Bellevue Emerging Markets Healthcare (Lux)

The MSCI World index shed close to 3% of its value in October in USD and for once even the mega cap stocks were practically unable to stem the general sell-off. The escalation of hostilities in the Middle East led to heightened uncertainty on every front. Stock and bond prices came under pressure while commodities and precious metals rose. The latest quarterly earnings announcements did not help to calm investor nerves either. Many of the companies that reported results were able to meet street expectations but they gave a guarded outlook and lowered their guidance, which was often blamed on an increase in input costs. Both labor and energy costs have been increasing at a fast pace lately. Stocks in the emerging market world were caught in the general downdraft, too, and ended the month under review about 4% lower. But emerging-market healthcare stocks clearly outperformed. The valuation of the Chinese healthcare sector appears particularly attractive to many investors as they began to take positions in that market. In addition, the reported quarterly results of Chinese healthcare companies were surprisingly good, which eased doubts about the recent anti-corruption campaign. These developments led the MSCI Emerging Markets Index into the green (+0.7% in USD).

Novo Nordisk announced that it was discontinuing its Phase III FLOW study of Ozempic (GLP1/semaglutide) in patients with type 2 diabetes (T2D) and chronic kidney disease (CKD) one year earlier than scheduled following an interim analysis because of the strong signals of efficacy in meeting its primary endpoint. FLOW is a special kidney study evaluating semaglutide in patients at high risk of developing kidney disease. The study was assessing the effects of subcutaneous semaglutide administered once a week on the progression of renal impairment and on the risk of renal and cardiovascular mortality in patients with type 2 diabetes and CKD compared to placebo. The decision by the study’s independent data monitoring committee to discontinue the study early due to its high efficacy marks another success for the incretin-based drugs. There are two companies in the fund's portfolio, Innovent and Wuxi Apptec, that are leading players in this drug class. Innovent just published impressive Phase II trial data in late October. Enrolled patients lost 18% of their weight following 48 weeks of treatment and the data on liver fat reduction was also promising.

The quarterly results reported by Brazilian pharmaceutical company Hypera disappointed investors, even though earnings per share were slightly better than the consensus forecast. Its gross margin dipped 17 basis points due to the growth of its institutional market business. An unexpectedly mild flu season didn't help either. Above-average temperatures in Brazil led to a significant drop in flu cases compared to the previous year. Hypera lowered its full-year forecast as a result of these two factors. Management is now guiding for an EBITDA margin of 5%. We slightly reduced the fund’s position in the stock, but we are staying invested for valuation reasons and because of the company’s solid quality.

A new position in Mindray was opened during the past month and existing positions in Hygeia, JD Health and Zhifei were increased. Positions in Beigene, Sun Pharma, Hypera and Hapvida were reduced and Dr. Sulaiman and Divi's Laboratories were dropped from the portfolio.

The fastest growing countries in the world can be found in emerging markets and they contain more than half of the world's population. Asian emerging markets are also forecast to account for more than 50% of global GDP by 2050. It is known that the economic growth model of countries shifts from manufacturing to the services sector as household incomes rise. A growing middle class fuels demand for modern medicine. Healthcare ranks increasingly high on their wish list. Billions are being invested in infrastructure, technology and research to modernize the healthcare systems in emerging market countries. This is giving a greater swath of the population access to better healthcare. Meanwhile rapid population aging is also stoking demand for healthcare. In 30 years’ time there will be 400 to 500 million people over 60 in China alone, and they will have a growing need for modern health services and medicines. Outside Asia, Brazil’s rapidly expanding private-sector healthcare market offers a range of interesting investment opportunities. The quality and long waiting times of the country’s public health system are no longer acceptable to many higher-income Brazilian households and they are increasingly embracing these new services offered by private-sector healthcare providers. Hospital chains embedded in a fully-integrated ecosystem are but one example of the beneficiaries of this structural change. The fund serves as a defensive vehicle for capturing the above-average growth potential emerging markets offer. It invests in the entire healthcare system value chain, from hospital chains, drug developers and device manufacturers to medical research specialists and digital health companies.