Reflecting the moves outlined above, over the first nine months of 2024, there has been a considerable shift in the composition of PCGH’s 10 largest holdings. Zealand Pharma, AstraZeneca, Abbott Laboratories, CSL, Elevance Health, Swedish Orphan Biovitrum, HCA Healthcare, and Alcon no longer feature. They have been replaced by United Health Group, Novo Nordisk, Roche, Sanofi, Fresenius, Sandoz, Terumo, and Intuitive Surgical.

Figure 8: PCGH 10 largest holdings as at 30 September 2024

Looking at some of the portfolio changes in more detail:

Figure 9: Novo Nordisk (DKK)

Source: Bloomberg

Novo Nordisk

PCGH had exposure to the obesity treatment market through Zealand Pharma, which seemed to deliver impressive gains, rising more than 10-fold over two years to June 2024. However, in August the managers decided to initiate a position in Novo Nordisk, taking advantage of some market volatility. The managers note that demand for the company’s GLP-1 product is very strong as was demonstrated by Novo Nordisk’s H1 2024 results which showed GLP-1 diabetes sales growth of 32% in Danish kroner. This contributed to an 18% growth in operating profit.

However, the share price has slipped in recent months, reportedly on concerns about constraints on the supply of its lead drug, Wegovy. In June, Novo Nordisk announced a plan to invest $4.1bn to expand its US manufacturing capacity, but this will take some years to come to fruition.

The managers feel that long-term story for the GLP-1 class of drugs is strengthening. In March, the FLOW clinical trial demonstrated a reduction in the risk of kidney-disease-related events in people with Type 2 diabetes and chronic kidney disease. In July, following the success of its SELECT trial, Wegovy was able to update its label to reflect a risk reduction of major adverse cardiovascular events associated with its use. In October, the SOUL trial achieved a similar result for oral semaglutide, which should allow Novo Nordisk to change its label for Rybelsus. Then in November, Novo Nordisk said that its ESSENCE trial was showing improved outcomes for patients with liver fibrosis who took semaglutide.

Figure 10: Roche (CHF)

Source: Bloomberg

Roche

Roche was a new position for the portfolio that was added in July this year on the back of a weak share price that the managers felt was turning for the better. In their commentary for that month, the managers noted that the Swiss-based pharmaceutical company had struggled on a relative basis for some time, but felt that there were green shoots starting to appear in its pipeline in therapeutic areas such as obesity and Alzheimer’s disease.

Roche’s nine-month figures, announced in October, were encouraging, with rising sales helped by demand for new drugs such as Vabysmo (for serious eye diseases), Phesgo (breast cancer) and Ocrevus (multiple sclerosis). The inhouse pipeline is seeing successes such as US approval for Itovebi to treat breast cancer, and this is being augmented through acquisition.

Figure 11: Fresenius (EUR)

Source: Bloomberg

Fresenius

Fresenius is a German healthcare services business that has been undergoing a restructuring. The managers believe that the benefits of this are starting to emerge. The company now has two main areas of focus:

Fresenius Kabi, which is a global market leader in IV drugs, number three in IV fluids, number one in parenteral (intravenous) nutrition and a leading player in enteral nutrition, a global leader in blood collection and infusion systems, and a producer of biosimilars – generic versions of biological products.

Fresenius Helios, which is the leading hospital care provider in Germany and Spain.

As with Sandoz (below), while there is arguably good growth potential within the rest of the business, the main attraction for PCGH’s managers is the potential for growth from the biosimilars business. Fresenius already has over 10 biosimilars in its pipeline and is targeting a three-to-fourfold expansion of its biopharma revenues between 2022 to 2026. PCGH’s managers highlight that $200bn of biologics are due to come off patent over the next decade. They feel that the challenge is to persuade US healthcare providers to prescribe these, but say that penetration of this class of therapeutics is taking off.

Figure 12: Sandoz (CHF)

Source: Bloomberg

Sandoz

Sandoz Group is a Swiss generics business that was spun out of parent Novartis towards the end of 2023. Like Fresenius, it has exposure to the potential growth of biosimilars. These are often not easy products to make, meaning that means that the barriers to entry should be high, which should help protect margins. The managers see the potential for positive sales and earnings revisions.

Sandoz’s nine-month numbers show a 9% increase in net sales, but in the third quarter, revenue growth of biosimilars was 37%, helped by some new product launches (including Pyzchiva to treat chronic inflammatory diseases, and an ophthalmology product Enzeevu to treat neovascular age-related macular degeneration). The company upped its full-year guidance for revenue growth and maintained its 20% margin target.

Figure 13: Terumo (JPY)

Source: Bloomberg

Terumo

Terumo is a Japanese medical device company that is seeking to deepen its relationships with its customers by offering them ‘solutions’ rather than just devices. The stock was added to the portfolio in June on the back of some share price weakness. Terumo’s business encompasses minimally invasive treatments in vascular intervention and cardiac surgery; medical care solutions (including infusion systems, peritoneal dialysis, infection prevention, and pain management); diabetes care products; vital signs monitoring products; blood and cell technologies (including a blood plasma donation system, cell collection, and cell therapy) and a contract development and manufacturing organisation (CDMO). PCGH’s managers feel that investors are overlooking the attractions of the CDMO business, and expect to see higher sales for Terumo’s plasma donation machine.

Other portfolio changes

In preparation for this note, we also discussed some other potentially interesting positions within the portfolio, including some in the innovation portion of the portfolio.

Figure 14: ICON (USD)

Source: Bloomberg

ICON

ICON is a clinical research company, one of the three largest players in this market. This sub-sector has been affected by the COVID-related disruption and the budget-cutting that has occurred as biotech funding has dried up. Biotechs are increasingly focusing on their most promising programmes, and this has affected early-stage research, in particular. ICON is less exposed to this part of the market than some of its peers. In addition, pharmaceutical companies have been cutting back on R&D. However, the managers think that the trend to outsourcing is as strong as ever and that it will be a beneficiary of that trend.

Figure 15: Avidity Biosciences (USD)

Source: Bloomberg

Avidity Biosciences is developing a new class of RNA therapeutics, delivering RNA to muscle, aimed at tackling rare and previously incurable genetic diseases. The company has three programmes – del-desiran, del-brax and del-zota – targeting Myotonic Dystrophy Type 1 (DM1), Facioscapulohumeral Muscular Dystrophy (FSHD), and Duchenne Muscular Dystrophy (DMD44), respectively.

The stock was added to the portfolio in June. The managers saw the potential of its pipeline of three clinical programmes to treat orphan disorders with significant unmet needs.

Merus is focused on oncology, where it has a number of clinical-stage therapies in development, including petosemtamab, which is aimed at treating neck and head cancer and where Phase III trials seem to be going well.

RxSight, which was added to the portfolio in May, aims to improve patients’ vision following cataract surgery. Its intra-ocular lenses are customisable to the patient’s needs post-implantation. PCGH’s managers say that this is the only company with this technology, and they see the potential for it to increase its current 10% market share.

In July, PCGH bought into Legend Biotech, which is focused primarily on the treatment of multiple myeloma. PCGH’s managers say expanded label indications for its lead CAR-T asset, Carvykti could improve its commercial potential.

In September, PCGH added Stevanato Group and Vaxcyte to its portfolio. Stevanato sold off on industry-wide destocking for vials that it produces, and which are used for injectable medications. The managers think the selloff was overdone and, as the stocks are cleared, revenues and profits should improve.

Vaccine company Vaxcyte is developing a range of products. PCGH’s managers were attracted by its success with VAX-24, targeted at invasive pneumococcal disease. They believe it could be best-in-class in what looks like a multi-billion-dollar market.

Performance

Figure 16: PCGH NAV total return performance relative to benchmark over five years ended 31 October 2024

Source: Morningstar, Marten & Co

It can be said that the trust has continued to perform well relative to its benchmark over 2024. We explore some of the reasons for this in the section below. Overall, stock selection, was the biggest driver of returns rather than asset allocation.

Figure 17: Total return performance for periods ending 31 October 2024

Top contributors

Over the nine months to end September 2024, PCGH’s NAV returns relative to its benchmark were held back by the trust’s overweight exposure to small- and mid-caps (although the large-cap £10bn–£100bn stocks that the trust did hold outperformed the equivalent stocks in the benchmark). European exposure was a positive and Japan and US a negative, but the managers say that this was more a reflection of stock selection than asset allocation. Sector-wise, in aggregate, biotech and pharmaceutical positions did well but healthcare facilities and equipment positions detracted.

Figure 18: Top positive contributors to return relative to benchmark 30 September 2024 YTD

Figure 19: Zealand Pharma (DKK)

Source: Bloomberg

Zealand Pharma

This is a stock that PCGH has held for a long time. It benefitted from positive clinical trial data on two of its obesity assets. One is a GLP1 inhibitor, which looks as though it will be third to market behind Eli Lilly and Novo Nordisk (both of which are also held in PCGH’s portfolio). It is being developed in conjunction with Boehringer Ingelheim and is currently in Phase III.

The other is an amylin programme, pretelintide. The managers say that the attraction of this is that it looks to have fewer side effects than GLP1 inhibitors and appears to result in less lean muscle loss (which has been flagged as an issue with GLP1, although the managers are not convinced that this is a serious problem, as regular dieting also results in lean muscle loss). Phase I trial results released in June were encouraging.

Others

UCB has a new product launch – Bimelx, for psoriasis – which seemed to have gone well. The rest of the pipeline appears to include some promising products, with data readouts due soon.

United Health Group is, after Eli Lilly, the largest stock in PCGH’s benchmark. The managers suggest that timing of trade in the stocks was the key to the returns in this table. On the whole, managed healthcare stocks have been delivering mixed performance, which is perhaps unsurprising given the potential distorting effect of the new US administration’s policies on this part of the market.

In April 2024, Shockwave Medical was bid for by Johnson & Johnson in a deal that valued the company at $13.1bn. Ahead of the $335 per share bid, Shockwave’s shares were trading in the $280s.

Lonza is a Swiss contract manufacturer of biologics (see our comments on Fresenius and Sandoz on page 7). Trading is on track with management expectations, and the company has just boosted its manufacturing capacity with the purchase of a large facility from Roche for $1.2bn.

Figure 20: Top negative contributors to return relative to benchmark 30 September 2024 YTD

Figure 21: Dexcom (USD)

Source: Bloomberg

Dexcom

On the negative side, glucose monitoring business Dexcom had poor Q2 figures and lowered guidance. The managers say that this hit the stock price as prior to this it was widely owned as a strong growth stock and was trading on a high multiple.

Others

Cytokinetics did well in December/January, partly on the back of speculation that Novartis is interested in acquiring the company. The price fell back when it became apparent that this was not going to happen. Acadia Healthcare is a similar business to the UK’s Priory Group. The managers feel that it has been affected by short-term issues. At the end of September, it paid around $20m to settle claims in relation to alleged inflated Medicare, Medicaid and TRICARE claims in relation to 2014 and 2017.

Novo Nordisk was discussed on page 6. Align Technology, maker of Invisalign braces, has missed earnings forecasts.

Premium/(discount)

Over the 12 months ended 31 October 2024, PCGH’s discount moved within a range of 10.5% to 3.4% and averaged 6.1%. At 12 November 2024, PCGH was trading on a discount of 3.8%.

Figure 22: PCGH premium/(discount) over five years ended 31 October 2024

Source: Morningstar, Marten & Co

Fund profile

PCGH aims to generate capital growth through investments in a global portfolio of healthcare stocks which is diversified by geography, industry subsector and investment size.

More information is available on the trust’s website polarcapitalglobalhealthcaretrust.co.uk

PCGH started life in 2010 as Polar Capital Global Healthcare Growth and Income Trust with an issue of ordinary shares and subscription shares. The subscription shares were exercised in full in July 2014 and this distorts the trust’s NAV returns for that early period. In June 2017, the trust was reconstructed and adopted its current name. About 26.3m shares were bought back and 27.8m shares issued around that time. The trust also took on gearing in the form of zero dividend preference shares.

PCGH has a fixed life, but this might be extended

Unless shareholders instruct otherwise, the board is obligated to put forward a liquidation vote for the trust in 2025/26. However, given the trust’s decent track record, it could be surprising if there was not some proposal put to shareholders to extend the fund’s life in some way.

The team has considerable real-world experience of the pharma and biotech industry

PCGH’s investment manager and AIFM is Polar Capital LLP. The lead managers on the trust are James Douglas and Gareth Powell. The management team has considerable real-world experience of the pharma and biotech industry, which should help inform their investment decisions.

PCGH’s performance is benchmarked against the total return of the MSCI ACWI Healthcare Index (in sterling).

Previous publications

Readers interested in further information about PCGH may wish to read our previous note – Healthy returns and a rosy outlook – which was published on 5 March 2024.

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