Global equity markets struggled in November, with the healthcare sector underperforming the broader market. Looking at the healthcare subsectors in greater detail, pharmaceuticals and biotechnology were the best performing subsectors by virtue of declining more modestly than healthcare supplies, healthcare facilities and healthcare equipment. November was especially challenging for small and mid-cap stocks, illustrated by the Russell 2000 Index which declined over 10% in the month. The Company’s NAV declined by 2.5% in November, behind the benchmark (MSCI AC World Daily TR Net Health Care Index) which was down 0.1% for the month.

If ever there was a month of two halves, it was November. Early in the month, Pfizer announced surprisingly positive results for its oral COVID-19 anti-viral treatment Paxlovid. The scheduled interim analysis showed an 89% reduction in the risk of COVID-19-related hospitalisation or death from any cause compared to a placebo in patients treated within three days of symptom onset. Touted by some as a “real game-changer” in the efforts to halt the pandemic, the update put significant upward pressure not just on Pfizer’s equity but on those areas of the market that would benefit from the pandemic receding. In the world of healthcare, we would point to healthcare facilities (improved patient volume on high fixed-cost bases) and medical devices and equipment companies (patients returning to the system to address their unmet medical needs). Conversely, those areas that have been a beneficiary of the pandemic, such as the life sciences tools and services and the diagnostics subsectors, struggled. There was clear light at the end of the COVID-19 tunnel.

It does not make sense, however, to panic before we are all armed with important information about the new variant.Unfortunately, the appearance of a new, heavily mutated COVID-19 variant (known as Omicron) and a hawkish update from the Chair of the Federal Reserve were catalysts for a sharp market sell-off towards the month-end. It is appropriate and understandable to be concerned about the potential impact that Omicron will have on people’s lives and on the global economy. It does not make sense, however, to panic before we are all armed with important information about the new variant. With global healthcare systems mobilising considerable resources to find the answers, we would hope to have more information on the following key metrics in the next two or three weeks: (1) how transmissible is Omicron compared to the Delta variant?; (2) how effective are the current vaccines against Omicron; and (3) how stable and how virulent is Omicron? Making strong predictions about Omicron’s characteristics is fraught with danger but there is nothing wrong with being optimistic and hoping that Omicron has mutated so much that it renders itself unstable and therefore less harmful to it hosts. If that does prove to be the case, we can perhaps start to entertain the idea that the end of the pandemic is in sight.

A hawkish update from the Fed Chair Jerome Powell added momentum to the sell-off, with Powell telling a Senate banking committee that inflation can no longer be considered “transitory”. In his opening remarks, Powell said that the recent rise in COVID-19 cases and the emergence of the Omicron variant pose “downside risks to employment and economic activity and increased uncertainty for inflation.” The prospect of an earlier end to bond tapering and a flattening yield curve stimulated a broad sell-off and put upwards pressure on the Cboe Volatility Index.

Positive contributors were Alnylam Pharmaceuticals, Cytokinetics and Merck & Co. Alnylam Pharmaceuticals performed strongly, recovering from the October sell-off that was catalysed by the surprising announcement that CEO John Maraganore is going to step down at the end of the year. The company also hosted an R&D day that focused on continued commercial execution of its four commercial assets, the potential launch of its fifth product, as well as the advancement of early, mid and late-stage investigational programs. US biotechnology company Cytokinetics continued its upward trajectory in November, although we saw little by way of material news flow that would shift our thesis. A lack of exposure to Merck & Co was a positive contributor, as the share price struggled to digest the positive update from Pfizer’s Paxlovid (Merck & Co has a competing product that appears to be less effective) and a disappointing update with an HIV asset that is in clinical development.

The Fund’s lack of exposure to Pfizer negatively impacted performance with the Paxlovid update adding significant momentum to the equity story. US biotechnology company Biohaven Pharmaceutical Holding had a challenging month, with the catalyst appearing to be the signing of an ex-US commercialisation deal for its migraine asset Nurtec ODT with Pfizer. Prima facie, the deal is very attractive given the $500m upfront payment (split $150m in cash and $350m in Biohaven Pharmaceutical Holding’s equity at a 25% market premium) and the potential for $740m in milestones. Unfortunately, however, some in the market were hoping for a more comprehensive strategic update and reacted accordingly. Danish biotechnology company Zealand Pharma had a difficult month with the catalyst for the underperformance being an underwhelming commercial update for Zegalogue, a rescue pen for the treatment of low blood sugar (or severe hypoglycaemia). With little in the way of near-term catalysts, the shares have been heavily sold off.

While November was a hugely frustrating month, the significant sell-off in a few high-quality companies is generating really exciting investment opportunities...

In terms of portfolio changes, we added a US biotechnology company, United Therapeutics, to the portfolio and we also added Surgery Partners. With a broad suite of products designed to treat a severe, chronic condition known as PAH (Pulmonary Arterial Hypertension – a type of high blood pressure that effects the heart and lungs), strong commercial execution could put upward pressure on consensus forecasts. US-based Surgery Partners is a leading operator of surgical facilities and ancillary services, a business we believe will benefit from the shift in patient volumes away from the more traditional hospital in-patient settings. The positions were, in part, funded by sales in EssilorLuxottica, Syneos Health and Renalytix, all of which have performed well and were sold on valuation grounds.

While November was a hugely frustrating month, the significant sell-off in a few high-quality companies is generating really exciting investment opportunities in the healthcare sector, a sector where we believe the fundamentals remain strong and there is a commitment to finding innovative solutions to ongoing access and treatment challenges. The backlog is building, and unfortunately it might not be building solely with patients that have postponed elective procedures. It might be a backlog that is heavily populated with missed diagnoses of more acute conditions that cannot be ignored any longer.

As at 03 December 2021