Monthly Commentary
April 2018

April witnessed a modest recovery in the sector, following a difficult end to the first quarter. The Company’s NAV was up 2.85% in April and outperformed the benchmark (MSCI All Country World Index / Healthcare TR), which was up 2.67% (in GBP terms) for the month. The relative performance was driven by strength in managed care, medical devices and European biotechnology.

Whilst the previous month was rich in newsflow surrounding mergers and acquisitions (M&A) and corporate restructuring, April was an extremely busy month for corporate earnings. Without being too granular or stock-specific, it is worth reflecting on some of the key themes that we have observed thus far. Starting with the large-cap pharmaceutical and biotechnology sectors, results for some have been adversely impacted by customer buying patterns and rebating to gain preferable formulary positioning. A broad statement, but the first quarter reporting season has done little to assuage fears that the pharmaceutical and biotechnology sectors could continue to struggle to deliver sustainable growth in the absence of differentiated product offerings.

On a more constructive note, the medical devices sub-sector has had a strong start to the year in terms of top-line organic growth driven by, amongst other things, new product cycles. The life sciences and tools sector has also had a strong operational start to 2018 as the market participants continue to benefit from strong end-markets, both by geography and by end-customer. Last, but not least, there were fears that ‘flu-related costs would be a challenge for the medical cost trends for the managed care group, fears that have thus far been allayed with some better-than-expected earnings prints.

Moving away from earnings, the highest profile scientific gathering in April took place between the 14 and 18 April; it was the American Association of Cancer Research (AACR). We had already seen some positive headlines ahead of the event, but the AACR was used as a platform to highlight ground-breaking, and indeed life-changing, developments primarily in the field of lung cancer. Merck & Co stole the show with data that, at this point in time, appears to be best in class and has extended the company’s leadership in lung cancer immuno-oncology. At a minimum, the differentiation that Merck & Co. has shown has materially raised the bar for the leading competitors in this specific field of oncology, namely AstraZeneca, Bristol-Myers Squibb and Roche. To offer balance, April did witness a set-back for Merck & Co, and partner Incyte Corp (Incyte), as they announced the termination of a late stage clinical trial. The trial combined Merck & Co’s Keytruda with Incyte’s Epacadostat and was evaluating the treatment of metastatic melanoma (skin cancer) but was stopped as the study did not meet the primary endpoint of progression-free survival. A few days later, Incyte and partner Eli Lilly & Co., had a challenging Advisory Committee in the US for their oral rheumatoid arthritis drug, Baricitinib. With question marks over safety, the market appears to have adopted a much more cautious stance on the product’s commercial potential in the US.

On the political front, US President Trump was scheduled to deliver a speech on drug pricing towards the end of April, but the speech was postponed until early May. Conventional wisdom leading up to the event pointed to a speech that would focus on greater competition and transparency within the healthcare system, but with an acknowledgement that major legislative change appears unlikely. In the absence of further information, the pending speech could continue to dampen near-term enthusiasm, not just for the therapeutic companies, but for other parts of the pharmaceutical value-chain.

The primary contributors during month were Anthem, Becton Dickinson and Wilson Therapeutics. With regards to Anthem, the strong performance in the month was driven by a strong set of 2018 first quarter results, a pattern reflected across the majority of the Managed Care sector. Becton Dickinson’s performance, we believe, was driven by a growing appreciation of the merits of the recent CR Bard acquisition. Finally, US biotechnology company, Alexion Pharmaceuticals, made an offer to acquire Wilson Therapeutics, an early-stage company based in Sweden whose lead drug candidate WTX101 is in late-stage clinical development as a treatment for Wilson disease (a rare genetic disorder that leads to the accumulation of dietary copper in the body which has debilitating and potentially life-threatening liver-related and neurological consequences for patients). Alexion made an US$855m cash offer for Wilson Therapeutics, at SEK232/share, representing a 70% premium to the company's share price.

Detractors in the period were Alnylam Pharmaceuticals (Alnylam), Takeda Pharmaceutical (Takeda) and Vertex Pharmaceuticals (Vertex). The Alnylam weakness was a continuation of the concerns that surfaced late in March in terms of potential competition for their lead asset, Patisiran. Likewise, with Takeda, March’s weakness continued in to April as the market continues to digest the implications of the company’s offer to acquire Shire. Finally, Vertex struggled to perform with investors appearing to be concerned about the release of some preliminary data from an asset that will potentially compete with the company’s cystic fibrosis franchise.

In terms of the Fund, we were carrying quite a high cash position at the end of March and have since re-deployed the capital primarily into existing holdings in life sciences and tools companies. We have also taken advantage of the recent weakness to build a position in US biotechnology company, Incyte, given we believe the market is overly-discounting the company’s pipeline assets. We also added US medical devices company, Baxter International Inc, to the portfolio reflecting our view that the company’s top-line is starting to inflect and the company’s journey on productivity gains has only just begun. On the Innovation side, we made just the one change during the month by exiting our position in Coltene. The Swiss manufacturer of dental tools and disposables has been a long-term holding, but we see better uses of capital elsewhere.

Looking forward, now that we have navigated the seasonally weak first quarter, we can once again think about focussing on the strong underlying fundamentals that exist in healthcare. With its low relative and reasonable absolute valuation, we continue to believe the growth profile of the industry is attractive in a low-growth world.

Dan Mahony & Gareth Powell

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Statements/Opinions/Views: All opinions and estimates constitute the best judgment of Polar Capital as of the date hereof, but are subject to change without notice, and do not necessarily represent the views of Polar Capital. This material does not constitute legal or accounting advice; readers should contact their legal and accounting professionals for such information. All sources are Polar Capital unless otherwise stated.

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Benchmarks: The following benchmark index is used: Dow Jones World Technology Index (Total Return). This benchmark is generally considered to be representative of the Technology Equity universe. This benchmark is a broad-based index which is used for comparative/illustrative purposes only and has been selected as it is well known and is easily recognizable by investors. Please refer to www.djindexes.com for further information on this index. Comparisons to benchmarks have limitations as benchmarks volatility and other material characteristics that may differ from the Company. Security holdings, industry weightings and asset allocation made for the Company may differ significantly from the benchmark. Accordingly, investment results and volatility of the Company may differ from those of the benchmark. The indices noted in this document are unmanaged, are unavailable for direct investment, and are not subject to management fees, transaction costs or other types of expenses that the Company may incur. The performance of the indices reflects reinvestment of dividends and, where applicable, capital gain distributions. Therefore, investors should carefully consider these limitations and differences when evaluating the comparative benchmark data performance. Information regarding indices is included merely to show general trends in the periods indicated, it is not intended to imply that the Company was similar to the indices in composition or risk.

Regulatory Status: Polar Capital LLP is a limited liability partnership number OC314700. It is authorised and regulated by the UK Financial Conduct Authority (“FCA”) and is registered as an investment adviser with the US Securities & Exchange Commission (“SEC”). A list of members is open to inspection at the registered office, 16 Palace Street, London, SW1E 5JD. FCA authorised and regulated Investment Managers are expected to write to investors in funds they manage with details of any side letters they have entered into. The FCA considers a side letter to be an arrangement known to the Investment Manager which can reasonably be expected to provide one investor with more materially favourable rights, than those afforded to other investors. These rights may, for example, include enhanced redemption rights, capacity commitments or the provision of portfolio transparency information which are not generally available. The Company and the Investment Manager are not aware of, or party to, any such arrangement whereby an investor has any preferential redemption rights. However, in exceptional circumstances, such as where an investor seeds a new fund or expresses a wish to invest in the Company over time, certain investors have been or may be provided with portfolio transparency information and/or capacity commitments which are not generally available. Investors who have any questions concerning side letters or related arrangements should contact the Polar Capital Desk at the Registrar on 0800 876 6889. The Company is prepared to instruct the custodian of the Company, upon request, to make available to investors portfolio custody position balance reports monthly in arrears.

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Forecasts: References to future returns are not promises or estimates of actual returns Polar Capital may achieve. Forecasts contained herein are for illustrative purposes only and does not constitute advice or a recommendation. Forecasts are based upon subjective estimates and assumptions about circumstances and events that have not and may not take place. 

Performance/Investment Process/Risk: Performance is shown net of fees and expenses and includes the reinvestment of dividends and capital gain distributions. Factors affecting the Company’s performance may include changes in market conditions (including currency risk) and interest rates and in response to other economic, political, or financial developments. The Company’s investment policy allows for it to enter into derivatives contracts. Leverage may be generated through the use of such financial instruments and investors must be aware that the use of derivatives may expose the Company to greater risks, including, but not limited to, unanticipated market developments and risks of illiquidity, and is not suitable for all investors. Those in possession of this document must read the Company’s Investment Policy and Annual Report for further information on the use of derivatives.  Past performance is not a guide to or indicative of future results. Future returns are not guaranteed and a loss of principal may occur. Investments are not insured by the FDIC (or any other state or federal agency), or guaranteed by any bank, and may lose value. No investment process or strategy is free of risk and there is no guarantee that the investment process or strategy described herein will be profitable.

Allocations: The strategy allocation percentages set forth in this document are estimates and actual percentages may vary from time-to-time. The types of investments presented herein will not always have the same comparable risks and returns. Please see the private placement memorandum or prospectus for a description of the investment allocations as well as the risks associated therewith. Please note that the Company may elect to invest assets in different investment sectors from those depicted herein, which may entail additional and/or different risks. Performance of the Company is dependent on the Investment Manager’s ability to identify and access appropriate investments, and balance assets to maximize return to the Company while minimizing its risk. The actual investments in the Company may or may not be the same or in the same proportion as those shown herein. 

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Launched in 2010, Polar Capital Global Healthcare Trust plc (“PCGH”) has grown to become a leading European investor with a multi-cycle track record. Managed by a team of dedicated healthcare specialists, the PCGH aims to maximise long-term capital growth by investing in a diversified portfolio of healthcare companies from around the world. The managers’ core belief in rigorous fundamental analysis, and being unconstrained by not following a benchmark, enables PCGH to deliver global equity market outperformance through exposure to a universe of over 3,000 companies.

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