Bellevue Digital Health

Global stock indexes (MSCI World Net Index +2.7%) made pleasing gains in August, as did the broad healthcare sector as measured by the MSCI World Healthcare Index (+5.5%). US tech stocks (Nasdaq 100 +1.2%) and the Russell 2000 (-1.5%) were laggards, whereas the Bellevue Digital Health Fund (+10.0%) was a strong performer. Two factors contributed to the fund’s outperformance: Good company news flow and a macro environment that favors the non-cyclical healthcare sector. Digital health growth stocks clearly benefited from both factors and the prospect of an imminent rate cut from the US central bank.

The Bellevue Digital Health (Lux) Fund’s positive performance in August was broadly based. 26 of the 37 stocks in its portfolio made a positive contribution to performance. The top contributors were Omnicell (+52.3%), Evolent Health (+37.1%), Exact Sciences (+35.0%), Procept BioRobotics (+24.8%), Penumbra (+21.1%), TransMedics (+18.1%), Natera (+15.5%) and Intuitive Surgical (+10.8%).

Omnicell, a healthcare technology company, reported quarterly earnings that topped its own forecast as well as analyst expectations. Evolent Health gained on takeover speculation. We think its management would be receptive to a takeover bid. Exact Sciences, a leader in advanced cancer diagnostics, reported second-quarter sales and earnings that beat analyst estimates and it revised its full-year adjusted EBITDA guidance significantly higher. Procept BioRobotics received FDA approval for its AI-based Hydros robotic system sooner than expected. The new system for the removal of benign prostate tissue in males using high-velocity water jets fully integrates advanced image guidance and treatment and is equipped with value-added features such as AI-assisted treatment planning. Hydros is also a platform for developing new treatment options for other indications, such as the removal of prostate cancer tissue.

In other positive news QuantumPharm (+66.8%) and Waystar (+18.4%), both stocks that were recently added to the portfolio in 2024 through IPOs, generated double-digit returns in the past month. These promising companies could become major positions in the fund's portfolio in view of their anticipated successful business development.

Portfolio performance during the month under review was negatively impacted by Outset Medical (-85.1%), Nevro (-37.7%), Teladoc (-24.0%) and GN Store Nord (-13.0%), all of which have low weightings in the portfolio,  and by two core shareholdings, Ambu (-6.5%) and Privia (-2.9%). Outset Medical, Nevro and Teladoc reported disappointing results that again revealed inherent weaknesses at the management level and/or in their business models. We sold all three positions. At GN Store Nord, business with its gaming and hearing solutions is going very well, but the anticipated recovery in the enterprise business (headsets and video solutions) has been pushed back. We are nevertheless confident that this recovery will soon be visible. Ambu published its full results for the second quarter, following the earlier publication of high-level financial results. The reported sales growth of its single-use endoscopes fell short of estimates, which led to profit-taking. 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.