Global equity markets ended August in negative territory, however beneath the surface there was a significant divergence in performance, with large-cap and established market stocks faring markedly better than their small-cap and emerging market counterparts. As for healthcare, which outperformed the broader market, the pharmaceutical, biotechnology and life sciences tools and services subsectors saw positive returns, while healthcare IT, supplies, services, equipment and managed care had a more challenging month. The Company’s NAV was up 0.5% in August, behind the benchmark (MSCI All Country World Daily Net Total Return Health Care Index) which was up 0.6% for the month (both in sterling terms).
On the macroeconomic front, data released in August for the US was mixed, with GDP growth behind consensus, but inflation cooled faster than anticipated and the job market continued to appear resilient. Nonetheless, there are signs the unemployment rate might start to creep up as the number of new job openings declined and wages are moderating. Whether this is sufficient for the Federal Reserve to pause any interest rate rise is yet to be seen. The picture in China was much gloomier where exports, industrial production and retail sales were soft, the property market slumped and the expected rebound from its zero-Covid policy has failed to materialise. The Chinese government has been taking measures to boost its economy but has also been setting out strategies to promote local industries, protect consumers and encourage fair competition, including a sweeping crackdown on bribery in the healthcare sector. It will take many more months to establish whether this balancing act between the expansionary agenda and the more protective policies will play out in favour of the Chinese economy.
Early in August, Danish pharmaceutical company Novo Nordisk published positive clinical trial results for its weight-loss drug Wegovy. The study showed the drug is associated with a statistically significant 20% reduction in major adverse cardiovascular events compared with a placebo. A positive surprise, the results proved to be a significant catalyst not just for Novo Nordisk but for other companies with similar assets in late-stage development for obesity. The data was so compelling that second derivative beneficiaries such as the contract manufacturing companies also received a boost to their valuations. By contrast, medical device companies exposed to areas such as bariatric surgery, diabetes and sleep apnoea came under pressure. While the data is genuinely exciting, it is our view that we need to see more real-world evidence of the drug’s long-term benefits before materially reducing the addressable markets for the aforementioned medical device companies.
The positive clinical data released by Novo Nordisk understandably injected upwards momentum into not just Novo Nordisk but also other companies that have exposure to the weight-loss theme.
August also witnessed the publication of the US government’s list of drugs that will be subject to Medicare price negotiation under the Inflation Reduction Act (IRA). As a reminder, the negotiations between the US government and the pharmaceutical companies will take place this year and next, with the negotiated prices taking effect in 2026. A well-telegraphed event, the list of drugs contained few surprises and appears to be targeting mostly mature franchises that are either in decline or will soon be facing generic competition. In short, we believe the pharmaceutical industry should be well equipped to digest the impact.
Fund review and activity
The top three contributors in August were UnitedHealth Group, AptarGroup and Zealand Pharma. The Fund was not exposed to UnitedHealth Group, which continues to struggle as the market contemplates rising medical costs. AptarGroup’s strong performance reflects not just positive earnings revisions, but also an appreciation that the company is supplying components to three of the GLP-1s, indicated for both diabetes and obesity. Zealand Pharma continues to perform strongly, with NovoNordisk’s cardiovascular data the catalyst.
Negative contributors during the period were Novo Nordisk, Inspire Medical Systems and DexCom. The Fund was not exposed to Novo Nordisk which continues to be driven by increasing expectations for Wegovy. By contrast, medical device companies Inspire Medical Systems and DexCom have had a challenging time, with the key driver being concerns that the weight-loss drugs will permanently impair the companies’ addressable markets, namely sleep apnoea devices and continuous glucose monitoring.
With an attractive valuation and a resilient earnings profile, we initiated a position in US health insurance company Humana. With rising medical costs appearing to be incorporated into the company’s benefits design, we believe the market can now focus on the durable growth of the company’s primary end market, the US seniors. The position was funded via the sale of US distributor McKesson, a stock that has performed strongly but is now carrying less upside from a valuation perspective.
Outlook
The positive clinical data released by Novo Nordisk understandably injected upwards momentum into not just Novo Nordisk but also other companies that have exposure to the weight-loss theme. By contrast, we feel it is too early to assume the products will disrupt and materially reduce the addressable markets for a swathe of medical device companies in areas such as bariatric surgery, continuous glucose monitoring and sleep apnoea. The near-term overhang is real, but it is very difficult to quantify today the broader impact on the medical devices sector and indeed on the long-term health implications of patients that take weight-loss drugs over a sustained period.
