September was a challenging month for global equities, with healthcare modestly underperforming the broader market. The period was characterised by the COVID-19 Delta variant-fuelled growth concerns, inflation worries and a Fed update that was perceived to be relatively hawkish versus consensus expectations. In terms of healthcare, the weakness was across the board, with most subsectors in the US down in the mid-single digits percentage range for the month. The Company’s NAV declined by 1.4 % in September, which was ahead of the benchmark (MSCI AC World Daily TR Net Health Care Index) which declined by 3.2% for the month.

Consolidation was the dominant theme for healthcare during September. Swedish Orphan Biovitrum and Hill-Rom Holdings (Hill-Rom) were the subject of bids early in the month. Private equity firm Advent and sovereign wealth fund GIC are working together to acquire Swedish Orphan Biovitrum, an asset where we believe the pipeline assets are undervalued. Baxter International’s decision to acquire Hill-Rom accelerates the company’s connect care strategy, is accretive to top and bottom-line growth and is expected to generate a high single-digit ROIC by year five. Merck & Co also announced their intention to acquire US biotechnology company Acceleron Pharma (Acceleron) for $11.5bn. Acceleron’s lead pipeline asset is a drug called sotatercept for the treatment of pulmonary hypertension (a type of high blood pressure that affects the arteries in the lungs). Interestingly, Merck & Co stated on the Acceleron call: “We preserve the ability to pursue additional, meaningful, value-enhancing and innovation-driven business development transactions. BD will remain a high priority, and we will continue to return excess cash to our shareholders through share repurchases”.Given healthcare is a highly fragmented sector, we would not be surprised if consolidation continues to be a prominent theme over the medium term.

Positive relative contributors in September were Swedish Orphan Biovitrum, Baxter International and Cytokinetics. Swedish Orphan Biovitrum was the beneficiary of an acquisition proposal for SEK235 per share from private equity firm Advent and sovereign wealth fund GIC. Baxter International announced its intention to acquire Hill-Rom Holdingsac, an update that was well received given Hill-Rom’s excellent growth prospects. There was no material news in period for Cytokinetics although a number of mid-cap biotechnology companies with mid to late-stage assets did rally on the news that Merck & Co intends to acquire Acceleron.

We took profits in life sciences tools and services peers Thermo Fisher and Sartorius after impressive periods of performance.

Negative relative contributors were Amedisys, AptarGroup and Thermo Fisher Scientific (Thermo Fisher). Amedisys continues to struggle with concerns around staffing and staff turnover in its hospice business, coupled with question marks over 2022’s growth prospects. There was no material news for AptarGroup in the period, with the market appearing to remain focussed on the recovery of the pharmaceuticals’ unit following an aggressive destocking earlier in the year. We were underweight Thermo Fisher versus the benchmark during September, a stance that adversely impacted performance following a very upbeat investor day that included a robust long-term outlook.

In terms of portfolio changes, following the acquisition announcements, we exited our positions in both Swedish Orphan Biovitrum and Hill-Rom Holdings. We also exited our position in Incyte following a disappointing label update from the FDA for key pipeline driver ruxolitinib cream, for the treatment of atopic dermatitis. We took profits in life sciences tools and services peers Thermo Fisher and Sartorius after impressive periods of performance. Both have positively rerated to valuations that leave us uncomfortable. The proceeds were recycled into UnitedHealth Group, the sector-leading managed care organisation, Danish hearing aid company GN Store Nord, and dental supplier Envista Holdings.

Navigating the Q3 earnings season could prove interesting given a number of companies have publicly stated that they had underestimated the impact of the Delta variant. Perhaps more important than the impact on Q3 earnings, however, will be the pace of recovery and how the management teams are feeling about the environment into the year-end. Wage inflation will also be a focus, especially for facilities and service providers.