Bellevue Medtech & Services (CH)

Data on the US economy in April was mixed. Although the jobs data was better than expected, core inflation data fell short of expectations. Consumer confidence in the US tumbled even lower in April on tariff-related anxiety.

The broad equity market (-6.2%) corrected, pressured by the darkening outlook and the news on the tariff front. Healthcare equities (-8.8%) were unable to escape the downward trend and the medtech & services sector (-10.2%) also closed deep in the red. The Bellevue Medtech & Services Fund (-11.8%) underperformed its benchmark. The US dollar shed 6.6% of its value against the Swiss franc in April. The fund's monthly performance in USD was -5.1%. Healthcare services exposure contributed a negative 7.6% to fund performance, medtech stocks -4.2%.

McKesson (-1.5%), a US pharmaceutical wholesaler,  made a negative contribution to absolute performance but a positive contribution to relative performance.

April was a weak month for US health insurance stocks: UnitedHealth (-27.0%), Elevance (-10.1%), Centene (-8.3%), Molina (-7.7%), CVS Health (-7.5%) and Cigna (-3.9%) all traded lower. The month actually began on a positive note for US health insurers. For one, the finalized government payment rates to Medicare Advantage plans for 2026 turned out to be significantly higher than expected and, second, US health insurers are not exposed to the tariff war. The nevertheless weak performance of US health insurance stocks can largely be traced to UnitedHealth's latest quarterly earnings announcement. Although UnitedHealth reported lower-than-expected medical service costs for Q1, management had to cut its full-year EPS forecast for 2025 by 12%, for two reasons. One was the significantly higher level of care activity within its Medicare Advantage (MA) business at the end of the first quarter. The other was much lower-than-expected earnings from its OptumHealth unit due to inaccurate patient risk assessments and consequently lower reimbursement payments. We believe UnitedHealth can successfully address both challenges as the year progresses. Thanks to the increase in government payment rates for MA plans in 2026 (see above), the currently strong demand for medical care from its insured beneficiaries should be offset by rising insurance premiums. UnitedHealth also confirmed its long-term earnings growth target of 13-16%.

The fund’s positions in the medtech firms Penumbra (+1.8%) and Align Technology (+1.4%) had a positive impact on performance. Penumbra reported significantly better-than-expected sales and said that it had submitted clinical trial data on its Thunderbolt aspiration tubing for its computer-assisted vacuum thrombectomy system in the removal of blood clots in the brain to the FDA much earlier than expected.

Well-managed, innovative large-cap companies such as Intuitive Surgical (-3.2%), Boston Scientific (-5.2%), Stryker (-6.6%) and Abbott (-7.9%) weighed on the fund’s performance but they demonstrated quite clearly in their latest quarterly reports that tariffs posed much less risk to their earnings than investors had expected. We see three factors here that mitigate the impact of tariffs. First, rising procedure volumes lead to higher sales, which in turn has a positive leverage effect on profits. Second, a weaker dollar leads to higher reported profits. Third, additional cost-cutting measures enhance profitability. Boston Scientific has lifted its profit guidance for 2025; Abbott confirmed its earlier guidance.

All performance data is in CHF / AA shares.

In the healthcare services space, we believe hospital operators, health tech companies and US health insurers have considerable upside potential. Hospitals should benefit from high patient volumes, higher prices, and only moderately higher personnel costs. We expect health insurers to report solid member growth and higher profit margins in Medicare Advantage and Medicaid business lines. Continued high US Treasury yields could also have an accretive effect on earnings.

In view of the better-than-expected Q1 reports from medtech companies, we expect solid growth in surgical procedure volumes for 2025, and maybe even a slight uptick in growth. The resulting operating leverage and the weak US dollar should cushion the negative impact of tariffs on earnings per share growth.

The approval and subsequent launch of relevant new products will continue to bolster sales growth, too. Examples here are Abbott’s Lingo, Libre Rio, Libre 3, TriClip and AVEIR products, Boston Scientific’s Farapulse PFA system and Watchman FLX Pro device, and the new da Vinci 5 surgical robot from Intuitive Surgical. We believe the sector's pricing power will remain above historical levels in 2025, too. Margins are expected to improve in the wake of the fast sales growth.