Bellevue Medtech & Services (CH)

Data readouts on the US economy in February were mixed. Core inflation came in better than expected, but the jobs report and consumer sentiment fell short of expectations. Bond yields retreated in February and the 10-year US Treasury yield ended the month 0.3% lower at 4.2%.

The sector rotation triggered in January when the Chinese company DeepSeek released its first AI model continued into February as capital flowed out of tech stocks and into the healthcare and other sectors. The latest readings on the US economy and Donald Trump’s threat to impose tariffs on imported goods from China, Canada and Mexico had a relatively positive impact on the broad healthcare sector (+0.4%) compared to the world stock market (-1.4%).

The Medtech & Services sector (-2.7%) was unable to keep pace with the broader healthcare sector and the Bellevue Medtech & Services Fund (-3.2%) also headed south. Healthcare services had a negative effect of -3.1% on portfolio performance, and medtech stocks had a slightly negative effect of -0.1%.

US wholesale pharmaceutical distributor McKesson (+6.9%) made another positive contribution to absolute performance, while HCA Healthcare (-7.8%), the largest hospital operator in the US, and Veeva (-4.6%), a provider of cloud-based software solutions for more efficient drug marketing and drug discovery processes, detracted from absolute and relative performance. McKesson’s latest guidance came as a positive surprise to investors. 

Stocks of US health insurers showed a mixed performance in February. CVS Health (+15.6%) and Cigna (+4.3%) traded higher, while UnitedHealth (-13.0%), Centene (-9.8%) and Humana (-8.4%) closed in the red. CVS surprised investors with better-than-expected earnings guidance for 2025, largely thanks to a strong forecast for its health insurance business. UnitedHealth and Humana traded lower after the Wall Street Journal published an article claiming that the US Justice Department was launching a new investigation into the company’s Medicare Advantage billing practices. UnitedHealth issued a media release in response stating that it was not aware of any “new” investigations and that the company's billing practices were reviewed by the government on a regular basis. It also stated that the Department of Justice regularly conducts such reviews and has never found any evidence of misconduct at UnitedHealth.

Abbott (+7.2%), Penumbra (+6.2%), Idexx Laboratories (+2.9%) and Boston Scientific (+0.7%) made positive contributions to performance, while Align Technology (-15.2%), Becton Dickinson (-9.5%), Cooper (-7.0%) and Stryker (-2.0%) detracted from performance. Penumbra and Idexx reported good quarterly results that surprised to the upside, but investors were underwhelmed by Becton Dickinson’s quarterly results. Becton Dickinson also announced that it was planning to separate its biosciences and diagnostic solutions unit, which is likely to dilute earnings per share. The weakness in Align and Cooper’s shares is attributed to the recent drop in US consumer confidence.

Life science tools companies Thermo Fisher (-12.1%) and Danaher (-7.4%) were performance detractors although Thermo Fisher reached a deal to buy Solventum's purification and filtration business and Danaher announced a new initiative targeting an additional USD 150 mn in annual cost savings. We presume that the negative quarterly reports published by other life science tools companies cast a cloud over hopes of a speedy recovery.

All performance data is in CHF; AA shares.

In the healthcare services space, we believe hospital operators, health tech companies and US health insurers have considerable upside potential. Hospitals should benefit from high patient volumes, higher prices, and only moderately higher personnel costs. We expect health insurers to report solid member growth and significantly higher profit margins in Medicare Advantage and Medicaid business lines. Continued high US Treasury yields could also have an accretive effect on earnings.

In view of the strong Q4 earnings announcements from medtech companies and their latest guidance for 2025, as well as our talks with company executives, we expect procedure volumes to stay strong in 2025. Volume growth is unlikely to accelerate but should remain at healthy levels.

The approval and subsequent launch of relevant new products will continue to bolster sales growth, too. Examples here are Abbott’s Lingo, Libre Rio, Libre 3, TriClip and AVEIR products, Boston Scientific’s Farapulse PFA system and Watchman FLX Pro device, and the new da Vinci 5 surgical robot from Intuitive Surgical. We believe the sector's pricing power will remain above historical levels in 2025, too. Margins are expected to improve in the wake of the fast sales growth.