Bellevue Medtech & Services (CH)

The Bellevue Medtech & Services Fund CH ended April (+2.9%) in positive territory in step with its benchmark (+2.9%) and well above both the broader healthcare sector (+1.1%) and the world stock market (-0.6%). Healthcare services contributed 0.9% to the fund's monthly performance, medtech stocks 2.0%.

The fund's performance in April was mainly fueled by better-than-expected first-quarter earnings announcements. A stronger-than-expected upturn in procedure volumes and strict cost management were the main factors behind the positive surprises.

HCA Healthcare (+6.4%), the largest hospital operator in the US with 182 clinics in 20 states, made a positive contribution to the fund's absolute and relative performance. HCA beat the consensus profit forecast thanks to a strong recovery in surgical procedures and lower personnel costs and its management raised its sales and earnings guidance for 2023.

US health insurers Molina (+8.7%), Humana (+6.7%), Centene (+6.5%), UnitedHealth (+1.7%), Elevance (-0.5%) and Cigna (-3.2%) showed mostly positive returns, which is also reflected in their contribution to the portfolio’s absolute and relative performance. All US health insurers except for Cigna have released their first-quarter results. Earnings were better than expected and management earnings guidance for 2023 was increased across the board. This confirms our assumption that these management teams astutely factored a recovery in surgical treatments into the offered insurance premiums. Joe Biden's announcement that he would seek a second term portends less political risk for health insurers.

Rumors that Boston Scientific (+1.7%) would issue a public takeover bid for the medical technology company 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.

In the medtech space, Intuitive Surgical (+15.1%), Inspire Medical (+11.6%), Abbott (+7.1%), Edwards Lifesciences (+3.8%) and Boston Scientific made positive contributions to the portfolio's absolute and relative performance. First-quarter results from the large-cap and broadly diversified companies Intuitive, Abbott, Edwards Lifesciences and Boston Scientific were well above the projected top and bottom line numbers in some cases, which can be traced to a sharp upturn in surgical treatments. These companies also raised their sales and profit guidance for 2023. A significant improvement in nursing staff levels, reduced mortality among the elderly and less fear among the same population segment of contracting COVID-19 in a hospital setting were cited as the main drivers behind the strong rebound in surgical procedures.

Align Technology (-4.9%), the market leader for transparent teeth aligner systems, was unable to meet excessively high investor expectations.

Life sciences tools companies Danaher (-8.2%) and Thermo Fisher (-6.0%) had a negative impact on the performance. Danaher dialed back its 2023 growth forecast for its bioprocessing business due to the drop in demand from biotech and pharmaceutical companies. Thermo Fisher did not revise its sales forecast, but it too has been impacted by a drop in demand from drug manufacturers.

In the healthcare services segment, we believe the US health insurance industry offers the most upside potential. Premium volumes are expected to show a very good trend in 2023. On the one hand we expect solid enrollment growth in “Medicare Advantage” and “Commercial” plans and above-average premium growth rates on the other. We think the conservative earnings projections of US health insurers offer more than enough cushion to offset a full recovery in elective procedures. The higher levels of short and mid-term bond yields might even give their earnings an additional boost. Politics-related risks remain benign in view of a divided Congress and Joe Biden's announcement that he would seek a second term of office.

For medtech companies, we expect treatment volumes will be back to normal levels by the end of 2023, given the high levels of immunity and improved staffing conditions at hospitals. Additional upside is certainly possible considering the current treatment backlogs. We assume pricing power will improve, i.e. prices are unlikely to change, whereas during the previous 10 years medtech companies experienced a price erosion of 1-2% p.a. Better cost management and strong sales growth are therefore likely to lead to better profit margins. Attractive catalysts ranging from new product launches (e.g. Pascal Precision, Dexcom G7, Omnipod 5) and groundbreaking clinical trial results (e.g. ADVENT) to first-time reimbursements (e.g. for CardioMEMS, CGM sensors for type 2 diabetes patients requiring basal insulin therapy) will provide additional upswing.

We think a recession is possible in 2023. Medtech & services stocks tend to outperform in a recessionary environment.