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Fund Manager Commentary As at 29 January 2021
Global equity markets have had an uncertain start to 2021, with healthcare modestly out-performing the broader markets. With both Moderna and Pfizer/BioNTech having set very high bars with their COVID-19 vaccine data late in 2020, the market appears to be less enthusiastic about the recent updates from Johnson & Johnson (JNJ) and Novavax, possibly an unjust assessment. Looking at the healthcare subsectors, life sciences and tools and healthcare services were strong during January whereas managed healthcare and facilities lagged. Pharmaceuticals and biotechnology were both in modest, positive territory. The Company’s NAV increased 1.2% in January, which was ahead of the benchmark (MSCI AC World Daily TR Net Health Care Index) which was up 0.6% for the month.
The first three weeks of January contained a number of the ingredients that underpin our constructive stance on the healthcare sector as we look at 2021 and beyond, namely companies investing in technologies that drive efficiencies. Here, both Boston Scientific and Hill-Rom are looking to acquire assets that remotely monitor patients’ cardiac activity, highlighting the need for early detection and management of cardiac disease. January also witnessed some clinical updates that were well received by the market in the areas of Alzheimer’s (Eli Lilly) and polyneuropathy (Alnylam), with the positive COVID-19 vaccine data from JNJ and Novavax coming later in the month.
M&A was also buoyant in January with half a dozen deals announced in the first week alone. Last but not least, the start to the reporting season has been positive with bellwethers United Healthcare, JNJ, Abbott Laboratories and Danaher all reporting strong 2020 earnings with in-line to better guidance for 2021. Unfortunately, the strong start to the year and early enthusiasm was tempered with a marked selloff as we approached the month end. The catalyst for the selloff, we believe, was triggered by the ever-growing influence of retail investors and the decision for pockets of the market to reduce near-term risk exposure via de-grossing.
In terms of material catalysts during the reporting period, Eli Lilly’s phase II Alzheimer’s data was probably the highlight. Eli Lilly’s donanemab, an antibody that targets a modified form of beta amyloid called N3pG, showed a significant slowing of decline in a measure of cognition and daily function in patients with early symptomatic Alzheimer's disease compared to a placebo. In the trial, donanemab slowed decline by 32% relative to the placebo which is a statistically significant outcome. In terms of next steps, Eli Lilly is running another clinical trial but is also in discussion with the US FDA to assess the regulatory path forward. US biotechnology company Alnylam also disclosed positive topline results for its next-generation asset vutrisiran. Vutrisiran, being developed for the treatment of polyneuropathy (a disease where multiple peripheral nerves become damaged), met the primary and all secondary endpoints. A major de-risking event, the update was very well received by the market.
There were also two COVID-19 vaccine updates in the reporting period, from JNJ and Novavax. JNJ’s vaccine candidate was 72% effective in the US and 66% effective overall at preventing moderate to severe COVID-19 28 days after vaccination. An underwhelming headline, perhaps, but the vaccine was 85% effective in preventing severe disease and also demonstrated complete protection against COVID-19-related hospitalisation and death. Given the single dose, and the ease of storage (the vaccine candidate is estimated to remain stable for at least three months at temperatures of 2-8°C), then the vaccine could well play an important role in tackling the COVID-19 crisis globally. Novavax also disclosed encouraging results for its vaccine, with 89.3% efficacy in its phase III UK study, with 85.6% efficacy against the UK-variant strain. Novavax also conducted a phase III South African study with the vaccine showing 60% efficacy.
Positive contributors from active positions were Renalytix AI, Alnylam Pharmaceuticals and Neurocrine Biosciences. Renalytix AI was especially strong in the period, with the market reacting positively to two updates. First, Renalytix AI announced a partnership with US dialysis provider DaVita. The objective of the partnership is to improve patient outcomes and provide meaningful cost reductions for healthcare providers and payers by enabling earlier intervention for patients with early-stage kidney disease through actionable risk assessments and end-to-end care management. Second, and more importantly, the Centers for Medicare & Medicaid Services in the US announced the establishment of the Medicare Coverage of Innovative Technology to provide a coverage pathway for Medicare beneficiaries to have faster access to new, innovative medical devices and diagnostic tests designated under the Breakthrough Device review program. As a reminder, Renalytix AI’s lead product, KidneyIntelX, was granted FDA breakthrough designation back in May2019.
Alnylam Pharmaceuticals reacted positively to a clinical update early in the month, as discussed previously. Neurocrine’s momentum was in response to a solid set of preliminary financial results, with lead asset Ingrezza (for the treatment of tardive dyskinesia – involuntary, repetitive body movements) showing stability after a challenging period, which was driven by a high percentage of psychiatric practices not taking face-to-face meetings with patients. Negative contributors from active positions were ACADIA Pharmaceuticals, Zealand Pharma and Humana. There were no material updates from US biotech ACADIA Pharmaceuticals during the reporting period, with the stock possibly caught up in the de-grossing momentum. Zealand Pharma’s weakness was in response to a capital raise announced on 27 January. Managed care company Humana actually offered an encouraging update at an investor conference in early January but suffered alongside the managed care group, a group that appears to be very much out of favour at present.
In terms of portfolio changes, we added a position in Australian healthcare services company, Ramsay Health Care. Ramsay Health Care is a leading private hospital operator in Australia, a business that has been adversely impacted by the COVID-19 crisis. With a growing backlog, we believe that surgery volumes could accelerate in the coming months, a scenario that is not necessarily fully reflected in the current valuation.
The additions to the portfolio were funded by sales in Chugai Pharmaceuticals and Eli Lilly, both which have enjoyed significant, positive momentum in recent months. Following a marked derating heading into the US elections, Chugai Pharmaceuticals has benefitted from a rapid, post-election rerating as the market digested the positive implications of a Democratic President but a divided Congress. Eli Lilly has also rerated in spectacular fashion following a positive financial update in December 2020, some positive newsflow for its key diabetes asset, tirzepatide, and the previously mentioned Alzheimer’s data.
Oxford Immunotec was also sold following the announcement that US-based life sciences and tools company, Perkin Elmer, has reached an agreement to acquire the company.
January has been a hugely frustrating month, but one that leaves us with heightened enthusiasm for the healthcare sector given what lies ahead. The frustration comes from the end-of-month selloff following what was a really strong start to the year, both in terms of newsflow and operational momentum. The enthusiasm is borne from the observation that some of the key investment themes we have identified are evident and accelerating. The healthcare industry is continuing to invest in products, technologies and services that will drive efficiencies and coordinate care to yield better outcomes for patients. The pace of innovation is unlikely to slow, and there is strong rationale that M&A will continue to be an important source of growth as companies look to complement their internal assets. Prevention is super-critical, and there is hope that the accelerated investment in diagnostics infrastructure will prove to be valuable once we move past the COVID-19 crisis and healthcare systems start to screen for a wider menu of diseases. With the political landscape in the US also becoming clearer, given the Biden administration is appearing to adopt a more supportive and inclusive philosophy, we think an optimistic stance is the right one.
James Douglas
James studied medicinal chemistry and has worked in healthcare, in sales, research and fund management, throughout his career
Gareth Powell
Gareth worked at a pharmaceutical company and in academic laboratories before setting up the healthcare team in 2007
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