Bellevue Emerging Markets Healthcare

Market attention in December was once again focused on central bank action, some of which took investors by surprise. The SNB and the Bank of Canada both announced surprisingly large cuts of 50 basis points. Meanwhile the Brazilian central bank lifted its benchmark rate by a greater-than-expected full percentage point. Central banks in Australia, the United Kingdom and Japan left their rates unchanged in December and the Fed raised its overnight lending rate by a quarter-point as expected, but it surprised the market by projecting only two quarter-point rate cuts in 2025 instead of the previously expected four cuts. This latter news was also the main reason for the stock market’s weak performance in December. The MSCI World Index closed the month clearly lower (-2.6% in USD). Healthcare stocks were even weaker, shedding more than 6% of their value over the month. Disappointing clinical data from Novo Nordisk, political initiatives in Washington to reduce the cost of healthcare in the US, a renewed rise in bond yields and end-of-the-year window dressing were additional negative factors for the healthcare sector. Both the MSCI Emerging Markets Index and emerging-market healthcare stocks gave up much less ground in comparison, closing the month -0.1% and -0.5% lower, respectively.

Legend Biotech shares retreated in the face of unrelenting selling pressure. Its CAR T-cell therapy (Carvykti) is clearly viewed as the best available treatment for multiple myeloma, having demonstrated remarkable and lasting efficacy. It is now being widely used in the market – so far some 5000 patients have already received treatment with Carvykti. In 2024, Legend Biotech and its partner Johnson & Johnson generated more than USD 1 bn in sales with this drug. However, there has also been some concern about side effects. There is the risk of serious neurologic side effects in approx. 2% of patients and of so-called parkinsonism in 1-2% of patients. Phase II data on a competing product being developed by Arcellx/Gilead was recently reported that showed a similar efficacy profile but without severe side effects. We are nevertheless confident that Carvykti will continue to claim at least part of the total market in multiple myeloma thanks to its big head start and its very high efficacy. In addition, the rival product must also demonstrate no notable side effects in Phase III testing in order to have a real chance of elbowing Carvykti out of the market. The fund sold some of its Legend shares but remains invested in the stock with a weighting of just under 3%.

Brazil’s National Regulatory Agency for Private Health Insurance and Plans published a report on a legislative proposal focusing on private health insurance. The aim is to better protect policyholders from potential cancellations, limit their out-of-pocket costs, and make the process of premium adjustments/increases more transparent. Under the proposed new regulations, insurers with high gross margins would no longer be able to increase prices to the same extent as they have in the past. Out-of-pocket costs would be capped at 30% per treatment. Total out-of-pocket costs would also be capped at 30% of policyholders’ monthly premium, or at 3.6 monthly premiums per year. Insurers would only be allowed to cancel a policy once a year at the end of each year, giving a 60-day notice period, and they would have to comply with stricter regulations. The proposed changes have been released for public review and comment. A final decision is expected to be reached by the end of the first quarter of 2025. Obviously, these additional regulations would have a negative impact on the country’s health insurance sector. As a result of this uncertainty, the fund closed its position in Hapvida.

Existing positions in Wuxi Bio and Wuxi Apptec were increased during the month under review and new positions in PharmaEssentia und Sulaiman were opened. Shareholdings of Legend Biotech, Akeso and Hansoh were reduced. Hapvida 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.