Bellevue Medtech & Services

Global equities closed slightly higher in October (MSCI World Net Index +0.6%), while European stocks (Euro Stoxx 50 -3.3%) and Germany’s bellwether index (DAX -1.3%) lost ground. A solid jobs report and slightly higher-than-expected inflation in the US pushed up US bond yields; 10-year US Treasury yields, for instance, rose by 0.5% to 4.2%, and the US dollar strengthened against other major currencies.

Global medtech stocks (MSCI World Healthcare Equipment & Supplies -0.4%) and the Bellevue Medtech & Services Fund (-0.4%) closed the month little changed despite the adverse market environment. Both benefited from the dollar's strength (US investments have a high weighting) but even more so from the excellent third-quarter results that were reported by US medical technology companies during the month under review. This also explains their hefty outperformance of the healthcare market as a whole, as measured by MSCI World Healthcare (-2.3%).

Large-cap medtech names in the portfolio made positive contributions to performance – Intuitive Surgical (+5.3%), Edwards (+4.2%), Boston Scientific (2.9%), Abbott (+2.5%), Medtronic (+1.7%) and Stryker (+1.2%). 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 smaller-cap medtech players Penumbra (+20.9%), Procept BioRobotics (+15.3%) and Dexcom (+7.9%) also performed well.

Penumbra beat consensus sales estimates, as did Procept BioRobotics. Dexcom impressed investors with its announcement of record-high new customer additions in Q3 and the filing of a 15-day G7 CGM sensor to the FDA for approval. After the slump in growth in the second quarter, it appears that Dexcom's management is on track to resolve its biggest problems by the end of the year and return to a growth trajectory in 2025.

Performance detractors in October were companies affected by the weak or slower-than-expected recovery of the Chinese market (GE Healthcare -4.4%, Siemens Healthineers -11.1%) or by natural disasters in the US (Hurricanes Helene and Milton), which impacted major production plants for basic surgical supplies (e.g. IV fluids like saline) and which also had a negative effect on patient contacts and consumer spending (TransMedics -46.4%, Straumann -17.4%, IDEXX -17.3%, Align -17.3%).

Healthcare services providers (5% portfolio weighting) weighed on portfolio performance in October. US health insurers delivered negative returns: Elevance (-19.9%), Humana (-16.5%), Centene (-15.1%), Cigna (-6.7%), Molina (-4.3%) and UnitedHealth (-0.9%). In their earnings announcements for the third quarter, these companies reported higher medical cost ratios in their Medicare Advantage (for people age 65 and older) and 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. All performance data is in EUR / B shares.

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.

Hospitals stand to 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 and premium rate increases. 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.

Unlike in 2023, we are anticipating tailwinds for our investment solution in 2024: Rate cuts by the Fed, attractive valuation levels (valued at a discount despite above-average earnings growth), a general repositioning as investors drop last year's outperformers and move into high-quality stocks, and a meager outlook for global economic growth (which in the past has been good for non-cyclical sectors). All of these factors argue for an investment in the Bellevue Medtech & Services (Lux) Fund.