Bellevue Medtech & Services (CH)

The US economy showed signs of strength in December. Better-than-expected job market and inflation data were but two of several indicators that the US economy was humming along. The dollar appreciated and US bond yields rose as a result, with ten-year US Treasury yields up 40 basis points at 4.6% as the month ended. As had been expected, the US Federal Reserve lowered its key lending rate by 0.25% to a 4.25-4.5% target range, the third consecutive cut, but it guided for fewer rate cuts in 2025 due to the stubbornly high level of inflation.

As a result, world equities closed the month with a muted performance (+0.3%). The broad healthcare market (-3.2%) declined on weakness in US health insurers and biopharmaceuticals, the latter due to their particularly defensive profile. December was a weak month for the Bellevue Medtech & Services Fund (-6.2%), too, which was unable to beat its benchmark (-5.7%) or the broader healthcare sector. Healthcare services stocks had a negative effect of -5.4% on portfolio performance, medtech stocks a negative effect of -0.8%.

The performance of US health insurers was mixed. Centene (+4.0%) and Molina (+0.7%) made positive contributions to performance, whereas CVS (-22.7%), Cigna (-15.4%) and UnitedHealth (-14.3%) detracted from performance.

The latter three health insurers also own pharmacy benefit manager (PBM) entities, a business that involves large volumes of prescription drugs sold by biopharmaceutical companies and that accounts for a hefty share of their operating profits. A bipartisan bill making its way through Congress would break up companies that have both PBM and health insurance operations. In addition, President-elect Donald Trump has made negative comments about PBMs. We think the probability of this bill being signed into law is very low.

McKesson (-6.5%), a wholesale distributor of pharmaceutical products in the US, HCA Healthcare (-5.3%), the largest hospital chain in the US, and Veeva (-4.9%), a leading provider of cloud-based software solutions for more efficient drug discovery and marketing, were performance detractors.

Large-cap medtech names such as Edwards Lifesciences (+6.9%), Becton Dickinson (+5.8%) and Boston Scientific (+1.5%) made positive contributions to performance. Edwards surprised investors with better-than-expected sales guidance for 2025, given at its investor day in December. In addition, medtech companies are profiting from the sustained sharp upturn in surgical procedure volumes.

Small-cap medtech companies such as Dexcom (+2.7%), Insulet (+0.8%) and Penumbra (+0.2%) also made positive contributions to performance. Dexcom benefited from new treatment guidelines from the American Diabetes Association (ADA), which now recommends continuous glucose monitors for adults with type 2 diabetes who don’t require insulin. More than 25 million people in the United States fall into this category.

Life sciences investments were mixed with a positive contribution from Thermo Fisher (+1.3%) and a negative contribution from Danaher (-1.2%).

All performance data is in CHF; AA shares.

In the healthcare services space, we see substantial upside potential in US hospital and health insurance stocks. Hospitals will benefit from high patient volumes, higher prices, and only moderately higher labor costs. We expect health insurers to report rising premium income in the wake of solid membership growth as well as premium growth. Persisting high US government bond yields could have an accretive effect on earnings, too. Political risks are still low. We assume that the elections in November will not give either party a solid majority of seats in either chamber.

In their talks with investors in March, the executives of many medical technology companies expressed positive views about the course of business during the first quarter and said that they expected fast growth in surgical procedure volumes in 2024. The approval and subsequent launch of relevant new products will continue to bolster sales growth, too. Examples here are Abbott’s TriClip, AVEIR and Libre products, Boston Scientific’s Farapulse PFA system and the new da Vinci 5 surgical robot from Intuitive Surgical. We believe company pricing power in the low single-digit percentage range is still intact. Margins are expected to widen due to the faster-than-average sales growth and further improvements in supply chains.

Economic growth could slow during the course of 2024. Medical technology and healthcare services companies tend to outperform in a weaker environment.