February was an extremely challenging month, with Russia’s invasion of Ukraine a tragedy that could have far-reaching humanitarian and geopolitical ramifications. Our thoughts are with all those innocent people that find themselves caught in the crossfire. With regards to equities, the markets were remarkably resilient, with healthcare comfortably outperforming.

From a subsector perspective, healthcare distributors and facilities were especially strong, while life sciences tools and services and pharmaceuticals struggled. The Company’s NAV increased by 1.8% in February, ahead of the benchmark (MSCI AC World Daily Net TR Health Care Index) which declined by -0.5% for the month.

As mentioned, February was challenging, with the market carrying over many of January’s concerns, including the outlook for inflation, economic growth and the cadence of the Federal Reserve’s potential rate hikes. Events in Russia and Ukraine have only heightened uncertainty, acting as a catalyst for switching into safe-haven assets and more defensive sectors such as healthcare. This makes sense if the market is concerned about economic growth and if one considers that biopharmaceuticals and life sciences companies carry the lowest earnings and price beta to a variety of macro indicators such as GDP (Gross Domestic Product), PMIs (Purchasing Manager’s Index) and CAIs (Current Activity Indicators).

Sector view

Focussing on healthcare, the US Senate confirmed Robert Califf will lead the FDA, installing permanent leadership after a 13-month holding pattern. A cardiologist by training, it is hoped the new Commissioner will bring stability back to the division, offering clear guidelines in areas such as the accelerated approval process and resource allocation. With last year’s Alzheimer’s controversy fresh in the memory, restoring confidence in the agency is an important factor when it comes to investing in biopharmaceuticals, especially those that have yet to be approved and commercialised assets.

We also note with interest the recent advisory committee (AdCom) in the US that sat down to discuss the broad utility of clinical trials conducted in a single ethnic group. In this case, US-based Eli Lilly and China-based Innovent Biologics conducted a study for an oncology drug called Tyvyt (sintilimab) with the data solely based on Chinese patients. Looking for drug approval in the US, the AdCom voted 14-1 in favour of further data including running studies that are applicable to the US population. A disappointing update for Eli Lilly and Innovent Biologics, both of who are looking to adopt a disruptive pricing strategy for the asset, but perhaps a relief for the incumbents who have similar assets approved and on the US market with comprehensive data packages.

Portfolio review

Positive contributors during the reporting period were Pfizer, Tenet Healthcare and Alnylam Pharmaceuticals. A lack of exposure to US pharmaceutical company Pfizer was a positive relative contributor with the stock continuing to struggle, presumably as the market re-assesses the commercial potential of the company’s COVID-19 portfolio, both on the COVID-19 vaccine side and on the therapeutics side. Tenet Healthcare produced a strong set of Q4 2021 results early in the month plus 2022 guidance that offered comfort that both the organic and inorganic growth engines are performing well. Further, the management team expects recently inflated labour costs to moderate as the year goes on. There was no thesis-changing news flow during the period for Alnylam Pharmaceuticals with the stock recovering from the January sell-off.

We continue to believe healthcare is an attractive, medium-term investment opportunity given strong fundamentals and defensive qualities that enhance the companies’ ability to navigate the near-term macro challenges.

Negative contributors in February were United Therapeutics, AbbVie and Biohaven Pharmaceutical Holding. United Therapeutics produced a reasonable set of Q4 2021 financial results but, unfortunately, announced that the FDA has requested additional information regarding the pulmonary safety of Tyvaso DPI (filed for the treatment of pulmonary arterial hypertension). The review deadline has been pushed out by three months to May 2022, with the share price correction reflecting increased anxiety among investors as to the approvability of the drug. A lack of exposure to AbbVie impacted relative performance, with the company producing another solid set of financial results that were well received by the market. Biohaven Pharmaceutical Holding continues to deliver on heightened expectations for migraine asset Nurtec ODT, but it is the company’s direction of travel in drug development that is perplexing the market. Alongside the company’s Q4 2021 financial results, the company announced the acquisition of a platform technology that explores solutions for disorders such as epilepsy, neuropathic pain and bipolar disorder, all high-risk/high-reward indications. Biohaven Pharmaceutical Holding also announced an in-licensing agreement for an asset in late-stage development for a rare disorder known as spinal muscular atrophy, a disease where there are already products approved and on the market.

Fund activity

In terms of portfolio changes, we exited our position in clear aligner company Align Technology and recycled the proceeds into Japanese pharmaceuticals company Astellas Pharma. With an attractive valuation, Astellas Pharma could benefit from upward pressure on its terminal value if upcoming data read-outs in oncology and the symptoms of menopause are positive.

We continue to believe healthcare is an attractive, medium-term investment opportunity given strong fundamentals and defensive qualities that enhance the companies’ ability to navigate the near-term macro challenges. Further, we believe the Omicron variant could be the variant that moves COVID-19 from being a pandemic to becoming endemic, a scenario that will allow patients to re-engage with healthcare systems to address their medical needs that have been hitherto ignored. More importantly, perhaps, a less virulent variant should also ease pressure being experienced on the staffing side as self-isolation and quarantines, hopefully, become a thing of the past.

As at 3 March 2022.