Bellevue Medtech & Services (Lux)

Global stock markets, pressured by stubbornly high inflation figures in the US and the subsequent rise in market interest rates, gave up some ground in April (MSCI World Net Index -2.6%), as did European stocks (Euro Stoxx 50 -2.2%) and Germany’s bellwether DAX index (-3.0%). The broad healthcare sector (MSCI World Healthcare Net -2.9%), the medtech sector (MSCI World Healthcare Equipment & Supplies -4.6%), and the Bellevue Medtech & Services Fund (-5.0%) were not shielded from the broad market downturn.

In the medtech segment, Boston Scientific (+6.1%), Shockwave (+2.5%), Insulet (+1.4%) as well as TransMedics (+28.7%) and Procept BioRobotics (+8.4%) made positive contributions to portfolio performance. Boston Scientific pleased investors by reporting surprisingly strong organic sales growth for the first quarter and revising its sales guidance for 2024 sharply higher. Faster sales growth was attributed in part to market share gains by the company’s new Farapulse PFA catheter for atrial fibrillation. Johnson & Johnson announced the takeover of Shockwave (YTD performance: +79.5%). Investors are very optimistic that TransMedics and Procept BioRobotics will publish excellent first-quarter results in the coming month of May, which explains their strong gains.

Large-cap medtech companies such as Edwards Lifesciences (-10.4%), Dexcom (-7.1%), Intuitive Surgical (-6.1%), Abbott (-5.3%) and Stryker (-4.9%) weighed on the fund’s performance. These faster-growing, more expensively valued stocks were obviously pressured by profit-taking and the increase in market interest rates. In addition, Edwards Lifesciences and Dexcom beat consensus sales expectations but not by a wide margin, while Abbott did not increase its earnings forecast for 2024 enough to impress investors.
 
US health insurers (4.9% of portfolio assets as of the end of April) were performance laggards. With the one exception of Elevance (+3.1%), their performance contribution was negative: Molina (-15.8%), Humana (-11.9%), Centene (-5.9%), UnitedHealth (-1.2%) and Cigna (-0.6%).
Elevance, a US health insurer focused on employer-sponsored plans, exceeded expectations for Q1 profit and increased its full-year profit guidance for 2024. Molina’s higher-than-expected medical cost ratios for the first quarter and its earnings forecast for 2024 disappointed investors.

In early April a positive payment adjustment of 3.7% on average was announced for Medicare Advantage plans for 2025, which is the same as in the advance notice published by CMS in January. Investors, however, had been expecting that the proposed increase in January would be raised by 0.5% to 1%, just like in previous years. That didn't happen, though, which led to some uncertainty regarding insurer profit margins during the next few years. This situation could affect Humana the most and, to a lesser extent, UnitedHealth, Centene and Molina. We believe there are plenty of opportunities for insurers to expand their margins from a mid- to long-term perspective. All performance data is in EUR / B shares.

In their talks with investors in March, the executives of many medical technology companies expressed positive views about the course of business during the first quarter and said that they expected fast growth in surgical procedure volumes in 2024. Their forecast has been confirmed in the ongoing first-quarter reporting season. The approval and subsequent launch of relevant new products will continue to bolster sales growth, too. Examples here are Abbott’s TriClip, AVEIR and Libre products, Boston Scientific’s Farapulse PFA system and the new Da Vinci 5 surgical robot from Intuitive Surgical. We believe company pricing power in the low single-digit percentage range is still intact. Margins are expected to widen due to the faster-than-average sales growth and further improvements in supply chains.

Hospitals stand to benefit from high patient volumes, higher prices, and only moderately higher labor costs. We expect health insurers to report rising premium income in the wake of solid membership growth and premium rate increases, although investors are currently most interested in insurers offering employer-sponsored health plans. Persisting high US government bond yields could have an accretive effect on earnings, too. Political risks are still low. We assume that the elections in November will not give either party a solid majority of seats in either chamber.

Unlike in 2023, we are anticipating tailwinds for our investment solution in 2024: Rate cuts by the Fed, attractive valuation levels (valued at a discount despite above-average earnings growth), a general repositioning as investors drop last year's outperformers and buy up high-quality stocks, plus a continued uncertain outlook for global economic growth (which in the past has been good for non-cyclical sectors). All of these factors argue for an investment in the Bellevue Medtech & Services (Lux) Fund.