Bellevue Diversified Healthcare (Lux)

Despite starting the month in a constructive manner, a late sell-off drove a negative performance for global equities in August. In a much anticipated speech, Fed Chairman Jerome Powell delivered a hawkish message to the market at the Jackson Hole meeting on August 26, triggering a risk-off sentiment.

Despite its defensive nature, the healthcare sector (MSCI World Healthcare net; -6.0%; fund benchmark) underperformed global markets (MSCI World net; -4.2%) over the month driven by sector and stock-specific news flow (see below). The Bellevue Diversified Healthcare Fund (B shares; -6.0%) recorded a negative absolute performance in the month, but slightly outperformed its healthcare index benchmark by 6 bps driven by stock selection, and allocation across style & market capitalization (i.e. underweight cyclical tilt stocks and mid caps).

Key healthcare news flow over the month included the passing of the US Inflation Reduction Act (IRA), which included reforms to Medicare drug pricing policy. Although the current legislation is limited in scope, the entrance of direct drug price negotiation by the US government is an unwelcome development. We have confidence that the industry can adapt, and it remains the case that the near-to-mid-term earnings generated by the sector are more predictable than those from the broader equity markets at this point of the cycle, in our view.

Litigation risk reemerged in the sector as the market started to focus on upcoming Zantac trials related to its potential association with cancer. As the popular heart-burn drug has been marketed by multiple companies (=5 companies) as both an prescription drug and OTC drug over the decades, this headline risk had a broad impact.

On the positive side, within biotech we saw some encouraging pipeline developments (e.g. Alnylam’s APOLLO-B trial) and M&A activity (e.g. Pfizer/Global Blood Therapeutics; Amgen/ Chemocentryx) which helped drive a re-rating for the subsector. Unfortunately, macro pressures meant this rally fading later in the month.
 
Healthcare services was the best performing healthcare industry in the month (-1.6%; CAH activist investor emerges; supportive macro for distributors/MCOs on a relative basis), followed by biotech (-3.3%; positive catalysts, negative macro environment), medtech (-6.1%; recession fears and mixed results/guidance hit consumer-related end-markets), pharmaceuticals (-7.7%; reform, Zantac litigation), life science tools (-9.4%; reform; negative macro environment), and finally healthcare IT (-9.9%; negative macro environment).
 
Amongst fund holdings, positive absolute performances in USD from Alnylam (46%, APOLLO-B headline data), Sarepta (18%, regulatory progress), and Neurocrine (11%, strong Q2 results) were of note. Negative absolute performances from Polypeptide (-25%, negative Q2 results), Lundbeck (-21%, clinical trial failure), and Horizon (-19%, negative Q2 results) were disappointing.

In line with our strategy, we continue to hold a diverse exposure across healthcare with a tilt towards structural growth companies. In terms of subsectors, we currently hold slight overweight positions in healthcare services and biotech, with underweight positions in the other subsectors. In what remains uncertain macro and financial condition outlooks, we see healthcare as a good place for investors given its defensive nature, strong pricing power, and largely inelastic demand for products and services.