Bellevue Digital Health

Global stocks (MSCI World Net Index +4.6%) and the US tech sector (Nasdaq 100 +5.3%) closed sharply higher in November, whereas the broad healthcare sector tracked by the MSCI World Healthcare ended the month slightly lower (-0.9%).

This clearly divergent performance can be traced to the surprisingly strong election results that made Donald Trump the 47th president of the US. The Republican party not only captured the Senate but also kept its majority in the House. Key aspects of Donald Trump’s “America First” policy are reducing government regulations and laxer enforcement of antitrust laws and principles, which explains the big gains by US tech and financial stocks. On the other hand, the nomination of vaccine skeptic Robert F. Kennedy Jr. as the next US health secretary irritated Wall Street and had a negative impact on biotech and pharmaceutical stocks.

The Bellevue Digital Health Fund (+6.3%) outperformed global equity markets and the broad healthcare sector. 24 of the 34 stocks in the fund's portfolio made a positive contribution to performance. The list of winning stocks was led by Natera (+38.7%), Privia Health (+17.0%), Globus Medical (+16.4%), Insulet (+15.2%), Align (+13.5%), Dexcom (+10.7%), Veeva (+9.1%), Intuitive Surgical (+7.6%) and Procept BioRobotics (+6.2%).

Natera clearly beat consensus sales and earnings expectations. Three clinical studies that will be published early in the new year should help to further enhance the profile and utility of its leading MRD technology in guiding clinical care. This could lead to full reimbursement of Natera's services for privately insured patients. These tests (and the associated costs) are already being conducted but are not covered. Full coverage would increase Natera’s sales by more than 50%, without any notable increase on the cost side. Privia Health published good third-quarter results and expects its operating profit for 2024 to be at the upper end of the given range and it continues to expand in the US (establishing a presence in Iowa). Insulet beat the consensus sales forecast for the third quarter and increased its sales guidance for 2024 as a whole. Its Omnipod 5 automated insulin delivery system is now also compatible with Abbott’s FreeStyle Libre 2 Plus for US users. This creates significant market potential for Insulet within the type 2 diabetes market, where Abbott is the undisputed market leader in continuous glucose monitoring sensors. Globus Medical beat investor expectations too and reported record-high robot unit placements. Dexcom seems to be making good progress toward resolving its self-inflicted sales problems. Veeva surprised investors by announcing a new sales target of USD 6 bn in sales in 2030 at its capital markets day.

Evolent Health (-44.7%) and Exact Sciences (-9.9%) were the biggest performance detractors, along with Ambu (-14.9%) and QuantumPharm (-66.7%).

Evolent Health reported disappointing results for the third quarter and lowered its guidance for 2024 and 2025. Unexpectedly higher pay claims expense from prior quarters and higher medical cost trends among some of Evolent Health’s customers resulted in below-average operating earnings. Some contracts did not contain any terms for adjusting rates to reflect such spikes in costs. Evolent has been negotiating higher rates for these now unprofitable contracts effective 2025 and, if no agreement can be reached, the contracts will be terminated. Its profitability is therefore expected to improve next year, but revenue losses cannot be completely ruled out. Exact Sciences’ third-quarter results were slightly lower than expected at the top line while earnings were much better than expected. However, management slashed its forecast for the fourth quarter of 2024. This unnerved investors, although the guidance cut was mostly due to temporary factors. Hurricanes Helene and Milton, for example, had a negative impact on the lab testing volumes and also disrupted the delivery of test results. Both factors will have a negative impact on reported fourth-quarter sales. QuantumPharm shares came under pressure as the expiration date for the IPO lock-up period approached. Most of the shares held by the fund had been sold beforehand, well above the price set during the IPO. All performance data is in USD / B shares.

From a fundamental point of view, digital health companies have reported stable above-average growth and that is expected to continue in 2024.

In their discussions with investors during February and March, the executives of many companies made positive remarks about business in the first quarter and for 2024 as a whole. The approval and subsequent launch of relevant new products will continue to bolster sales growth, too. Examples here are Inspire Medical's new Inspire 5 device for obstructive sleep apnea, Dexcom's Stelo and G7 blood glucose sensors, Intuitive Surgical's new da Vinci 5 surgical robot, and Insulet's Omnipod 5 patch pump.

As witnessed during the last two years, even outstanding sector-specific fundamentals can be overridden by macroeconomic developments and shifting investor preferences. In 2024, we expect our investment solution to benefit from several factors: Cuts in US interest rates (which usually benefits growth stocks the most), attractive valuation levels (price/sales multiples close to historical lows), an expected increase in M&A and IPO activity, a general repositioning as investors drop last year's outperforming stocks and buy high-quality stocks, and the underwhelming growth outlook for the world economy (which in the past has been a relatively good setting for non-cyclical subsectors such as the digital health) underpin our optimism and make a good case for investing in the Bellevue Digital Health (Lux) Fund.