Market and sector review
Historically, December’s trading environment has been characterised by thin volumes and heightened volatility and this year was no exception. Equity markets struggled and finished the last month of 2024 in negative territory. The narrowness of the market which was a feature throughout the year continued in December, with information technology, communication services and consumer discretionary being the best performing sectors. Given the strength in year-to-date winners, it should be no surprise that healthcare lagged the broader market. Within healthcare, the best performing subsectors were healthcare information technology, life sciences tools and services, healthcare equipment and pharmaceuticals. Healthcare services, managed care, healthcare facilities, supplies, and distributors had a more challenging month.
There was no thesis-changing news on the macroeconomic front. Data points to a resilient US economy, with inflation abating (perhaps slower than expected) and unemployment only marginally ticking up. The Federal Reserve, which has a dual mandate of managing inflation and achieving full employment, cut the US benchmark interest rate by only 25 basis points, remaining in ‘wait-and-see’ mode as a hasty unwinding of the tightened monetary conditions might stoke inflation without a benefit to economic growth.
"As we look forward, however, there are plenty of reasons to be optimistic, a view based on high levels of innovation, new product cycles, and ongoing demand for healthcare products and services.
After a difficult November, healthcare continued to languish, with the moves lower driven by sector-specific dynamics. In particular, the political news flow once again pressured managed care companies. This time it was due to proposed policies aimed at increasing transparency in the pharmacy benefits manager (PBM) business model, reducing the role of PBMs in negotiating drug prices and even at eliminating the rebates PBMs receive from drug manufacturers. Additionally, there remains uncertainty around the upcoming US administration change, an administration whose views on healthcare remain opaque, leaving generalist investors unengaged with the sector. This lack of interest was perhaps even more exacerbated by a series of underwhelming or disappointing clinical trials results relative to elevated expectations in areas such as pain management, Parkinson’s disease and obesity.
Fund performance
The Company’s NAV returned -5.6% in December, compared to -4.5% for its benchmark, the MSCI All Country World Daily Net Total Return Health Care Index) (in sterling terms).
Positive contributors relative to the benchmark in December were Stevanato Group, UCB and Swedish Orphan Biovitrum.
There was no thesis-changing news on Stevanato Group although the company did host a plant tour in mid-December that highlighted the company’s market leadership and key growth drivers, an event that was well received by those who attended. Neither UCB nor Swedish Orphan Biovitrum benefitted from positive news flow, with both appearing to benefit from increasing enthusiasm for recent launches that should provide near and medium-term top-line momentum.
Negative contributors in the period under review were Avidity Biosciences, RxSight and Novo Nordisk.
There was no company-specific news on Avidity Biosciences during December, with the stock caught up in the broader biotechnology selloff. RxSight struggled, the primary reason appearing to be a sell-side survey that highlighted increasing competition and the potential for moderating volumes in 2025. Late in the month, Novo Nordisk disclosed late-stage clinical data for key obesity asset CagriSema. While positive, with weight loss of 22.7% after 68 weeks, the results fell short of elevated market expectations which were north of 25%. The negative reaction to the miss was exacerbated by a surprising revelation that Novo Nordisk introduced flexible dosing into the study, effectively allowing patients to titrate down to either control their side-effects or to manage the extent of their weight loss.
We added positions in Sysmex and Exact Sciences in December. Sysmex, a Japanese medical devices company, focusses on the field of haematology and is enjoying a new product cycle that could help the company deliver high single-digit top-line growth and double-digit earnings growth. There is also a sense that the new management team is very focussed on costs and margin expansion. Exact Sciences is focussed on the development and commercialisation of a non-invasive screening test for the early detection of colorectal cancer. After a difficult 2024 in the field, 2025 could see a revenue acceleration driven by a refocussed salesforce, incentives to drive preventative medicine, positive pricing and ongoing demand for the company’s key screening products.
Outlook
On a relative basis, 2024 was an extremely challenging one for healthcare with the sector very much out of favour, as illustrated by ETF outflows and depressed valuations. As we look forward, however, there are plenty of reasons to be optimistic, a view based on high levels of innovation, new product cycles and ongoing demand for healthcare products and services. US political headlines may well create short-term volatility, but when there is greater clarity on the investment landscape, the market can refocus on the industry’s strong fundamentals that could deliver earning growth ahead of the broader market in 2025.
