Bellevue Medtech & Services (CH)

Data released in October, such as a solid jobs report and slightly higher-than-expected inflation, provided further indications that US economic growth was stabilizing. US bond yields rose as a result, with the 10-year Treasury yield increasing by 0.5% to 4.2%. The US dollar gained in value against other major currencies.

The world stock market (+0.4%) closed the month slightly in the green, but the broad healthcare sector (-2.5%) was a laggard, as could be expected in such a setting. The Bellevue Medtech & Services Fund (-2.3%) performed better than the health sector as a whole and closed the month slightly ahead of its benchmark (-2.4%). Healthcare services had a negative effect of -2.7% on performance, while medtech stocks contributed 0.4% to performance.

Veeva Systems (+2.0%), a provider of cloud-based software solutions for more efficient drug development and commercialization, made a positive contribution to the fund's absolute and relative performance.

Stocks of US health insurers Elevance (-20.0%), Humana (-16.6%), Centene (-15.3%), Cigna (-6.9%), Molina (-4.5%) and UnitedHealth (-1.1%) came under pressure and detracted from performance. In their earnings announcements for the third quarter, health insurers reported higher medical cost ratios in Medicare Advantage (for people age 65 and older) and in Medicaid (for low-income households) lines of business. The impact of the higher cost ratios varied depending on the relative size of each insurer’s Medicare Advantage and Medicaid business and the skills and strategies of their management. Looking towards 2025, we expect solid membership growth and a significant improvement in health insurers’ profit margins.

Large-cap medical technology companies performed well in October. Intuitive Surgical (+5.1%), Edwards (+4.0%), Boston Scientific (2.7%), Abbott (+2.4%), Medtronic (+1.6%) and Stryker (+1.1%) made positive contributions to performance. Third-quarter earnings announcements showed that almost all players are benefiting from the ongoing fast growth in surgical procedure volumes. Intuitive Surgical, Boston Scientific, Abbott and Stryker also raised their sales and earnings guidance for 2024. At the annual Transcatheter Cardiovascular Therapeutics Conference (TCT), Edwards Lifesciences presented clinical data that confirmed its innovation leadership in transcatheter aortic and tricuspid valve replacement systems.

Shares of the smaller-cap medtech companies Penumbra (+20.7%) and Dexcom (+7.7%) also gained on positive third-quarter earnings reports. Penumbra beat investor sales expectations and investors welcomed Dexcom’s announcement that its patient base had risen to a new record high in Q3 and that it had submitted a 15-day G7 CGM sensor to the FDA for approval.

Life sciences tools companies Danaher (-9.5%) and Thermo Fisher (-9.5%) had negative returns. Their quarterly reports showed that their targeted markets were recovering only gradually, which disappointed investors. Statements about the course of business in the Chinese market also weighed on investor sentiment.

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.