Bellevue Medtech & Services (CH)

The Bellevue Medtech & Services Fund CH retreated in July (-3.3%) and was unable to outperform its benchmark (-1.8%) and the broad healthcare sector index (-1.6%). Following their strong performance from the previous month, medtech stocks were primarily to blame for the fund's relative underperformance, while healthcare services exposure had an overall neutral impact.

Investments in medical technology stocks detracted from fund performance even though these companies increased their full-year guidance and published very good quarterly results that in most cases beat street expectations. These earnings announcements were impressive proof of the strong rebound in surgical procedure volumes, but it seems that short-term investors used the clearly positive announcements to take profits after the medtech sector's good performance in the previous month. A weaker US dollar versus the Swiss franc (-2.6%) also weighed on the fund's performance.

Among the medtech names that have already published their results, some showed constructive returns, such as Abbott (-0.3%) and Axonics (+16.2%), whereas others were a drag on monthly performance although their latest quarterly results were very solid. The latter include Boston Scientific (-6.8%), Dexcom (-5.8%), and Intuitive Surgical (-7.8%). Edwards Lifesciences (-15.4%) was the only medtech holding whose results were in line with expectations, i.e. not better than expected. Some medtech companies that have not yet published their quarterly results, Penumbra (-14.3%), Inspire Medical (-13.8%) and Shockwave (-11.3%) for example, also fell on profit-taking. Tandem Diabetes (+38.3%), IDEXX (+7.3%) and Align (+3.8%) had a positive impact on portfolio performance. Shares of the Life Sciences Tools companies Danaher (+3.3%) and Thermo Fisher (+2.2%) also performed well. Although both of these companies slashed their projections for the 2023 fiscal year, investors concluded that they have hit bottom. We share this assessment.

Healthcare services providers performed well overall in the face of the general environment. Although HCA Healthcare (-12.6%), the largest healthcare provider in the US, published a solid set of Q2 results that clearly confirmed the strong recovery in procedures and a declining trend in personnel costs, its shares were marked down. Reported medical costs at US health insurers Elevance (+3.2%), United Health (+0.4%) and Humana (-0.7%) came in at the upper end of expectations, but they were stable and did not show any deterioration during the past two months. Higher investment income and, above all, the optimistic statements about premium pricing developments and the confirmation of earnings per share (EPS) guidance for fiscal 2024 helped to ease investor concerns. Cigna (+2.2%) also benefited indirectly from this news, and two other US insurers that are more focused on Medicaid, Molina (-1.8%) and Centene (-1.9%), also mentioned that business was in line with expectations and that no additional challenges were discernible with respect to 2024. All performance data is in CHF; AA shares.

In the healthcare services segment, hospitals and US health insurance offer considerable upside potential. We believe hospitals will benefit from the ongoing recovery of procedure volumes and from a slower rise in costs for nursing staff. As for the health insurers, we expect premium volumes to show very good growth due to the steady increase in the number of insured people and the above-average premium growth in 2023. Higher short and mid-term interest rates could give their reported earnings an additional boost. Political risks remain muted 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 procedure volumes will be back to normal levels by the end of 2023, supported by the expansion of treatment capacity at hospitals. Further upside potential is possible considering the current backlog of delayed procedures and could unfold over a period of several years. 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.