Bellevue Digital Health (Lux)

Global equity markets were fairly stable in April and closed the month in slightly positive territory (MSCI World Net Index +1.8%), as did the US tech sector (Nasdaq 100 +0.5%). Macro topics such as a potential recession or credit crunch continue to hover over the market. Not surprisingly, then, the broad healthcare sector (MSCI World Healthcare Net +3.5%) showed a good relative performance, which can be traced to its low exposure to the economic cycle (being a non-cyclical industry) and low levels of debt. The same positive factors also apply to the Bellevue Digital Health Fund (+3.8%). The fund's focus on well-financed companies has served it well during this difficult market phase. More than 95% of the companies in its portfolio do not have any immediate funding needs. This means these companies can follow through on their growth strategies without any financial limitations, which is clearly a competitive advantage in today's financial market environment. Together with the non-cyclical healthcare market, that means a recession would likely have a much smaller impact on their business.

16 of the 38 companies in the fund's portfolio made a positive contribution to performance. The core portfolio positions Shockwave Medical (+33.8%), Intuitive Surgical (+17.9%) and Inspire Medical (+14.3%) made the best contributions to portfolio performance. Rumors that Boston Scientific would issue a public takeover bid for Shockwave Medical (+30.7%) propelled the latter’s stock to higher ground. Shockwave is a developer of intravascular lithotripsy technology (IVL) used to treat patients with calcified peripheral and coronary blood vessels. Intuitive Surgical's first-quarter sales and profits were much better than expected thanks to the strong recovery in procedure volume. Its management now expects procedure volume to grow by 18%-21% (previously 12%-16%) and has increased its full-year sales and profit guidance for 2023. Inspire Medical, Procept BioRobotics (+7.0%), Ambu (+5.8%), Axonics (+5.3%) and TransMedics (+4.5%) also benefited from a recovery in procedure volumes.

Performance detractors were Pacific Biosciences (-8.5%), 10X Genomics (-6.0%) and Veeva Systems (-2.6%), which saw some profit-taking after its strong performance in the preceding month. Decliners also included Illumina (-11.6%), Natera (-8.6%), Exact Sciences (-5.5%), Align (-2.6%) and Phreesia (-2.0%). In its first-quarter announcement, Illumina reported that its next-generation NovaSeq X gene sequencer had a good market uptake, beating investor expectations, but overall system utilization had declined, which is why management guidance for the full year was not raised. The pending divestment of Grail and pressure from activist investor Carl Icahn are additional factors of uncertainty but could also be triggers for a big jump in the stock price. 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 companies in the Digital Health Fund's portfolio are expected to generate high double-digit sales growth rates over the coming years 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. Venture Capital (VC) investors in the US have invested about USD 103 bn in 4500 digital health VC transactions 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.