Bellevue Digital Health

Global stocks (MSCI World Net Index -2.6%) and the broad healthcare sector as measured by the MSCI World Healthcare Index (-6.1%) closed sharply lower in December. The stark divergence of the healthcare sector is attributable to the shocking murder of UnitedHealth executive Brian Thompson in New York, which sparked widespread controversy over the role of the health insurance industry and the profit-driven system of healthcare in the US. In addition, President-elect Trump’s statements that his administration was going to "knock out the middleman” in the healthcare system sowed uncertainty among investors. His comments sent the shares of major US health insurers into deeply negative territory (S&P Managed Care Index -12.8%).

The Bellevue Digital Health (Lux) Fund (+4.0%) delivered a good full-year performance and beat the broad healthcare sector’s performance (+1.1%). Europe-based investors additionally benefited from the significant appreciation of the US dollar – the Bellevue Digital Health (Lux) Fund generated a return of 10.9% in euros and 11.9% in Swiss francs.

The fund’s performance in December (-6.0%) was in line with that of the broader healthcare sector. Six of the 34 stocks in the fund's portfolio made a positive contribution to performance. The top performers were Phreesia (+19.6%) and Waystar (+18.8%). Phreesia's reported third-quarter earnings that clearly beat investor expectations. It appears that investors are starting to acknowledge the company’s shift in strategy with a sharper focus on profitable growth. Waystar management was optimistic about acquiring new clients from its competitor Change Healthcare (part of UnitedHealth).

The negative portfolio return in December can mostly be blamed on profit-taking in stocks that had made strong gains and on widespread selling of stocks with negative returns for tax optimization purposes. Fund performance was negatively impacted in particular by TransMedics (-28.1%), Procept BioRobotics (-15.8%), Align (-10.4%), Exact Sciences (-9.5%), Veeva (-7.7%), Natera (-5.7%) and Intuitive Surgical (-3.7%). TransMedics came under additional selling pressure after management lowered its full-year sales forecast for 2024, which implies a significant slowdown in growth during the fourth quarter. It also announced an unexpected change in CFO. We already met the new CFO at an investor conference and our initial impression is good. TransMedics will launch two new clinical trials in 2025 with the aim of demonstrating that its advanced OCS organ transport system increases successful organ transplant rates and improves clinical outcomes. The results of the trials will be decisive for the future course of business. TransMedics could definitively establish itself as the new gold standard in the organ transplant market and thereby justify the additional costs associated with its OCS system. 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.