The October US inflation report, released on 10 November, showed greater moderation than had been expected, raising hopes that the FED might decelerate the pace of interest rate hikes – and boosting equity markets. Later in the month, some of the post-CPI moves reversed, as investor attention turned back to broader economic growth concerns. Markets then rallied again on November 30, after Jerome Powell announced a moderation of interest rate increases. For the month of November, Healthcare equities returned 5.6% and global equities 7.0%.
November almost concluded the Q3 2022 reporting season (see page 2). Sub-sector-wise, Biotech returned 9.3%, with the solid performance of smaller biotechs – propelled by the CPI data and the FED speach– proving important contributors. M&A news added to the sub-sector performance: Merck intends to buy BioSciences for USD 1.35bn and a journal reported that Sanofi is interested in acquiring Horizon. Earlier in the month, vaccine stocks got a boost after German Chancellor Scholz announced that BioNTech/Pfizer are allowed to offer vaccines to expats in China, potentially paving the way for a wider use of vaccines. Tools & Services (8.0%) were propelled higher by the CPI data
and the FED news. Headlines in China on relaxed/non-relaxed COVID-19 precautions rocked stocks back and forth over the month. Overall, there was a preference for instrument providers (many posting double-digit gains) over bioprocessing names (generally up low- to mid-single digits), driven by reporting and less COVID-19 exposure. A sector re-rating by a major broker also brought some volatility into play. Healthcare Technology rose 7.4% on hopes of peaking inflation. Equipment & Supplies (6.0%) growth names rose sharply in the wake of the CPI data, but later gave up some of their outperformance. Here too, Powell pushed stocks up again. The top performing stock was Abiomed (49.9%), to be acquired by Johnson & Johnson for USD 16.6bn. Pharma gained 5.5% and here too, many small and mid caps had a good month. Larger safe-haven stocks moved up during the second half of November, when the market took a more cautious stance on the macro situation. Among these large caps, Roche was the sole to lose ground, following the failure of its Alzheimer’s trial (Gantenerumab). Providers & Services (1.4%) were impacted by the CPI-fuelled rally and the rotation out of defensive segments, be they distributors (that later recouped losses) or managed care. The latter was further hit by the flu theme (expectations being for a more severe flu season than in past years), with hospitalisations on the rise. Also of note is the global opioid settlement reached by the major pharmacy chains: CVS has agreed to pay USD 5.0bn and Walgreens USD 5.7bn.
Earnings season: Trends outlined in last month’s report held true for firms reporting in November. Overall, this earnings season was more volatile than the past ones. While consensus-beats were not particularly rewarded, there has been remarkable negative convexity on misses. With regards to the 2023 outlook, only a bunch of firms were brave enough to provide projections. Inflationary pressures, a potential looming recession and the unsolved situation in the Ukraine make it hard to have a clear view on 2023 at this point in time. Within Equipment & Supplies, the relatively defensive segments (chronic care, hospital supplies) did better than the more consumer-facing ones (hearing aids, dentals, vision in part). Hospital capex-dependent names continue to enjoy stable order books (cash seems to be there for the right innovation and for hospital efficiency improvements to counter staffing shortages) but were hampered by some supply chain hiccups. Orthopaedic companies saw procedural volumes recover in Q3, although staffing issues hindered them in generating more top-line growth. In Providers & Services, most of the managed care companies posted better-than-expected results, with Humana – the only company to have reported in November – proving the exception and recording a slight miss on sales (-0.5% vs. consensus). Further, Humana’s 2023 outlook was in line with the industry (high single-digit Medicare Advantage membership growth). No hospital provider released results in November. Within services, CVS and Cigna both outpaced expectations with strong pharmacy revenues, also helped by a more severe flu and respiratory season. As for distributors, all three US firms unveiled higher-than-anticipated numbers, driven by a good US pharmaceutical business. Their 2023 outlooks were also solid. For Tools & Services, after the spotlight having been on CROs (funding environment) and bioprocessing (resilience of core bioprocessing demand, post-pandemic stocking effects) in October, November saw pure-play instrument firms report their results. Agilent, Mettler Toledo and Waters all released decent numbers, with demand for instruments still strong and end markets that continue to look healthy. Also, with regards to China, the firms showed very strong Q3 top-line results (Agilent +44%, Mettler Toledo +15%, Waters +23%). In Pharma, earnings surprises were in-line with historical averages. In terms of sales, positive surprises were lower than the 2-year average. Biotechnology reported aggregate sales and earnings surprises that fell short of the historical average.
Children and adolescents seem to have suffered less from severe COVID-19 physical symptoms. However, they are paying a heavy price when it comes to mental health. A summary of many studies, covering over 80,000 children and adolescents globally, concluded that over the course of the pandemic, one in four youth experienced depression symptoms and one in five anxiety symptoms, number that have effectively doubled from pre-pandemic levels, when around 166 million adolescents aged 10-19 lived with a mental disorder. However, only 2% of government health budgets are allocated to mental health. Beyond the traditional antidepressants, there has been very little innovation – with therapies also being primarily developed for adults. There is a huge unmet need and large healthcare companies have not been investing in this space because of the unattractive risk/reward profile (high risk of failure in clinical trials due to high placebo effect). This is why mental health really matters to us and we are constantly on the lookout for new solutions to help the most vulnerable. Check out our video on this subject!
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Rarely are health inequalities more apparent than when walking around San Francisco during the J.P. Morgan Healthcare Conference. In our chart of the month, Raphael Oesch (Portfolio Manager), takes a look at the statistics and discusses some of the reasons behind the figures.
We recently attended the 41st J.P. Morgan Healthcare Conference in San Francisco, which took place from January 9th to January 12th 2023. Our overall conclusion from the conference is that the industry remains in good shape. The key themes that emerged during the week from a devices and services perspective were, the rise of value-based care and innovation & digitalisation. However, it also became clear that the macroeconomic environment is still the dominant force behind (sub) sector performance.
Day after day currently feels like a roller coaster ride, going up because of better than hoped for CPI numbers, down because of looming recession fears, and back up because of a less hawkish FED speech. Are we there yet? What do you think?