Global equity markets made modest gains in June, recovering from some Fed-driven weakness in the middle of the month. The short-lived weakness was driven by a hawkish update from Fed Chair Jerome Powell as officials signalled rising rates earlier than previously telegraphed. However, the market’s fears were swiftly allayed when Powell reiterated his view that price increases and spiking inflation are likely to prove temporary as global supply chains re-open. Looking at the healthcare subsectors in greater detail, life science tools and services and healthcare equipment were the best performers, with healthcare facilities, services and managed care lagging. The Russell 2000 Index was also strong, up about 10% in the month. The Company’s NAV increased by 4.9% in June, which was behind the benchmark (Morgan Stanley Global Healthcare Index) which increased by 5.7% for the month.

Looking at the healthcare subsectors in greater detail, life science tools and services and healthcare equipment were the best performers…

The most impactful news flow in June, and possibly so far this year, was the FDA’s hugely surprising decision to give Biogen’s Alzheimer’s drug accelerated approval. To be branded Aduhelm, and to be priced at $56,000 per annum, the approval was made even more surprising given the drug’s broad label. So why keep using the word “surprising”? Back in November 2020, the FDA’s Peripheral and Central Nervous System Drugs Advisory Committee voted zero ‘yes’, 10 ‘no’ and one ‘uncertain’ on the question: “In light of the understanding provided by the exploratory analyses of Study 301 and Study 302, along with the results of Study 103 and evidence of a pharmacodynamic effect on Alzheimer’s disease pathophysiology, it is reasonable to consider Study 302 as primary evidence of effectiveness of Aducanumab for the treatment of Alzheimer’s disease?” Put simply, the evidence put forward at that time did not support approval of the drug. In an open letter, the FDA concluded that the “drug reduces amyloid beta plaque, and that this reduction is reasonably likely to predict clinical benefit.” As you can imagine, the decision put material upwards pressure on not just Biogen, but also other companies with similar assets in development (namely Eli Lilly and Roche Holdings) and those companies that may be involved in manufacturing the drugs.

June also witnessed a very exciting, and potentially impactful, update from the world of genome editing. By way of background, genome editing is a type of genetic engineering in which DNA is inserted, deleted, modified or replaced in the genome of a living organism. The technology uses a pair of ‘molecular scissors’ to precisely cleave targeted DNA sequences. US-based biotechnology company Intellia Therapeutics disclosed the first-ever clinical data supporting the safety and efficacy of CRISPR genome editing technology. More specifically, the company’s product is designed to inactivate a specific gene (known as the TTR gene) in liver cells to prevent the production of misfolded transthyretin (TTR) protein, which accumulates in tissues throughout the body and causes debilitating and often fatal complications. The update was very well received by the market, not just for Intellia Therapeutics, but for peers using similar technologies.

Switching gears to COVID-19, the global spread of the highly contagious Delta variant is something that should not be ignored, not just because it is highly transmissible but because it has been associated with more severe disease. Thankfully, the bio-pharma innovation engine is continuing to deliver solutions. Johnson & Johnson disclosed that a single shot of its vaccine generated strong, persistent activity against the rapidly spreading Delta variant and other highly prevalent SARS-CoV-2 viral variants. Along a similar vein, real world data has demonstrated that two doses of AstraZeneca’s vaccine are 92% effective against hospitalisation due to the Delta variant and showed no deaths among those vaccinated. For completeness, there is also evidence that both the Moderna and Pfizer/BioNTech vaccines should remain protective against new detected variants. Fingers crossed, but it does feel that the healthcare industry is continuing to find the right answers at the right time.

Positive contributors during the reporting period were Alnylam Pharmaceuticals, Biohaven Pharmaceuticals and Thermo Fisher Scientific. Alnylam Pharmaceuticals enjoyed a positive rerating as a result of several, incremental pipeline updates, the most significant of which was the FDA’s acceptance of the new drug application for vutrisiran for the treatment of polyneuropathy (a disease where the body’s peripheral nerves malfunction). There was no material news flow for Biohaven Pharmaceuticals during the reporting period although prescription trends for lead migraine assets Nurtec ODT do appear to be trending in the right direction. After a challenging period, Thermo Fisher Scientific has rebounded on expectations that, (a) the base business is recovering strongly, and (b) there may be further upside from COVID-19 testing and/or the need to use the company’s development solutions for further COVID-19 vaccines. Cash and others also had a positive impact on performance.

Negative contributors in June were Philips, Encompass Health and AptarGroup. Philips surprised the market by announcing a recall notification for a Continuous Positive Airway Pressure device called DREAMSTATION-1. The financial implications of the recall are hard to quantify at this stage although we do note that Philips has set aside €500m to pay for corrective actions. There was no material news for Encompass Health during the period although the company did announce the appointment of a new management team for the Home Health and Hospice business. As a reminder, in 2020 Encompass Health announced it was exploring strategic alternatives for its Home Health and Hospice business. A range of options are under consideration, including the full or partial separation of the business from Encompass Health through an IPO, spin-off, merger, sale or other transaction. AptarGroup’s disappointing recent performance reflects concerns that the post-1Q21 recovery in the pharmaceutical segment might not be straightforward. The Trust’s underweight position in Eli Lilly was also a drag on performance following its Alzheimer’s-related rally.

The challenge, and indeed the opportunity, is to try and recognise those technologies that are not only meeting unmet medical needs and adding value to the system, but also have broad and durable utility.

In terms of portfolio changes, we took profits in Kyowa Kirin and UnitedHealth Group following a period of positive performance. We also exited our position in Privia Health following a strong post-IPO rally. We recycled the proceeds from the sales into home health business Amedisys, life sciences tools and services company Thermo Fisher Scientific, and European pharmaceuticals company UCB. Amedisys’ shares have been under pressure recently due to factors that we believe should be short-lived, namely hospice admissions that were disrupted by the weather and COVID-19. Further, if the company can judiciously deploy its balance sheet on some tuck-in deals, interest in the equity story could be reignited. Thermo Fisher Scientific is a high quality, high growth company that was a significant beneficiary of the COVID-19 pandemic in 2020. Unfortunately, the short-term nature of those revenue and cashflow streams has overshadowed progress in the base business – it is that disconnect that we hope translates into an interesting investment opportunity. Finally, following a period of positive news flow in 2020, UCB derated during 2021 as the company entered into a news flow void. With an exciting pipeline, and a rich vein of news flow coming in H2 2021, that derating could reverse as we move through the balance of the year.

It makes sense to question and challenge the wisdom and philosophy of a regulator (the FDA) that has approved a drug that might turn out to be effective, but it is also right to reflect on the remarkable levels of innovation and dynamism the healthcare industry is enjoying right now. The challenge, and indeed the opportunity, is to try and recognise those technologies that are not only meeting unmet medical needs and adding value to the system, but also have broad and durable utility. With so much variety and diversity in the healthcare universe, we hope to be able to do just that.