Bellevue Emerging Markets Healthcare

The MSCI World Index rallied in November and closed 4.6% higher in USD. Once again, Wall Street performed the best, led by tech stocks. Donald Trump’s election victory boosted risk assets across a broad front and also gave the dollar some tailwind. Not very surprisingly, Tesla was the high flyer, gaining almost 40%. Elon Musk was selected to co-head a new advisory commission reporting to the White House, a move that is likely to benefit his company. Outside the US, almost all other stock exchanges came under pressure. Trump’s policies are very likely to stoke inflation in the US. As a result, nominal bond yields climbed considerably higher as US bonds sold off. European and Asian equity markets also headed south. This is mainly because of Trump's plans to impose blanket tariffs on all imports. Stocks in the emerging market space were down slightly more than 3.5% on average. Emerging healthcare stocks came under even more pressure and closed about 4.5% lower.

China’s Ministry of Health released its updated National Reimbursement Drug List (NRDL). 91 new drugs were added to the list, including 26 cancer drugs, 15 drugs for diabetes and 13 for orphan diseases. 43 drugs low in efficacy were taken off the list to make room for more innovative treatments. The overall price cut was 63%, which is within the range of the past few years. Once a drug makes it to the list, its price generally doesn’t change much in the ensuing years, and sometimes prices have actually been raised. The Chinese biotech company Akeso was likewise successful in getting its top product candidate, the bispecific antibody ivonescimab (PD1 and VEGF) on the list. This follows the publication of excellent data from a Phase III trial comparing ivonescimab with Keytruda, the current standard of care in certain cancers, around the middle of this year.

The shares of the fully integrated Brazilian healthcare provider Hapvida were hammered after it released its latest quarterly results. Hapvida profiled itself by offering low-cost health insurance and was known for focusing on cost control, and quite successfully at that. As a result, its medical loss ratio was very low compared to industry peers. The lower this ratio, the higher the gross profit margin. Apparently, however, this strategy also came at the expense of policyholder treatment quality, which has raised the risk of litigation. This uncertainty spells longer-lasting weakness in the company’s stock price and we therefore sharply reduced Hapvida’s weighting in the portfolio.

The positions in Max Healthcare and Bumrungrad were expanded during the past month. Zai Lab was added to the portfolio. Shareholdings of Innovent, Hapvida, Akeso and Hansoh were reduced. Smart Fit is no longer in the portfolio.

The fastest growing countries in the world can be found in emerging markets and they contain more than half of the world's population. Asian emerging markets are also forecast to account for more than 50% of global GDP by 2050. It is known that the economic growth model of countries shifts from manufacturing to the services sector as household incomes rise. A growing middle class fuels demand for modern medicine. Healthcare ranks increasingly high on their wish list. Billions are being invested in infrastructure, technology and research to modernize the healthcare systems in emerging market countries. This is giving a greater swath of the population access to better healthcare. Meanwhile rapid population aging is also stoking demand for healthcare. In 30 years’ time there will be 400 to 500 million people over 60 in China alone, and they will have a growing need for modern health services and medicines. Outside Asia, Brazil’s rapidly expanding private-sector healthcare market offers a range of interesting investment opportunities. The quality and long waiting times of the country’s public health system are no longer acceptable to many higher-income Brazilian households and they are increasingly embracing these new services offered by private-sector healthcare providers. Hospital chains embedded in a fully-integrated ecosystem are but one example of the beneficiaries of this structural change. The fund serves as a defensive vehicle for capturing the above-average growth potential emerging markets offer. It invests in the entire healthcare system value chain, from hospital chains, drug developers and device manufacturers to medical research specialists and digital health companies.