Healthcare Optimism

During the month of June the fund fell 2.9%¹. New COVID cases are accelerating again in the US and many emerging markets. Interestingly the number of daily deaths has so far not greatly increased in the USA possibly due to a younger demographic being infected and better drugs such as Gilead’s Remdesivir which is a cause for optimism. Economic stimulus does seem to be having its desired effect with economic indicators broadly improving although it is possible that economies will weaken again when stimulus tapers off in the second half of the year. We are cautiously optimistic that new targeted COVID antibody treatments from companies such as Regeneron and Pfizer will be available by year-end and vaccines will be ready for mass deployment in the first half of 2021.

In this month’s full commentary (below) we look into the performance of a selection of holdings in the fund.

We are happy to announce that as of 15 July 2020, the Fund’s objective will be updated to: deliver returns that exceed both the MSCI All Country World Total Return Index (net, AUD), and the RBA Cash Rate target +3%. This update will be concurrent with the opening of an additional Unit and Fee class that will be available to investors. The new unit class (“Class B”) will have a management fee of 1.25% (incl GST/RITC), with a performance fee of 20% above the MSCI world total return index (Net AUD) with a high watermark.

Top Holdings (alphabetically)

Bavarian Nordic Denmark Health Care

Genetic Signatures Limited Australia Health Care

Lumentum United States Information Technology

Photocure Norway Health Care

Telix Pharmaceuticals Ltd Australia Health Care

Notable positive performances were recorded by:

Australian medical imaging software company Mach7 which rose approximately 45% during the month after announcing its acquisition of US business partner Client Outlook. The acquisition will greatly increase the company’s addressable market and revenue. Mach7 trades at a significant discount to larger Australian rival Promedicus despite its recent rally.

Australian molecular diagnostic company Genetic Signatures which produces a Covid-19 test, rose 15% during the month as new Covid cases rose domestically where the company has a strong presence. We believe the market is still underestimating the size and duration of the covid testing opportunity for the company.

Optical equipment producers Viavi and Lumentum rose on optimism around the launch of the new iPhone which will boost demand for their 3D sensor products.

On the negative side:

US gene therapy producer Sangamo fell after partner Pfizer reported somewhat disappointing results of for its Haemophilia A gene therapy. Competitor Biomarin will be first to market with its gene therapy product however the efficacy of its product looks to wane over time leaving an opportunity for Sangamo if it shows better durability.

Australian radiation therapy and diagnostic producer Telix fell after delaying the filing of its prostate cancer diagnostic by six to eight weeks as the company is incorporating new data which will increase the addressable market by 50%. The product was expected to be approved by year-end which may now slip into next year. Nonetheless, we expect the product will be approved leading to a rapid revenue ramp in 2021 and 2022.

Danish vaccine producer Bavarian Nordic and US laboratory equipment producer Bio-Rad fell after very strong performance over prior months on little news.

New COVID cases are accelerating again in the US and many emerging markets. Interestingly the number of daily deaths has so far not greatly increased in the USA possibly due to a younger demographic being infected and better drugs such as Gilead’s Remdesivir which is a cause for optimism. Economic stimulus does seem to be having its desired effect with economic indicators broadly improving although it is possible that economies will weaken again when stimulus tapers off in the second half of the year. We are cautiously optimistic that new targeted COVID antibody treatments from companies such as Regeneron and Pfizer will be available by year-end and vaccines will be ready for mass deployment in the first half of 2021.