Worldwide Healthcare Trust PLC (LON:WWH) has announced its Annual Financial Report for the year ended 31 March 2024.
The statements below are extracted from the Company’s annual report for the year ended 31 March 2024 (the Annual Report). The Annual Report, will be posted to shareholders on 13 June 2024. Copies of the Annual Report will be available in hard copy format from the Company Secretary, Frostrow Capital LLP, 25 Southampton Buildings, London WC2A 1AL or from the Company’s website at www.worldwidewh.com where up to date information on the Company, including daily NAV, share prices and fact sheets, can also be found.
The Annual Report will be submitted to the Financial Conduct Authority and will shortly be available in full, unedited text for inspection on the National Storage Mechanism (NSM): https://data.fca.org.uk/#/nsm/nationalstoragemechanism
The Annual General Meeting will be held on Wednesday, 10 July 2024.
COMPANY PERFORMANCE
HISTORIC PERFORMANCE
FOR THE YEARS ENDED 31 MARCH
| 2019 | 2020 | 2021 | 2022 | 2023 | 2024 | |
| Net asset value per share (total return)*^ | 13.7% | 6.5% | 30.0% | (5.8)% | (0.1)% | 12.0% |
| Benchmark (total return)* | 21.1% | 5.7% | 16.0% | 20.4% | 2.5% | 10.9% |
| Net asset value per share | 272.3p | 286.9p | 370.3p | 346.5p | 343.5p | 381.1p |
| Share price | 273.0p | 292.0p | 369.5p | 327.5p | 311.5p | 335.0p |
| Premium/(discount) of share price to | ||||||
| net asset value per share | 0.3% | 1.8% | (0.2)% | (5.5)% | (9.3)% | (12.1)% |
| Dividends per share | 2.65p | 2.5p | 2.2p | 2.7p | 3.1p | 2.8p |
| Leverage | 4.9% | 12.0% | 7.6% | 10.9% | 10.5% | 10.8% |
| Ongoing charges^ | 0.9% | 0.9% | 0.9% | 0.9% | 0.8% | 0.9% |
| Ongoing charges (including performance fees paid or crystallised during the year)^ | 1.1% | 0.9% | 0.9% | 1.4% | 0.8% | 0.9% |
Comparative periods have been restated for the sub-division of each share of 25p each into 10 new shares of 2.5p each, approved at the AGM held on 18 July 2023 and effective on 27 July 2023.
* Source: Morningstar
^ Alternative Performance Measure (see Glossary).
* Source: Morningstar
STATEMENT FROM THE CHAIR
INVESTMENT PERFORMANCE
I am pleased to present your Company’s Annual Report and Financial Statements for the year ended 31 March 2024.
Stock market volatility continued in the year under review, with company and healthcare industry fundamentals often taking a back seat to macroeconomic forces and geopolitical events. The first half of the year was dominated by investor uncertainty and concerns regarding lingering inflation and continued high interest rates. The second half of the year saw these concerns abate, which helped markets to rise, in some cases, back to all-time highs.
Against this backdrop, I am pleased to report that the Company performed well, with a net asset value per share total return of +12.0% (2023: -0.1%), outperforming the Company’s Benchmark, the MSCI World Health Care Index measured on a net total return, sterling adjusted basis, which returned +10.9% (2023: +2.5%).
The Company’s share price total return during the year was +8.6% (2023: -4.1%). The disparity between the performance of the Company’s net asset value per share and its share price was reflected in the widening of our share price discount to our net asset value per share from 9.3% at 31 March 2023 to 12.1% at 31 March 2024.
Principal contributors to our outperformance were Big Pharma, Medtech and Emerging Biotech stocks. A key part of our Portfolio Manager’s strategy is to be overweight the Emerging Biotech sector. This reflects both the high levels of innovation and growth found in these companies as well as their potential to be acquisition targets by larger pharmaceutical companies seeking growth opportunities.
While the Company has underperformed the Benchmark on a five-year view (+45.8% compared to +68.3%), our long-term performance continues to be strong. From the Company’s inception in 1995 to 31 March 2024, the total return of our net asset value per share has been +4,733%, equivalent to a compound annual return of +14.4%. This compares to a cumulative blended Benchmark return of +2,438% and a compound annual return of 11.9% over the same period.
Further information on the healthcare sector, the Company’s investments and performance during the year can be found in the Portfolio Manager’s Review.
CAPITAL
Since the beginning of 2022, and for a variety of reasons, share price discounts across the investment company sector in the UK have widened. The average level of discount in the broader sector currently stands at c.14.0%*. This compares to the Company’s share price discount of 9.4% as at 5 June 2024.
It is the Board’s policy to buy back our shares if the Company’s share price discount to the net asset value per share exceeds 6% on an ongoing basis. Shareholders should note, however, that it remains possible for the discount to be greater than 6% for extended periods of time, particularly when sentiment towards the Company, the sector and to investment trusts generally remains poor. In such an environment, buybacks may prove unable to prevent the discount from widening. However, they enhance the net asset value per share for remaining shareholders and go some way to dampening discount volatility, which can adversely affect investors’ risk adjusted returns.
Over the year, the Company remained committed to its share buyback and issuance policy, regularly repurchasing shares. This commitment was demonstrated by the fact that a total of 80,265,298 shares were repurchased for treasury at a cost of £253m and at an average discount of 10.5%. In addition to increasing the Company’s net asset value per share, during the period under review this activity made the Company the most active acquirer of its own shares both in its sector and across the investment trust sector as a whole.
* Source: Winterflood Investment Trusts
The shares repurchased during the year under review equated to 12.8% of the Company’s share capital at the beginning of the year. The total number of shares shown to have been repurchased during the year has been adjusted to reflect the share split of each of the Company’s shares of 25p each into 10 shares of 2.5p each which took effect from 27 July 2023.
On 31 March 2024, there were 545,942,332 shares in issue (excluding the 55,722,868 shares held in treasury). From the beginning of the new financial year to 5 June 2024, a further 10,677,869 shares have been bought back for treasury, at a cost of £36.5m and at an average discount of 10.1%.
In a change to the Company’s stated policy, I confirm that all shares held in treasury at the date of the Company’s Annual General Meeting to be held on 10 July 2024, will not be cancelled and will continue to be held in treasury for re-issue at a premium to the net asset value per share.
REVENUE AND DIVIDEND
Shareholders will be aware that it remains the Company’s investment policy to pursue capital growth for shareholders and to pay dividends at least to the extent required to maintain investment trust status. Therefore, the level of dividends declared can go down as well as up. An unchanged interim dividend of 0.7p per share for the year ended 31 March 2024, was paid on 11 January 2024 to shareholders on the register on 24 November 2023.
The Company’s net revenue for the year as a whole decreased to £16.1m from £19.7m. This was due largely to a decrease in exposure to higher yielding stocks in the portfolio as well as a reduction in the size of the portfolio due to shares bought back by the Company during the year. As a result, the revenue return per share was 2.7p (2023: 3.0p per share).
Accordingly, the Board is proposing a slightly reduced final dividend for the year of 2.1p per share (2023:2.4p per share). Together with the interim dividend already paid, this makes a total dividend for the year of 2.8p per share (2023: 3.1p per share).
The effect of share buybacks means that the reported dividend per share, which is based on the number of shares in issue at the end of the financial year, is higher than the reported revenue return per share, which is based on the average number of shares in issue over the year.
Based on the closing mid-market share price of 353.5p on 5 June 2024, the total dividend payment for the year represents a current yield of 0.8%.
The final dividend will be payable, subject to shareholder approval, on 24 July 2024, to shareholders on the register of members on 14 June 2024. The associated ex-dividend date will be 13 June 2024.
The Company’s dividend policy will be proposed for approval at the forthcoming Annual General Meeting.
BOARD OF DIRECTORS
Humphrey van der Klugt will retire at the conclusion of Worldwide Healthcare Trust’s Annual General Meeting on Wednesday, 10 July 2024.
Humphrey has served on the Board since 2016 and was the Chair of the Audit & Risk Committee from 2016 to 2023. Humphrey’s accounting, general finance and portfolio management experience, including his deep knowledge of the investment trust sector, have been invaluable to the Board. His friendship and wise counsel will be greatly missed. The Board is in the process of recruiting a new Director to join the Board later in the year and we will keep shareholders informed of developments.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE (“ESG”) MATTERS
ESG matters continue to be an important priority for the Board. Our objective is to have full, transparent disclosure on the topic. Our Senior Independent Director, Bina Rawal, works closely with our Portfolio Manager on this matter.
Our Portfolio Manager remains committed to taking a leading role in the development of meaningful ESG engagement practices in the healthcare sector. As part of this, they facilitate dialogue and an exchange of leading practices among investors, companies and other relevant experts on ESG, in particular, the large capitalisation pharmaceutical sector. They also engage with a broad range of companies on a regular basis where areas of improvement can be identified. Further information on both ESG matters and climate change can be found in the Portfolio Manager’s ESG report.
CONTINUATION VOTE
The Board has committed to undertaking a continuation vote every five years, with a resolution tabled at the Annual General Meeting falling in the fifth year. Accordingly, such a resolution is included in the notice of Annual General Meeting contained within this report.
In the light of the Company’s long-term track record of outperformance, the positive outlook for the healthcare sector globally and the Company’s unique ability to provide shareholders with access to a broad range of healthcare investment opportunities worldwide, the Board unanimously recommends that shareholders vote in favour of the resolution allowing the Company to continue as an investment trust for a further five years.
ANNUAL GENERAL MEETING
The Company’s AGM will again be held at Saddlers’ Hall, 40 Gutter Lane, London EC2V 6BR on Wednesday, 10 July 2024 at 1.00pm. As well as the formal proceedings, there will be an opportunity to meet the Board and the Portfolio Manager and to receive an update on the Company’s strategy. We look forward to seeing as many of you as possible there.
For those investors who are not able to attend the meeting in person, a video recording of the Portfolio Manager’s presentation will be uploaded to the website after the meeting. Shareholders can submit questions in advance by sending them to [email protected].
I encourage all shareholders to exercise their right to vote at the AGM and to register your votes online in advance of the meeting. Registering your vote in advance will not restrict you from attending and voting at the meeting in person should you wish to do so. The votes on the resolutions to be proposed at the AGM will again be conducted on a poll. The results of the proxy votes will be published following the conclusion of the AGM by way of a stock exchange announcement and will also be able to be viewed on the Company’s website at www.worldwidewh.com.
OUTLOOK
While stock market volatility is to be expected, and in the coming year may be influenced by elections in the US and UK, our Portfolio Manager, OrbiMed, continues to remain positive on the outlook for the healthcare sector and our Company’s strategy for maximizing shareholder value over time. They believe that the overall future of the healthcare industry remains strong due to increasing demand globally, driven by a combination of the world’s aging population and improving access to healthcare products and services worldwide. At the same time, the rapid pace of innovation continues unabated, leading to the availability of new products and treatments.
OrbiMed further believes that the challenging investment backdrop for healthcare stocks that had existed since the easing of the COVID pandemic appears to be changing and that the recent upturn in share prices across the industry is more representative of its positive fundamentals.
Lastly, OrbiMed expects the currently high level of merger and acquisition activity in the healthcare sector to continue, supported by attractive valuations, healthy balance sheets and, within the pharmaceutical sector, a need to address future patent expirations.
Your Board shares OrbiMed’s optimism. We believe the prospects for the global healthcare sector are strong and that your Company is uniquely placed to take advantage of opportunities in a wide variety of companies around the world. Accordingly, we believe that long-term investors in the Company will continue to be rewarded.
Doug McCutcheon
Chair
6 June 2024
INVESTMENT OBJECTIVE AND POLICY
INVESTMENT OBJECTIVE
The Company invests in the global healthcare sector with the objective of achieving a high level of capital growth.
In order to achieve its investment objective, the Company invests worldwide in a diversified portfolio of shares in pharmaceutical and biotechnology companies and related securities in the healthcare sector. It uses gearing, and derivative transactions to enhance returns and mitigate risk. Performance is measured against the MSCI World Health Care Index on a net total return, sterling adjusted basis (“Benchmark”).
INVESTMENT STRATEGY
The implementation of the Company’s Investment Objective has been delegated to OrbiMed by Frostrow (as AIFM) under the Board’s and Frostrow’s supervision and guidance.
Details of OrbiMed’s investment strategy and approach are set out in the Portfolio Manager’s Review.
While the Board’s strategy is to allow flexibility in managing the investments, in order to manage investment risk it has imposed various investment, gearing and derivative guidelines and limits, within which Frostrow and OrbiMed are required to manage the investments, as set out below.
Any material changes to the Investment Objective, Policy and Benchmark or the investment, gearing and derivative guidelines and limits require approval from shareholders.
INVESTMENT POLICY
INVESTMENT LIMITS AND GUIDELINES
· The Company will not invest more than 15% of the portfolio in any one individual stock at the time of acquisition;
· At least 50% of the portfolio will normally be invested in larger companies (i.e. with a market capitalisation of at least U.S.$10bn);
· At least 20% of the portfolio will normally be invested in smaller companies (i.e. with a market capitalisation of less than U.S.$10bn);
· Investment in unquoted securities will not exceed 10% of the portfolio at the time of acquisition;
· A maximum of 5% of the portfolio, at the time of acquisition, may be invested in each of debt instruments, convertibles and royalty bonds issued by pharmaceutical and biotechnology companies;
· A maximum of 30% of the portfolio, at the time of acquisition, may be invested in companies in each of the following sectors:
– healthcare equipment and supplies;
– healthcare providers and services;
· The Company will not invest more than 10% of its gross assets in other closed ended investment companies (including investment trusts) listed on the London Stock Exchange, except where the investment companies themselves have stated investment policies to invest no more than 15% of their gross assets in other closed ended investment companies (including investment trusts) listed on the London Stock Exchange, where such investments shall be limited to 15% of the Company’s gross assets at the time of acquisition.
DERIVATIVE STRATEGY AND LIMITS
In line with the Investment Objective, derivatives are employed, when appropriate, in an effort to enhance returns and to improve the risk-return profile of the Company’s portfolio. Only Equity Swaps were employed within the portfolio during the year.
The Board has set the following limits within which derivative exposures are managed:
· Derivative transactions (excluding equity swaps) can be used to mitigate risk and/or enhance capital returns and will be restricted to a net exposure of 5% of the portfolio; and
· Equity Swaps may be used in order to meet the Company’s investment objective of achieving a high level of capital growth, and counterparty exposure through these is restricted to 12% of the gross assets of the Company at the time of acquisition.
The Company does not currently hedge against foreign currency exposure.
GEARING LIMIT
The Board has set a maximum gearing level, through borrowing, of 20% of the net assets.
LEVERAGE LIMITS
Under the AIFMD the Company is required to set maximum leverage limits. Leverage under the AIFMD is defined as any method by which the total exposure of an AIF is increased.
The Company has two current sources of leverage: the overdraft facility, which is subject to the gearing limit; and, derivatives, which are subject to the separate derivative limits. The Board and Frostrow have set a maximum leverage limit of 140% on both the commitment and gross basis.
Further details on the gearing and leverage calculations, and how total exposure through derivatives is calculated, are included in the Glossary. Further details on how derivatives are employed can be found in note 16.
PORTFOLIO
INVESTMENTS HELD AS AT 31 MARCH 2024
| Investments | Sector | Country | Market value £’000 | % of Investments |
| Eli Lilly | Pharmaceuticals | United States | 192,261 | 9.2% |
| Boston Scientific | Healthcare Equipment & Supplies | United States | 139,752 | 6.7% |
| Novo Nordisk | Pharmaceuticals | Denmark | 130,534 | 6.2% |
| AstraZeneca | Pharmaceuticals | United Kingdom | 129,973 | 6.2% |
| Intuitive Surgical | Healthcare Equipment & Supplies | United States | 123,124 | 5.9% |
| Merck | Pharmaceuticals | United States | 117,578 | 5.6% |
| Biogen | Biotechnology | United States | 92,990 | 4.4% |
| Tenet Healthcare | Healthcare Providers & Services | United States | 80,031 | 3.8% |
| Daiichi Sankyo | Pharmaceuticals | Japan | 77,991 | 3.7% |
| Stryker | Healthcare Equipment & Supplies | United States | 63,107 | 3.0% |
| Top 10 investments | 1,147,341 | 54.7% | ||
| BioMarin Pharmaceutical | Biotechnology | United States | 56,867 | 2.7% |
| Elevance Health | Healthcare Providers & Services | United States | 52,559 | 2.5% |
| Eisai | Pharmaceuticals | Japan | 52,016 | 2.5% |
| Thermo Fisher Scientific | Life Sciences Tools & Services | United States | 51,937 | 2.5% |
| Evolent Health | Healthcare Providers & Services | United States | 51,662 | 2.5% |
| GSK | Pharmaceuticals | United Kingdom | 50,940 | 2.4% |
| Natera | Life Sciences Tools & Services | United States | 46,733 | 2.2% |
| Ionis Pharmaceuticals | Biotechnology | United States | 42,969 | 2.0% |
| Caris Life Sciences* | Life Sciences Tools & Services | United States | 40,531 | 1.9% |
| Sarepta Therapeutics | Biotechnology | United States | 38,152 | 1.8% |
| Top 20 investments | 1,631,707 | 77.7% | ||
| ICON | Life Sciences Tools & Services | Ireland | 37,515 | 1.8% |
| Apellis Pharmaceuticals | Biotechnology | United States | 37,187 | 1.8% |
| Argenx | Biotechnology | Netherlands | 32,035 | 1.5% |
| Neurocrine Biosciences | Biotechnology | United States | 29,086 | 1.4% |
| SI-BONE | Healthcare Equipment & Supplies | United States | 29,033 | 1.4% |
| Vertex Pharmaceuticals | Biotechnology | United States | 28,781 | 1.4% |
| UnitedHealth | Healthcare Providers & Services | United States | 27,397 | 1.3% |
| Vaxcyte | Biotechnology | United States | 26,716 | 1.3% |
| Cytokinetics | Biotechnology | United States | 26,621 | 1.3% |
| Shanghai INT Medical Instruments | Healthcare Equipment & Supplies | China | 20,244 | 1.0% |
| Top 30 investments | 1,926,322 | 91.9% | ||
| Janux Therapeutics | Biotechnology | United States | 19,806 | 0.9% |
| Crossover Health* | Healthcare Providers & Services | United States | 18,018 | 0.9% |
| EDDA Healthcare & Technology* | Healthcare Equipment & Supplies | China | 15,129 | 0.7% |
| VISEN Pharmaceuticals* | Biotechnology | China | 13,714 | 0.7% |
| Beijing Yuanxin Technology* | Healthcare Providers & Services | China | 13,407 | 0.6% |
| Sino Biopharmaceutical | Pharmaceuticals | Hong Kong | 12,723 | 0.6% |
| Dexcom | Healthcare Equipment & Supplies | United States | 12,012 | 0.6% |
| Galderma Group | Pharmaceuticals | Switzerland | 11,652 | 0.6% |
| New Horizon Health | Life Sciences Tools & Services | China | 11,186 | 0.5% |
| Innovent Biologics | Biotechnology | China | 11,053 | 0.5% |
| Top 40 investments | 2,065,022 | 98.5% | ||
| Ruipeng Pet Group* | Healthcare Providers & Services | China | 10,844 | 0.5% |
| Jiangxi RiMAG Group* | Healthcare Providers & Services | China | 10,503 | 0.5% |
| MabPlex* | Healthcare Providers & Services | China | 5,395 | 0.3% |
| API Holdings* | Healthcare Providers & Services | India | 5,072 | 0.2% |
| Shandong Weigao Group Medical Polymer | Healthcare Equipment & Supplies | China | 2,961 | 0.1% |
| Shanghai Bio-heart Biological Technology | Healthcare Equipment & Supplies | China | 2,381 | 0.1% |
| Passage Bio | Biotechnology | United States | 2,218 | 0.1% |
| Ikena Oncology | Biotechnology | United States | 1,815 | 0.1% |
| Dingdang Health Technology | Healthcare Providers & Services | China | 1,510 | 0.1% |
| Peloton Therapeutics – Milestone* | Biotechnology | United States | 514 | 0.0% |
| Total equities | 2,108,235 | 100.5% | ||
| Biotech M&A Target Swap | Basket Swaps | United States | 176,869 | 8.4% |
| Apollo Hospitals | Healthcare Providers & Services | India | 16,416 | 0.8% |
| GLP-1 Dislocation;/MedTech Recovery Swap | Basket Swaps | China | 4,797 | 0.2% |
| Less: Gross exposure on financed swaps | (209,556) | (10.0)% | ||
| Total Equity Swaps | (11,474) | (0.5)% | ||
| Total investments including OTC Swaps | 2,096,761 | 100.0% |
* Unquoted holding
SUMMARY
| Investments | Market value £’000 | % of Investments |
| Quoted Equities | 1,975,108 | 94.2% |
| Unquoted equities | 133,127 | 6.3% |
| Equity Swaps | (11,474) | (0.5)% |
| Total of all investments | 2,096,761 | 100.0% |
PORTFOLIO MANAGER’S REVIEW
MARKETS
Global equity markets continued their rollercoaster ways in the financial year, with a volatile first half followed by a steep climb higher in the second half. One constant throughout the year has been the macroeconomic and political factors driving returns, trumping industry specific fundamentals.
The first half of the year was characterised mostly by investor fear and uncertainty, with rising interest rates, geopolitical conflicts, and persistent inflation providing the backdrop for the debate around a recession. Broad market returns during this period were flat to down, exacerbated by a precipitous market sell-off in October where “higher for longer” was the rally cry for investors to sell. Healthcare stocks eschewed their traditional defensive characteristics and lagged the market by over 5% (source: MSCI) during this period.
But the second half of the year saw a dramatic reversal of market performance as investors expressed enthusiasm over easing inflation data and the U.S. Federal Reserve’s indication of a potential end to its two-year interest rate hiking cycle. That momentum continued unabated into the financial year end where the MSCI World Index and the S&P 500 closed on all-time highs whilst the FTSE All-Share Index closed on a 52-week high. Healthcare stocks also rose, but again trailed the broad market by 6%.
The net of it was a difficult year for healthcare stocks. The MSCI World Index bucked the early tumult of the year to post an impressive total return of +22.4% (sterling). Whilst the MSCI World Healthcare Index also rebounded during the year, the total return of +10.9% (sterling) was the worst relative performance versus the broad market in over 20 years.
Despite the difficult backdrop for healthcare, the Company was able to produce a strong double-digit return that exceeded the Benchmark by over 1%, driven primarily by stock picking across Big Pharma, Emerging Biotech, and Medtech.
ALLOCATION
We actively manage the Company’s allocation across healthcare sub-sectors with reference to the Benchmark. In the reported financial year, we have continued our strategic overweight positioning in Biotechnology stocks, in particular Emerging Biotech. As innovation has become the real hallmark of the Company, the real cradle of innovation has been in Emerging Biotech stocks, companies that are typically without revenues but have been the technology engine behind both the majority of the industry’s pipeline and ultimately new product approvals. We ended the financial year with total Biotechnology exposure of 29.0%, 20.7% above the Benchmark, representing an increase year-over-year on both an absolute and relative basis. Within Emerging Biotech, there was a modest increase year-over-year (+1.7%) on an absolute basis and a large increase relative to the Benchmark (+3.9%) as valuations compressed in the period. Overall, the exposure is very much consistent with our long-held positioning that has typically ranged from high 20’s to low 30’s percentage on an absolute basis, which we expect to continue.
Similarly, we have continued our strategic underweight positioning in Pharmaceutical stocks in the reported financial year. There are two main rationales for this. First is a nod to the Benchmark where Pharmaceuticals (global large capitalisation stocks, generics, and specialty) comprise approximately 45% of the weighting, the largest segment of MSCI World Healthcare Index. This fact creates the most likely candidate for funding other segments of our investment. Second, and more importantly, the underweight positioning is primarily due to our fundamental outlook for the sector. Big Pharma companies, in our view, are a collection of companies that are easily divided into the classic “Have or Have Not” designation from a variety of metrics including but certainly not limited to valuation, growth profile, management credibility, pipelines, new product launches, strength of balance sheet, capital allocation priorities, and forward-looking catalysts. Our focus on the “Haves” has enabled us to capture performance in the financial year both in absolute terms and relative to the Benchmark, despite the underweight positioning. Year-over-year, our exposure in Big Pharma companies did increase by 3.3% (absolute) and 1.3% (relative) given high conviction ideas in companies that are significant weightings in the Benchmark including Eli Lilly, Novo Nordisk, and AstraZeneca.
In the Life Sciences Tools & Services (“Tools”) sector, we increased our exposure over the course of the year but remained underweight versus the Benchmark, reflecting the difficult macro environment for tools companies across many markets, including bioprocessing, instruments, China, and general biopharma weakness. We added one new significant position, Icon Life Sciences, a contract research organisation where market trends and opportunities have improved for the company. We await opportunities to add exposure as the Tools sector returns to more normal growth towards the end of calendar 2024.
ALLOCATION BY SUB-SECTOR
(WWH vs. MSCI World Healthcare Index)
| As of 31 March 2024 | As of 31 March 2023 | |||||
| Subsector | ^WWH % NAV | MSCI HC | Over/Under vs.BM | ^WWH % NAV | MSCI HC | Over/Under vs.BM |
| Pharmaceuticals | 31.0 | 44.8 | (13.8) | 26.8 | 43.0 | (16.2) |
| Big Pharma | 29.9 | 41.7 | (11.8) | 26.6 | 39.7 | (13.1) |
| Spec Pharma | 1.1 | 2.9 | (1.8) | 0.2 | 3.2 | (3.0) |
| Generics | – | 0.2 | (0.2) | – | 0.1 | (0.1) |
| Biotechnology | 29.0 | 8.3 | 20.7 | 24.1 | 9.4 | 14.7 |
| Big Biotech | 6.1 | 6.2 | (0.1) | 2.9 | 5.1 | (2.2) |
| Emerging Biotech | 22.9 | 2.1 | 20.8 | 21.2 | 4.3 | 16.9 |
| Life Science Tools & Services | 6.5 | 11.1 | (4.6) | 3.8 | 12.3 | (8.5) |
| Health Care Equipment & Supplies | 17.8 | 16.9 | 0.9 | 19.3 | 16.2 | 3.1 |
| Healthcare Services & Supplies | 10.2 | 15.1 | (4.9) | 15.4 | 14.9 | 0.5 |
| Japan | 6.3 | 3.8 | 2.5 | 6.3 | 4.2 | 2.1 |
| Emerging Market | 3.7 | – | 3.7 | 8.0 | – | 8.0 |
| Privates | 6.4 | – | 6.4 | 6.8 | – | 6.8 |
| Total | 110.9 | 100.0 | 10.9 | 110.5 | 100.0 | 10.5 |
^ Figures expressed as a % of total Net Asset Value. This includes all derivatives as an economically equivalent position in the underlying holding and allocated to the underlying holdings’ respective sectors and regions.
The portfolio allocation in Health Care Equipment & Supplies (“Medtech”) varied through the financial year given a variety of shifting tailwinds and headwinds. Whilst this is unlike our strategic positioning in Biotechnology and Pharmaceuticals, it is a typical trading pattern for us, historically, in Medtech. We started the financial year overweight given high conviction, single stock ideas and a sub-sector valuation that appeared reasonable against a backdrop of improving procedural utilisation rates. Exposure was reduced mid-year due to profit taking, ahead of a seasonally slower second quarter, and the negative fall-out from GLP-1 data sets, such as the SELECT trial, which created significant tumult in the sector during the year. Our exposure to the group increased in November 2023 to take advantage of what we saw to be a rebound in the hardest hit parts of the sub-sector. Into the year-end, the portfolio was back to a slight overweight position, albeit slightly down year-over-year (approximately 1.5% absolute and 2.2% relative). Looking ahead, subsector fundamentals are highly bifurcated between a select group of large capitalisation companies such as Boston Scientific, Intuitive Surgical, and Stryker which arebenefiting from sizable new product cycles, while most of the other large cap companies should remain at much lower growth rates and out of favour with investors.
In Healthcare Providers & Services (“Services”), we reduced our managed care exposure meaningfully over the course of the year. Our current underweight positioning reflects the significant challenges that this sector has faced, especially for companies exposed to Medicare Advantage – including an unprecedented spike in utilisation and insufficient reimbursement updates from a more negative government stance on the industry. We are watching carefully for opportunities to increase our exposure again as utilisation appears to be stabilising.
Historically, our exposure to Japanese pharmaceuticals has been idea based. That is, our long history in both due diligence and investing in companies from Japan has shown episodic opportunities of novel innovation and outsized returns from concentrated investments there, regardless of the Benchmark. As of the year-end, our overweight positioning here was stable, as two investment opportunities have carried through the start and end of the period, specifically Daiichi-Sankyo, the worldwide leaders in antibody drug conjugate technology for the treatment of multiple cancers, and Eisai, the longtime pioneers in Alzheimer’s disease, now presiding over a historic global launch of Leqembi (lecanemab).
Another sector in which we have historically been overweight is Emerging Markets, in particular China healthcare. Fundamentally, there are a multitude of reasons for this, including a sizable and growing market, patient demographics, local consumer demand, and ultimately government support in building healthcare infrastructure and reforms to improve access to healthcare services for its citizens. More recently, we have also discovered the incredible innovation that is also coming out of China in the healthcare space, drug discovery and development which is rivalling, and sometimes surpassing, their Western counterparts. That said, we have also acknowledged (and capitulated) to the plethora of headline risk that has been coming out of China, primarily the given geopolitical tensions between U.S. and China. As a result, we have lowered our exposure to Emerging Markets significantly over the past four years, ending the year at 3.7% and down over 4.3% year-over-year. Nevertheless, the secular tailwinds remain strong and we expect to continue to look for and invest in meaningful opportunities in China and India.
PERFORMANCE
For the year ended 31 March 2024, we are pleased to report that the Company generated a net asset value total return of +12.0% whilst the share price total return was +8.6%. The net asset value performance surpassed the Benchmark return of +10.9%. Drivers of both absolute and relative performance were similar to the most recent years, namely the fluctuations between fundamental industry drivers and macroeconomic factors heavily influenced the returns during the year. With interest rates being the most significant corollary to performance, the only sustained returns were achieved in the second half of the financial year when investors and the market began to expect – and price in – interest rate cuts in 2024.
As detailed below, key upside drivers for performance included stock picking in Big Pharma, allocation and stock picking in Biotechnology, and stock picking in Medtech. This was partially offset by allocation in China, stock picking in Japan, and exposure to unquoteds.
SUBSECTOR PERFORMANCE
On a sub-sector level, the largest contributor to absolute performance was from Big Pharma, contributing 7% (of the +12% net asset value return). Obesity drugs and the landmark data from the newest GLP-1 medications was the true hallmark for healthcare stocks in 2023 and was a key contributor to the Company’s absolute performance. Stock picking here was key as relative contribution from Big Pharma was also positive, despite the sizable underweight positioning versus the Benchmark throughout the financial year (average portfolio weight 28% compared to Benchmark weight 41%).
An outsized contribution also came from Medtech at just over 4% of the 12.0% NAV return. The space was particularly volatile in 2023 as small capitalisation stocks underperformed and obesity-laterals disrupted the share prices of many stocks. Additionally, stock picking here was particularly astute and combined with allocation effect (average year-long overweight of approximately 1.6%), investments in Medtech yielded nearly 2% of excess return.
A contribution of import was also generated within Biotechnology, more specifically Emerging Biotech stocks which generated nearly 3% of absolute return. Moreover, this return also represented nearly 3% of relative return, primarily due to stock picking. The majority of this contribution came from OrbiMed’s custom and proprietary mergers and acquisitions (“M&A”) swap basket, first constructed in April 2022, which consists of handpicked biotechnology companies (by OrbiMed) that we believe are likely M&A targets as an efficient way to gain exposure to a plethora of single stocks. The strategy proved very successful, with the basket returning over 65% (USD) since inception, outperforming broad small and mid-capitalisation stocks (+28% per the XBI) and large capitalisation (+17% per the NBI) Biotechnology stocks, contributing over 2% or nearly £35 million alone. The total net contribution for Biotechnology was partially offset by our investments in Big Biotech names, which were negative.
Detractors of note on a sub-sector level (China, Japan, Unquoted) were modest. The equity markets in China remained difficult as investor concerns over the economy were exacerbated by ongoing geopolitical tensions with the U.S. and proposed legislation that could limit China’s role in the U.S. biopharmaceutical industry. Overall, the Hang Seng Healthcare Index dropped 35% in the financial year under review.
Thus, allocation effect primarily led to more than a 2% negative impact from China-based investments.
In Japan, the TOPIX Pharm Index total return was negative at -6% (sterling) despite the Nikkei-225 Index advancing more than 25% (sterling) and reaching all-times highs in March 2024. Thus, the allocation effect, and stock picking, combined for more than a 1% impact to performance in the financial year.
UNQUOTEDS
During the financial year, the Company strategically refrained from making new investments in unquoted companies, as we continued to cautiously navigate the challenging public offering market for small and mid-capitalisation healthcare firms. While the capital market funding landscape has been improving, most of our unquoted companies are well capitalised and are being selective with regards to pursuing listings. We are optimistic about the ability of some of our unquoted investments to achieve listings within the next year as we anticipate the capital market funding environment will continue to improve.
As of the end of the financial year, unquoted investments made up 6.3% of the Company’s portfolio, a slight decrease from 6.7% as at 31 March 2023. The existing unquoted portfolio demonstrates a diverse and forward-looking approach. Geographically, exposure is evenly distributed among Emerging Markets and North American companies. On a sub-sector basis, the exposure is concentrated in Services and Tools, with small exposures to Biotechnology and Medtech.
We participated in one additional investment (£3.3 million) in API Holdings (better known as PharmEasy) which was also the only material write-down in valuation. The company was compelled to accept a capital infusion at a distressed valuation after a planned initial public offering (“IPO”) was delayed due to adverse market conditions, leading to a funding shortfall, including a potential breach of a debt covenant.
During the year under review, the unquoted investments made a loss of £14.7 million, from an opening market value of £145.2 million across 10 companies. The unquoted strategy as a whole had an implied return of -9.9% which detracted -0.7% from performance. API Holdings was the main detractor in the unquoted strategy while other emerging markets names had minor downward valuation revisions largely due to a historically challenging public market environment in China and Hong Kong. On the contrary, North American unquoted holdings had a positive return during the financial year.
ABSOLUTE CONTRIBUTION BY INVESTMENT FOR THE YEAR ENDED 31 MARCH 2024
Principal contributors to and detractors from net asset value performance
| Top five contributors | Sector | Country | Contribution£’000 | Contributionper sharep |
| Eli Lilly | Pharmaceuticals | United States | 77,301 | 13.2 |
| Novo Nordisk | Pharmaceuticals | Denmark | 59,568 | 10.2 |
| Intuitive Surgical | Healthcare Equipment & Supplies | United States | 49,032 | 8.4 |
| Boston Scientific | Healthcare Equipment & Supplies | United States | 36,022 | 6.2 |
| Tenet Healthcare | Healthcare Providers & Services | United States | 32,586 | 5.6 |
| Top five detractors | Sector | Country | Contribution£’000 | Contributionper sharep |
| Bristol-Myers Squibb* | Pharmaceuticals | United States | (12,246) | (2.1) |
| uniQure* | Biotechnology | Netherlands | (15,647) | (2.7) |
| Eisai | Pharmaceuticals | Japan | (16,628) | (2.8) |
| Madrigal Pharmaceuticals* | Biotechnology | United States | (16,642) | (2.8) |
| Biogen | Biotechnology | United States | (21,702) | (3.7) |
* Not held at 31 March 2024
MAJOR CONTRIBUTORS TO PERFORMANCE
The pursuit of innovation is the longtime hallmark of the Company. Nowhere has this been better exemplified than in the study and development of the incretin class of medicines, better known as the GLP-1 agonists or the now famous “obesity drugs” Wegovy (semaglutide) and Zepbound (tirzepatide). The journey of these medicines began in 1996 when the target was first isolated from the venom of a Gila monster and is now culminating in unprecedented benefit for patients with diabetes and obesity and a plethora of other indications, including cardiovascular disease, heart failure, chronic kidney disease, liver disease, just to name a few.
Eli Lilly can call themselves one of the true pioneers inthis class of drugs and currently markets the undisputed “best-in-class” agents in the space. The company’s most recent offering is Mounjaro (tirzepatide), a dual GLP-1 and “GIP” agonist. Whilst approved for diabetes in 2022, the company presented additional data in obesity in 2023, showing weight loss eclipsing 20% and even approaching 25% in some cases. This dual-agonist therapy has pushed weight loss to new levels and the company benefited materially from the SELECT trial, with investors (and the company) assuming that “more is better”: the cardiovascular benefits shown by Wegovy should extend to Mounjaro, if not more so, given the superior weight loss profile. Sales of Mounjaro were annualising at almost $10 billion per annum at the end of 2023. The year-end approval of Zepbound in obesity was the company’s first and only approval so far in obesity and the launch has thus been explosive to start 2024. The combination of data disclosures, approvals, launches, and anticipation of next generation agents throughout the fiscal year caused the share price to more than double in the period. Eli Lilly was the top contributor to performance for the Company at 3.8%.
The other true pioneer of the GLP-1 class is the global sales leader in this space, Novo Nordisk. 2023 contained a landmark moment for the company with the announcement and presentation of the SELECT trial, a global study that followed nearly 18,000 patients over five years to measure the benefits of taking Wegovy (semaglutide) on cardiovascular disease in obese patients. The full results were presented at the American Heart Association congress and simultaneously published in the New England Journal of Medicine in November 2023. The data was stunning and unequivocally showed a 20% drop in the risk of a patient suffering a “MACE” event (heart attack, stroke, or cardiovascular related death) by taking a once-weekly injection of Wegovy. This data surpassed all investor expectations and moved this drug from a lifestyle intervention into a chronic care medicine that can prolong a patient’s life. Sales growth has been explosive and the company’s total GLP-1 franchise was annualising close to U.S.$25 billion by the end of 2023, despite supply limitations, given insatiable demand. With additional manufacturing coming online in 2024, we expect this exciting growth to continue. With a share price rise of nearly 60% (sterling) in the period, Novo Nordisk was the second largest contributor to the Company’s performance.
With a seasoned management team, multi-decade head start and superior robotic technology, we view Intuitive Surgical as the best positioned company in thefast-growing and vastly under-penetrated surgical robotics space. The company operates as a monopoly with its da Vinci suite of robotic systems, and we see upcoming competitor system launches as market expansive as opposed to driving material share gains against Intuitive. Over the past year, building investor excitement over a potential new system that should further insulate the company from competition, as well as accelerating top and bottom-line growth, has driven strong share performance. Intuitive’s procedure volumes benefited from rebounding U.S. surgeries and deeper penetration into new procedure categories and international markets. As procedures improved, customers required further robotics capacity resulting in strong system placements as well. The company’s latest system, the da Vinci 5, was U.S. Food & Drug Administration (“FDA”) approved in March 2024 and the roll-out has already begun. While there are still several unanswered questions about the pace of new system purchases going forward, it is clear that consensus estimates have yet to fully reflect the new system launch, and we see significant further share price appreciation in the coming years.
Boston Scientific is an industry leading medical technologycompany that develops, manufactures, and markets minimally invasive medical devices in several high growth end markets including interventional cardiology, cardiac rhythm management, peripheral interventions, electrophysiology, neurovascular intervention, endoscopy, urology, gynecology, and neuromodulation. Over the past year, the company has successfully driven accelerating organic sales growth ahead of company guidance and investor expectations on the back of several new product launches, improving labour issues at U.S. hospitals and stabilising inflation headwinds. Moreover, investor optimism for improving future growth has increased in recent months on the back of positive trial results and subsequent FDA approval for the company’s next generation device for the treatment of atrial fibrillation, known as the FARAPULSE Pulsed Field Ablation System. While the company has several other new products launching over the next three years, investors are particularly focused on the pulsed field ablation device as the multi-billion dollar atrial fibrillation market could rapidly shift toward this new technology. We believe the ongoing company algorithm of best-in-class organic sales growth, differentiated margin expansion potential and ongoing M&A should result in continued strong and durable EPS growth for the foreseeable future.
The Texas-based hospital operator, Tenet Healthcare, had an excellent year, as the most outsized beneficiary of favourable hospital market trends during the fiscal year. Hospitals spent most of 2022 managing spikes in labour costs for temporary nurse staffing, but were set up favourably for 2023 with continued strong utilisation trends exiting COVID, receding labour costs, and higher-than-average reimbursement trends in delayed recognition of higher labour costs. This combination of strong volume, price, and lower cost drove stellar results for hospitals throughout 2023, including Tenet Healthcare. Share price gains were also realised by the company due to the company’s (1) business mix toward higher-value ambulatory surgery centres, (2) impressive free cash flow, and (3) reduced leverage. Finally, we would note the company executed three significant hospital divestitures in early 2024 at valuations far beyond their own, which unlocked further value to shareholders.
MAJOR DETRACTORS FROM PERFORMANCE
In 2023, one of the most notable new drug approvals was Leqembi (lecanemab), the first monoclonal antibody to show unequivocal disease modifying effects in the treatment of mild to moderate Alzheimer’s disease. This landmark full approval was achieved by Eisai and their partner Biogen in July 2023 after receiving accelerated approval in January 2023. However, the launch has proven to be much more of a challenge than originally expected. Many factors contributed to the guarded uptake of Leqembi for prospective patients, including a cognitive test and physical exam, biomarker-confirmed diagnosis using cerebral spinal fluid (via lumbar puncture) or positron emission tomography test, confirmation of ApoE status (for safety considerations), and enrolment in a federal patient registry.
Furthermore, the dosing regimen for Leqembi requires a patient to receive a long duration intra-venous infusion once every two weeks at an appropriate infusion centre. Much of the infrastructure for this was limited or even absent in the first year of the launch, curbing access to “chair time” for patients to get this novel medication. As a result, uptake has been modest through the second half of 2023, although it has inflected in early 2024. This situation has weighed on the share prices of both Eisai and Biogen. Share price declines were exacerbated when delays arose to the companies’ sub-cutaneous formulation of Leqembi, a drug regimen that would circumvent the need for infusion centres and perhaps require less frequent administration and almost assuredly allow for greater uptake and utilisation of Leqembi in afflicted patients.
Ultimately, Eisai and Biogen failed to dose 10,000 patients in the U.S. – their stated goal at launch – in the financial year ended 31 March 2024. Overall, the sub-optimal launch of Leqembi resulted in Eisai and Biogen being the largest detractors to performance in the period. However, key opinion leader feedback on Leqembi remains supportive; the drug remains an important and beneficial clinical intervention for patients with Alzheimer’s disease. We believe sales can and will inflect going forward and our ongoing investment in these companies remains a lucrative opportunity.
Madrigal Pharmaceuticals is a clinical-stagebiopharmaceutical company based in Pennsylvania, pursuing novel therapeutics for the treatment of NASH (nonalcoholic steatohepatitis), or the emerging acronym of MASH (metabolic dysfunction-associated steatohepatitis). MASH is a severe form of fatty liver disease, a condition in which the liver builds up excessive fat deposits. Over time, inflammation, fibrosis, and cirrhosis can occur, leading to liver failure. With few options to treat this deadly condition and a huge prevalence globally, the commercial opportunity is large. Their primary pipeline asset, resmetirom, is a thyroid hormone β-receptor agonist which is believed to play a role in liver health. It has shown promising data in late stage, pivotal trials for this disease. However, the emergence of data for the GLP-1 class of drugs (for the treatment of diabetes and obesity from Eli Lilly and Novo Nordisk) have shown significant ability to reduce liver fat accumulation, decrease inflammation, and prevent the progression of fibrosis in patients with NASH. This finding dramatically hurt investor sentiment for all NASH players, including Madrigal. Share price declines were exacerbated by a change in the CEO and a subsequent financing, which removed the takeout premium in the stock. Ultimately, with the commercial opportunity for resmetirom blunted, we exited the stock.
The Netherlands-based gene therapy player, uniQure, is a clinical-stage company that focuses on neurological disorders. Gene therapy, whilst still somewhat nascent, represents an incredible leap in innovation that has curative properties. The company’s lead asset is a novel gene therapy, AMT-130, for Huntington’s disease, an inherited disorder that causes cells in parts of the brain to gradually degenerate and die, progressively impacting a person’s functional abilities and results in movement, cognitive, and psychiatric disorders. However, in June 2023 the company provided a mixed interim update from its Phase I/II trial for AMT-130, which raised investor concern over target engagement of the gene therapy. The stock fell on the news and continued to sell-off. That said, we were encouraged by the totality of the data, including the early indication of function benefit across multiple measures. Ultimately, however, we concluded that the data was not approvable as is and an additional large, multi-year trial would be required to satisfy FDA and other regulatory authorities. As a result, we exited the stock.
The global pharmaceutical company, Bristol-Myers Squibb is well known for its leadership in oncology, withmajor cancer franchises in both immuno-oncology and multiple myeloma. However, both franchises are aged and have reached or are nearing expiration of exclusivity. With a declining topline, the company’s price-to-earnings multiple has compressed to below 10x, creating the most heavily discounted stock in the large cap pharmaceutical space. However, this “value play” turned into a “value trap” in 2023. The company has had one of the most productive pipelines in the industry over the past three years, with new approvals in immunology, haematology, oncology, and cardiovascular disease. However, commercial execution of the many new product launches has underwhelmed, and a top line renaissance has so far failed to materialise. The share price has subsequently fallen further as has the multiple. We exited the stock during the first half of the financial year as our conviction level for a turnaround deteriorated. The share price continued to move lower in the second half of the year.
DERIVATIVE STRATEGY
The Company has the ability to utilise equity swaps and options as part of its financial strategy. Equity swaps are a financial tool, a derivative contract, that allow for synthetic exposure to a basket of single stocks in an efficient manner and within a well-defined theme. For example, having 15 to 50+ additional positions at smaller weights in the portfolio (i.e., non-core) is suboptimal. An equity swap basket facilitates management of the investment theme and tracking of performance. The swaps contain multiple single stock long positions and the basket swap counterparty is Goldman Sachs, allowing for confidence in forward trading and rebalancing strategies.
The Company strategically invested in three customised tactical basket swaps, targeting growth opportunities in undervalued small and mid-capitalisation biotech, therapeutic and medical device companies.
These baskets were constructed to capitalise on three prevailing themes: 1) investment opportunities possessing considerable potential as attractive acquisition targets for larger corporations (M&A swap basket), 2) those exhibiting a favourable risk/reward profile in light of upcoming clinical catalysts and 3) substantial valuation dislocations in small and mid-capitalisation medical device companies brought about by the GLP-1 weight loss craze.
During the period under review, the basket swaps gained £32.7 million, which added 1.6% to performance. The gains were primarily due to the returns generated by the propriety Biotech M&A Target Swap.
Throughout the year, the Company also used single stock equity swaps to access Chinese and Indian investments, which would otherwise be inaccessible through more traditional investment methods. During the period under review, single stock equity swaps contributed £5.0 million to performance, and we remain confident in the long-term prospects of emerging market securities, particularly those trading locally in mainland China.
LEVERAGE STRATEGY
Historically, the typical leverage level employed by the Company has been in the mid-to-high teens range. Considering the market volatility during the past three plus financial years, we have, more recently, used leverage in a more tactical fashion. In 2023, we have flexed leverage modestly in response to the economic climate, including in consideration of a putative recession earlier in the period and interest rate fluctuations and speculation.
Most recently, leverage has converged to the low-double digit range, a reflection of our overall bullishness on the portfolio and a hopeful turn in biotechnology stocks. Some factors that keep us from extending leverage even further is the continued uncertainty with the macro backdrop, further geopolitical risk, the looming U.S. Presidential election, and relatively higher borrowing costs at present.
SECTOR DEVELOPMENTS
Innovation is one of the major value drivers across the healthcare space. One of the most objective measures of said innovation is novel product approvals and 2023 was record setting with 67 approvals across a wide range of therapeutic categories. More impressive has been the nearly 400 new drugs approved over the past 7 years. This marks one of the most productive periods in the bio-pharmaceutical industry. With standards for new product approvals ever increasing, this industry-wide accomplishment stands as one of the most consequential achievements in the modern era of medicine. Additionally, the recent return of FDA inspectors to China and other Asian venues for the first time in two of years is an encouraging sign for the industry (source: Washington Analysis).
There were many notable new drugs among the more than five dozen approvals in 2023. As mentioned previously in this report was the landmark approval of Leqembi (lecanemab), the first monoclonal antibody to show unequivocal disease modifying effects in the treatment of mild to moderate Alzheimer’s disease, ushering in a new paradigm in helping patients and families with this devastating disease. GSK presided over the best (non-COVID) vaccine launch in history after the approval of Arexvy, indicated for seniors for active immunisation for the prevention of lower respiratory tract disease in patients exposed to Respiratory Syncytial Virus (RSV). Another medicine approved for RSV was Beyfortus (nirsevimab), a monoclonal antibody designed to prevent infections in newborns babies. Multiple novel gene therapies were also approved, including Elevidys for Duchenne Muscular Dystrophy (a genetic problem in producing dystrophin, a protein that protects muscle fibers from breaking down, a disease found in young boys which results in the inability to crawl or walk and early death) and Roctavian for Haemophilia A (a genetic disorder resulting from a deficit of factor VIII, a vital blood-clotting protein, that manifests as protracted and excessive bleeding either spontaneously or secondary to trauma).
A significant investment theme in 2023 – a theme we expect to continue into 2024 – is the accelerated pace of mergers and acquisitions in the therapeutics space, fuelled by a variety of factors. First, the industry is facing another “patent cliff” with approximately U.S.$250 billion in branded sales at risk to generic alternatives commencing in 2025. Second, the looming drug price headwinds in the U.S. in 2026 (from the Inflation Reduction Act) is pressuring management teams to bolster top lines via M&A. Third, historically low biotechnology valuations have created bargains with many small and mid-capitalisation biotechnology companies being taken out at or below their all-time high price. Finally, and most importantly, innovation in biotechnology is at all-time highs where 65% of the industry pipeline and 50% of approved drugs originated from small and mid-capitalisation biotechnology companies.
This has created a very positive environment for deal making as high interest rates and a quiet initial public offering market created some barriers to access for capital for these companies. The financial year saw a total of 40-bio-pharmaceutical takeovers valued at U.S.$115 billion. The first 14 weeks of calendar 2024 saw14 deals, accelerating the trend into the new year.
INNOVATION
The largest sector development continues to be the incredible era of innovation that the bio-pharmaceutical industry is presiding over. The global phenomenon of obesity drugs that gripped the market in 2023 actually represents a class of drugs that is nearly 20 years old, but the continued innovation by the pioneers – Eli Lilly and Novo Nordisk – pushed the efficacy benefits beyond expectations. And these companies are not stopping here despite the recent launches of Wegovy and Zepound, rather, next-generation incretins are already in late-stage development. Over the next 6-12 months, data for “CagriSema” (from Novo Nordisk) and “retatrutide” (from Eli Lilly) will most likely improve the standard-of-care beyond what we are seeing today, pushing the life cycle of GLP-1 drugs (and the various combinations) well into the next decade and beyond.
Capital expenditure exceeding U.S.$10 billion per company is being spent on expanded global manufacturing capacity in attempt to satisfy the incredible demand for these drugs. Additionally, both companies are in hot pursuit of oral incretins as well, to further increase the size and reach of this market.
Another key tailwind for this class of drugs is also usage outside of “diabesity” with impressive clinical data for cardiovascular disease, heart failure, osteoarthritis, kidney disease, liver, and sleep apnea already published. Over the coming year we should see data in other indications as well, such as peripheral arterial disease and even Alzheimer’s disease. An independent study out of France even showed proof-of-concept for a GLP-1 molecule benefiting patients with Parkinson’s disease. Of course, there are many companies, both small and large, trying to enter this market and we should see plenty of rival data in 2024.
As 2023 came to a close, the latest generation GLP-1’s were annualising at U.S.$40 billion per annum – despite neither company having fully rolled out Wegovy and Zepbound globally by year end. Previously, we speculated if this market could reach U.S.$100 billion in annual sales by 2030. No more. Now we are contemplating a market size of potentially U.S.$200 billion by the decade end.
A therapeutic class that has been a hot bed of innovation over the past decade has been oncology. The launch of the first “immuno-oncology” agent ushered in a revolution in the treatment of cancer never before seen and despite the bar constantly resetting higher, the industry continues to deliver as “IO” agents eclipsed U.S.$45 billion in sales in 2023. This year, data for next generation IO agents (such as TIGIT, LAG3, and newer CTLA-4) may prove critical in the continued growth of this class. Also, novel bi-specific formulations could be game changing.
Not to be outdone, but the largest inflection of interest in the oncology space over the past year has been in the antibody-drug-conjugate (ADC) class of drugs. ADCs are a form of targeted medicines that deliver chemotherapy agents directly to cancer cells, destroying them whilst mostly sparing normal, healthy cells. The pursuit of ADCs was behind the largest business development deals in 2023, specifically the U.S.$43 billion acquisition of Seagen (by Pfizer) and the U.S.$22 billion development deal between Daiichi Sankyo and Merck.
Radiopharmaceuticals – the using of localised radiation in the form of injectable isotopes – was another area of oncology which saw outsized M&A activity with Eli Lilly, AstraZeneca, and Bristol-Myers Squibb all buying their way in to compete with the industry leader, Novartis.
With record new drug approvals and clinical pipelines as full as they have ever been, this impressive wave of innovation will be bountiful in 2024 and for years to come. Whilst our focus here has been on metabolic disease and oncology, by no means are new achievements in innovation limited to these therapeutic classes. 2023 saw the approval of the very first disease modifying agent for Alzheimer’s disease (Eisai’s Leqembi). 2023 saw the approval of the very first vaccine for respiratory syncytial virus (GSK’s Arexvy). 2023 saw the first approval for a gene therapy treatment for Duchenne muscular dystrophy (Sarepta Therapeutic’s Elevidys). Early 2024 saw the approval of the most sophisticated surgical robotic suite ever produced (Intuitive Surgical’s da Vince 5). Early 2024 saw the approval of the most efficacious agent to treat pulmonary arterial hypertension (Merck’s Winrevair). This list goes on and on – across immunology, inflammation, women’s health, haematology, endocrinology, respiratory, dermatology, gastrointestinal, neurology, infectious disease, and vaccines. The next 12-18 months will bring new and novel data sets across numerous disease states, advancing the standard of care in medicine, and driving the value of the sector higher.
Now in our 29th year, the performance from inception remains strong. As we closed the financial year, the NAV was near all-time highs and our bullishness into the new financial year remained steadfast. Overall, Worldwide Healthcare Trust’s net asset value performance since inception (from 28 April 1995), has posted a 4,733% return, or an average of 14.4% per annum through 31 March 2024. This compares to a benchmark return of 2,438% and 11.9% over the same investment horizon. This compares to the FTSE All-Share Index return of +636% and +7.1%. As we enter our 30th year of managing the Company, the multiple since inception of 48x represents both the strength of the healthcare industry and the unyielding global demand for healthcare related goods and services. It also shows what an active manager or specialist investor can do in healthcare, especially in the face of a highly idiosyncratic, global sector that possesses many barriers to understanding the scientific, clinical, regulatory, technological, and political environment that envelops all of healthcare.
OUTLOOK
The state of the healthcare industry remains strong, supported by significant global demand and new product flow, underpinned by an era of incredible innovation that has not been seen before. Moreover, the challenging investment backdrop for healthcare stocks that has been in place since the easing of the COVID pandemic appears to be in the past as the recent inflection of share prices across the industry is much more indicative of the positive fundamentals of the space. The long-term growth potential of healthcare also remains strong: global demographics, aging populations, and constant, persistent demand. Innovation, however, continues to advance in unparalleled fashion and is the primary driver of value creation. Innovation is not just in the domain of biotechnology, but across therapeutics, medical technology, patient services, analytics, and platform technologies. Together, they are improving patient care, advancing medical knowledge, and creating new medicines, with many that now can offer a cure. The productivity in the therapeutics space continues to be exceptional, with pipelines the fullest they have ever been, and the number of new drug approvals at all-time highs. The inflection in M&A in the space is just one testimony to this productivity, one that has already continued in 2024.
Overall, we remain committed to our long-term investment strategy that has underpinned our impressive track record since inception. There is no change to our investment philosophy and we eschew change for its own sake. We look forward to what the year ahead brings, across the entirety of the healthcare spectrum, as the growth of this industry continues to create a multitude of exciting investment opportunities.
Sven H. Borho and Trevor M. Polischuk
OrbiMed Capital LLC
Portfolio Manager
6 June 2024
