July, as always, was a very heavy earnings period but, thankfully, healthcare has shown a clean pair of heels so far, with >90% of S&P 500 healthcare companies beating earnings estimates and >90% beating revenue estimates. The European season has also been encouraging for healthcare, albeit less impressive, with just over 50% of companies beating earnings estimates and nearly 80% beating revenue estimates (source: Bloomberg).

July was a strong month for healthcare facilities (primarily driven by HCA Holdings), life sciences tools and services...

July was a strong month for healthcare facilities (primarily driven by HCA Holdings), life sciences tools and services (driven by a strong recovery in end markets and the base businesses) and supplies (driven primarily by Align Technology). At the other end of the scale, managed care and biotechnology struggled, with the former appearing to be the victim of profit-taking and the latter struggling with direction and a clear narrative. The Company’s NAV increased by 4.1% in July, which was ahead of the benchmark (MSCI AC World Daily TR Net Health Care Index) which increased by 2.3% for the month.

Given the market’s focus on the COVID-19 Delta variant, it would be remiss not to share some thoughts. The Delta variant is currently listed as a variant of concern by the Centers for Disease Control and Prevention (often referred to simply as the CDC) and given it is responsible for a significant increase in new cases in regions such as the US, the UK and India, investor concerns are rising about the impact it could have on re-openings, especially across Europe and the US. A highly transmissible strain, the Delta variant already accounts for nearly 100% of new cases in the UK and c60% of new cases in the US. So, what are the potential implications for society? Thankfully, it appears that the authorised vaccines are highly effective against Delta when it comes to severe disease, hospitalisation and death (less so against symptomatic disease). Indeed, Public Health England studies have shown that the efficacy against hospitalisation is c96% for the Pfizer/BioNTech vaccine after two doses and c92% for the AstraZeneca vaccine after two doses – impressive, and reassuring, statistics. It is also worth noting that, according to Dr Anthony Fauci (director of the US National Institute of Allergy and Infectious Diseases), more than 99% of COVID-19 deaths in the US were in unvaccinated individuals.

Positive contributors during the reporting period were Hill-Rom Holdings, Biohaven Pharmaceuticals, Cytokinetics and Bio-Rad Laboratories. Hill-Rom Holdings’ performance was driven by two things: first, speculation in the market that Baxter International is looking to acquire the company, with a bid of $144 per share having been rejected (source: WSJ). Second, Hill-Rom Holdings’ 2Q21 earnings were really strong, especially in the company’s connected care portfolio which we perceive to be the highest valued part of the business. In early July, Biohaven Pharmaceuticals announced a strong set of preliminary 2Q21 revenues for lead migraine asset Nurtec ODT. The $93m figure compared to a consensus forecast that was closer to $55m and put material, upwards pressures on the shares, momentum that was maintained throughout the rest of July. Cytokinetics disclosed a positive readout for lead asset CK-274, for the treatment of obstructive hypertrophic cardiomyopathy. With a market cap of just $2.4bn, we believe the stock continues to carry significant, upside risk. Bio-Rad Laboratories continues to execute, producing a super set of 2Q21 results and a material upgrade to 2021 guidance. Importantly, the key driver behind the impressive performance has been the underlying business as opposed to the less permanent upside that has come from COVID-19-related business. Finally, the value of the company’s stake in Sartorius continues to appreciate with SRT up a not insignificant 65% YTD.

Negative contributors in July were AptarGroup, Medley, Centene and AstraZeneca. AptarGroup’s 2Q21 results disappointed the market, as did the guidance for 3Q21. While the issues facing the company appear to be transient (input costs and de-stocking within the pharma business), the turnaround from here could take several quarters to complete. Frustrating, Medley sold off given it is a high beta stock, with the Japanese market reacting to some of the extreme weakness impacting the Chinese market. Unlike Centene’s managed care peers, the company’s 2Q21 results were lacklustre and included an increase to the FY21 MLR forecast. The attractive long-term margin expansion story, coupled with the heavily discounted valuation, help us retain our positive stance. There was no material news during the reporting period for AstraZeneca although the market was carrying some concerns that AstraZeneca’s pro-forma guidance would disappoint. It did not, comfortably bracketing consensus expectations.

In terms of portfolio changes, behavioural health provider, Acadia Healthcare, has been on the watch list for some time, with the recent pull-back the opportunity we had been waiting for to add to the portfolio. Sadly, we believe that the near and medium-term demand for behavioural health services will be high with Acadia Healthcare well positioned to supply those much-needed services. With a strong balance sheet, attractive growth outlook and supportive valuation we believe Acadia Healthcare carries more upside than downside risk. US biotechnology company, Neurocrine Biosciences, was sold to fund the addition of Acadia Healthcare.

In addition, we continue to see tangible evidence that some of the Fund’s long-term investment themes are continuing to bear fruit, especially in areas such as outsourcing, delivery disruption and prevention.

The macro outlook is confusing investors currently, with inflation expectations continuing to move higher, cyclical stocks underperforming and bond markets refusing to sell off. We believe the explanation for the recent behaviour is that we have reached a mid-cycle transition, which is generally supportive of higher quality assets, with a bias towards large caps. Healthcare is a sector that generally does well during this phase given it is richly populated with high quality growth companies at reasonable valuations. In addition, we continue to see tangible evidence that some of the Fund’s long-term investment themes are continuing to bear fruit, especially in areas such as outsourcing, delivery disruption and prevention.