Bellevue Digital Health (Lux)

Global stocks (MSCI World Net Index +3.2%) and the US tech sector (Nasdaq 100 +1.2%) gained more ground in March. The broader healthcare sector also showed a positive return (MSCI World Healthcare Net +2.3%), as did the Bellevue Digital Health Fund (+1.2%).

The market's gains during the month under review were driven by optimistic management commentary, new product approvals, takeover rumors, and nearly unchanged US bond yields.

15 of the 33 positions in the portfolio made a positive contribution to performance in March.

The best performance drivers among the top 10 portfolio positions were Shockwave (+24.8%), Dexcom (+20.5%), Align Technology (+8.4%), Natera (+5.7%) and Intuitive Surgical (+3.5%). Among the smaller positions, Exact Sciences (+20.0%) and Inspire Medical (+20.0%) stood out.

Shockwave’s shares jumped after the Wall Street Journal wrote that Johnson & Johnson was interested in buying the company. After Boston Scientific announced the acquisition of Axonics in January, this would be the second acquisition of a company in the digital health portfolio this year and it would again underpin our expectation of increasing acquisition activity going forward.

The US FDA approved Dexcom's Stelo, an innovative wearable glucose biosensor designed for people living with type 2 diabetes not on insulin, a market that numbers 25 million people in the US alone. It is the first over-the-counter glucose sensor to reach the market and can be worn for up to 15 days before requiring a replacement.

Natera shares were marked up after its Renasight genetic test for people with chronic kidney disease (CKD) was recommended in the updated medical guidelines of the Kidney Disease Improving Global Outcomes (KDIGO) organization.

Exact Sciences shares rose after publishing excellent clinical data for its new colorectal cancer screening test Cologuard Plus in the New England Journal of Medicine (NEJM).

Inspire Medical attracted buyers after investors recognized that clinical data from Eli Lilly's SURMOUNT-OSA study could actually be a much more positive catalyst.

Pacific Biosciences (-32.2%), Recursion Pharmaceuticals (-25.9%), 10X Genomics (-19.5%), Privia Health (-12.2%) and TransMedics (-9.4%) detracted most from performance in March.

Pacific Biosciences management’s presentation of the market potential of its long-read Revio sequencing system at a couple of conferences failed to convince investors. We believe that the macroeconomic environment needs to improve before its shares can stage a strong recovery.

Recursion Pharmaceuticals, which specializes in proprietary AI-enabled tools to accelerate drug discovery processes, fell short of consensus sales expectations because of a delayed milestone payment.

The investment community is not yet convinced of the potential behind 10X Genomics’ GEM-X technology because its currently high cost is seen as an obstacle to broad market adoption. All performance data is in USD / B shares.

From a fundamental point of view, digital health companies have reported stable above-average growth and that is expected to continue in 2024.

In their discussions with investors during February and March, the executives of many companies made positive remarks about business in the first quarter and for 2024 as a whole. The approval and subsequent launch of relevant new products will continue to bolster sales growth, too. Examples here are Inspire Medical's new Inspire 5 device for obstructive sleep apnea, Dexcom's Stelo and G7 blood glucose sensors, Intuitive Surgical's new da Vinci 5 surgical robot, and Insulet's Omnipod 5 patch pump.

As witnessed during the last two years, even outstanding sector-specific fundamentals can be overridden by macroeconomic developments and shifting investor preferences. In 2024, we expect our investment solution to benefit from several factors: Cuts in US interest rates (which usually benefits growth stocks the most), attractive valuation levels (price/sales multiples close to historical lows), an expected increase in M&A and IPO activity, a general repositioning as investors drop last year's outperforming stocks and buy high-quality stocks, and the underwhelming growth outlook for the world economy (which in the past has been a relatively good setting for non-cyclical subsectors such as the digital health) underpin our optimism and make a good case for investing in the Bellevue Digital Health (Lux) Fund.