Despite the global challenges, March was a positive month for global equities, with the healthcare sector outperforming the broader market. From a healthcare subsector perspective, pharmaceuticals, biotechnology, managed care and distributors all experienced strong returns, while healthcare supplies and services, life sciences tools and services, healthcare equipment and healthcare facilities exhibited a more muted performance. The Company’s NAV increased by 6.5% in March, in line with the benchmark (MSCI AC World Daily Net TR Health Care Index) which also rose by 6.5%.

Macro backdrop

The Russian offensive into Ukraine continued into March, with hopes for a swift resolution vanishing after numerous inconclusive meetings between the various parties. The global community responded to the invasion by imposing further sanctions on Russia and Belarus, sanctions that are already starting to impact international businesses. Furthermore, commodities, especially oil, agricultural products and certain metals, continued the upwards trajectory that started in late February, given the importance of both countries in their production. These price increases only add more fuel to the already rampant inflationary fire. Understandably, investors accelerated their retreat into safe havens and more defensive sectors.

Many countries have seen a resurgence of COVID-19 cases, with Asia-Pacific especially impacted. We believe this may be due to a combination of less effective vaccines, lower vaccine uptake and lower acquired immunity. China is one example of a government responding quickly to the higher number of infections by forcing cities into full lockdown, including Shanghai, one of the busiest container ports in the world. These lockdowns have further weakened an already fragile global supply chain with many companies warning they might be unable to fulfil orders because some components are unavailable, their factories are shut or they are unable to ship goods.

The disruption of the delivery of healthcare is a key investment theme for the Polar Capital healthcare team, as is the need for effective behavioural health services. During March, the US healthcare insurance and services company UnitedHealth Group invested in both areas, underpinning our view that both opportunities are increasing in importance and offer sustainable growth. They first acquired out-patient mental health provider Refresh Mental Health and then home-health provider LHC Group. In both instances, UnitedHealth Group is looking to improve care coordination, improve outcomes and patient experiences as well as drive better value.

Fund activity

Positive contributors during the reporting period included Horizon Pharma, Acadia Healthcare and Swedish Orphan Biovitrum. Horizon Pharma produced a strong set of FY21 financial results coupled with encouraging FY22 guidance. The company’s drug development news flow also continues to be positive. Acadia Healthcare also disclosed a solid set of FY21 results coupled with FY22 guidance that offered relief in the face of nervousness around staff recruitment and wage inflation. Swedish Orphan Biovitrum, a recent addition to the portfolio, published positive clinical data in the field of haemophilia A, potentially offering long-term sustainability for one of its key franchises.

Negative contributors in March were Bio-Rad Laboratories, Baxter International and Eli Lilly & Co. There was no company-specific news flow for Bio-Rad Laboratories during the period, with the stock continuing to struggle alongside its life sciences tools and services peers. With regards to Baxter International, the market is concerned about the company’s freight costs, input costs and access to semiconductors for its smart beds and dialysis businesses. The Fund’s lack of exposure to Eli Lilly hurt performance, with the stock performing well alongside a number of its large-cap pharmaceutical peers.

We believe the risks of slowing economic activity and/or a recession have not disappeared completely, both of which are scenarios that make the healthcare sector look more attractive on a relative basis.

We used some of the uncertainty in the market to increase our exposure to the biotechnology and pharmaceuticals subsectors with the additions of Chugai Pharmaceutical, Incyte Corporation and Swedish Orphan Biovitrum, all of which appear to have positive momentum with existing launches as the market recovers from the COVID-19 pandemic. We also added life sciences tools and services company Sartorius which we believe to be a high-quality operator in end markets with attractive growth prospects. Sales in Abbott Laboratories and Alnylam Pharmaceuticals funded the purchases.

Despite the cocktail of rising inflation, more hawkish central banks and war in eastern Europe, the markets remain incredibly resilient. Importantly, however, we believe the risks of slowing economic activity and/or a recession have not disappeared completely, both of which are scenarios that make the healthcare sector look more attractive on a relative basis. That appeal is heightened further if one takes the view that the utilisation and consumption of healthcare products and services will pick-up as COVID-19 moves away from being a pandemic and becomes more endemic in nature. If that is the case, we could see upwards pressure on revenues for a broad swathe of healthcare companies as we navigate our way through the year.

As at 5 April 2022.