Bellevue Digital Health (Lux)

Stock markets began the month under review in the green but fell hard and fast at the end of the month. The sell-off was triggered by Jerome Powell's remarks that taming inflation was the Fed's top priority and that interest rates would likely be pointing up for longer than anticipated. The US tech sector (Nasdaq 100 -5.1%) and the broader healthcare market (MSCI World Healthcare Net -6.0%) traded sharply lower. The Bellevue Digital Health Fund (+0.8%) held its ground quite well amid the shifting macro factors that once again affected the performance of equity markets. Although many digital health companies have consistently delivered good results in the past, a prolonged phase of valuation contraction (which began very early in 2021, long before it began to spread to the broader stock market) led to steep losses in some digital health stocks. It seems that investors are again basing their decisions on the specific fundamentals of each company.

The second-quarter reporting season was mixed in August and is now coming to a close. 19 of the 39 stocks in the portfolio made a positive contribution to the monthly performance. Shockwave Medical (+40.7%), Penumbra (+17.8%), Axonics (+11.4%), TransMedics (+28.9%) and Outset Medical (+18.4%) made positive contributions to the portfolio performance. Shockwave's second-quarter sales beat expectations by more than 12% and the company revised its full-year targets sharply higher. In addition, FDA approval of Shockwave's “L6” intravascular lithotripsy catheter came sooner than expected. Penumbra sailed past the low market expectations for its second-quarter results. Axonics also beat analyst expectations for second-quarter sales by 15% and raised its top-line growth forecast for 2022 from +32% to +40%.
 
TransMedics beat investor expectations and secured sufficient capital to fund its long-term expansion plans by issuing new shares (3.25 million shares at an issue price of USD 40). Our visit to Boston in June 2022 confirmed that TransMedics' technology represents a paradigm shift in organ preservation for transplantation and creates novel possibilities, including organ optimization and viability assessment before transplantation. We therefore increased our position in the stock through the capital increase. Outset Medical was given a green light from the FDA and can resume deliveries of its Tablo Hemodialysis system for home use. In addition, the Department of Veterans Affairs signed a contract to sell Outset's Tablo hemodialysis system to the 106 VA hospitals nationwide (providing care to 35000 dialysis patients).

Performance detractors included Tandem Diabetes (-30.9%), Health Catalyst (-28.3%), Doximity (-21.6%), Teledoc Health (-15.7%), Align (-13.3%), Abiomed (-11.5%), Veeva Systems (-10.9%), Ambu (-10.7%), Intuitive Surgical (-10.6%), Inspire Medical (-8.4%) and Omnicell (-7.1%). These markdowns are attributable to a mix of profit-taking, recession fears and earnings announcements that fell short of market expectations.

Tandem Diabetes reported 2Q sales that were only slightly below analyst expectations. However, its US activities accounted for a significantly smaller share of overall business, which fueled investor fears that Insulet (+3.1%) might widen its share of the market with its newly launched Omnipod 5 and significantly slow the growth of Tandem Diabetes. We too expect the Omnipod 5 to be successful in the market, giving the entire insulin pump market a boost. However, we assume that the vast majority of Tandem Diabetes customers who have insurance coverage for a new pump will buy another pump from Tandem Diabetes. We also expect rival Medtronic to continue to lose market share. Health Catalyst published disappointing results and lowered its outlook for fiscal 2022 and 2023. We had already steadily reduced our position during the course of the year due to a lack of transparency and have now completely exited this position. All performance data is in USD / B shares.

The fund's investment strategy is focused on innovative market leaders and solidly financed companies. More than 95% of the companies in the portfolio have no immediate financing needs. Companies in the highly regulated and non-cyclical healthcare market also benefit from the industry’s high entry barriers.

The portfolio contains fast-growing, disruptive companies that are applying digital technology to improve healthcare delivery and outcomes while making healthcare more cost-effective. In addition, the estimated multi-year sales growth rate of the companies in the Digital Health Fund's portfolio currently averages 30%-plus and visibility is good.

The growing acceptance of digital solutions in the wake of the pandemic has pushed up the potential growth trajectory of the digital health investment case. We also expect M&A activity to pick up significantly. Equity capital investors have invested about USD 95 bn in 4000 privately held digital health firms since 2011, so we expect a steady stream of attractive IPOs in the coming years – another reason, and an important one, for investing in this sector.