Monthly Commentary
October 2017

Global markets performed strongly in October with the healthcare sector an underperformer.  Within healthcare there was a large dispersion of returns around the third-quarter earnings reporting season especially for certain large-cap biotechnology and pharmaceutical stocks.  For October, the NAV was down 0.8% compared to the 0.1% decrease reported for the benchmark (Morgan Stanley Global Healthcare Index).  While the portfolio benefited from a strong earnings report across the managed care sector, where we have a significant weighting, weakness in three large biotechnology companies – especially Celgene – were major detractors to performance.

The contrast in performance across the sector was epitomised by the relative return of Johnson & Johnson (J&J) compared to Celgene in October. J&J is the largest position in the portfolio and has been a strong performer in 2017 with a decent rally in the shares following third-quarter results that demonstrated the strength of business at the world’s largest healthcare company.  Ironically, with the challenges facing many large-cap pharma and biotechnology stocks, it is the strength of J&J’s biopharmaceutical business that is driving the acceleration of growth and operating leverage for the company as opposed to its medical device and consumer health businesses.  Despite a strong new product portfolio and a burgeoning pipeline in biopharmaceuticals, we think that J&J is still not a “loved” stock.

Celgene, on the other hand, has been a consensus overweight for many growth investors in the biotechnology sector.  The company experienced a torrid time in October with a massive change in sentiment for the stock that we have rarely seen in the healthcare sector.  The company started the month poorly after some sell-side analysts began to voice concerns over the intellectual property (IP) protection around Celgene’s largest product, Revlimid.  This was followed by the early termination of a Phase 3 study investigating the use of a new drug candidate, mongerson, for the treatment of Crohn’s disease.  We had considered this a high-risk project but the decision to stop development fuelled concerns regarding Celgene’s pipeline and long-term growth prospects.  Celgene then reported mixed quarterly results and reduced its long-term EPS guidance from more than $13 per share to more than $12.50 per share in 2020.  The stock suffered another sharp sell off – the stock was down over 30% in US Dollars over the course of October.  With a share price of $100, the current 2018 P/E multiple is 11.5 times earnings and is pricing in little optimism on any pipeline progress or growth beyond 2020.

Drug pricing has been a hot political topic in the US and so we have been avoiding companies involved in the supply chain including distributors and pharmacy benefit managers (PBMs).  In particular, we have been concerned that legislation may require greater transparency on which companies benefit by making a margin on the difference between the list price and the net price that a drug company actually receives.

During October, rumours emerged that a new entrant is now looming on the horizon in the shape of Amazon.  It appears that Amazon has acquired pharmacy licenses in a number of US states and that it may enter the market before year-end.  While Amazon has yet to detail its plans to enter the healthcare market there are significant investor concerns that Amazon will disrupt both the distributor, pharmacy and PBM business models by creating greater transparency and taking market share.

In many ways, Amazon looming on the horizon validates our view that the healthcare industry has begun a process of major structural change.  As with many other industries that have been disrupted by technology, the incumbents in healthcare may face competitive challenges not only from small start-ups but also from non-traditional, new entrants to the market.

We made a number of changes to the growth portfolio at the beginning of the month.  We sold the positions in Sanofi, Medtronic and HCA ahead of third-quarter results – we remain concerned that 2018 consensus estimates may be too high for all three companies.  We used the proceeds to add a number of new positions.  In medical devices, we added Stryker, Terumo and Varian. We also added Bio-Rad, a life sciences tools company; Biogen, in biotechnology; and PRA Health, a contract research organisation (CRO) services company.

In the innovation portfolio, we continue to look for new additions and we are patiently exiting some of the small cap positions we have held historically.  In September, we sold the position in Primary Health and Religare Health Trust.  We added two new positions – Nektar Therapeutics, a US biopharmaceutical company, and MedaPhor, a small UK-based company with innovative technology for the ultrasound market.

While this has been a difficult earnings season, we continue to believe that healthcare offers growth opportunities for investors.  Over the next few weeks, members of the team are attending a number of investor conferences that should help us position the portfolio for 2018.  We remain positive on the outlook for healthcare as valuations seem reasonable, both on a relative and absolute basis, and we can see many investment opportunities arising from the ongoing structural change.

Dan Mahony & Gareth Powell

Disclaimer

Important Information: This document is provided for the sole use of the intended recipient and is not a financial promotion. It shall not and does not constitute an offer or solicitation of an offer to make an investment into any Fund or Company managed by Polar Capital. It may not be reproduced in any form without the express permission of Polar Capital and is not intended for private investors. This document is only made available to professional clients and eligible counterparties. The law restricts distribution of this document in certain jurisdictions; therefore, it is the responsibility of the reader to inform themselves about and observe any such restrictions. It is the responsibility of any person/s in possession of this document to inform themselves of, and to observe, all applicable laws and regulations of any relevant jurisdiction. Polar Capital Technology Trust plc is an investment company with investment trust status and as such its ordinary shares are excluded from the FCA’s (Financial Conduct Authority’s) restrictions which apply to non-mainstream investment products. The Company conducts its affairs and intends to continue to do so for the foreseeable future so that the exclusion continues to apply. It is not designed to contain information material to an investor’s decision to invest in Polar Capital Technology Trust plc, an Alternative Investment Fund under the Alternative Investment Fund Managers Directive 2011/61/EU (“AIFMD”) managed by Polar Capital LLP the appointed Alternative Investment Manager. In relation to each member state of the EEA (each a “Member State”) which has implemented the AIFMD, this document may only be distributed and shares may only be offered or placed in a Member State to the extent that (1) the Fund is permitted to be marketed to professional investors in the relevant Member State in accordance with AIFMD; or (2) this document may otherwise be lawfully distributed and the shares may otherwise be lawfully offered or placed in that Member State (including at the initiative of the investor). As at the date of this document, the Fund has not been approved, notified or registered in accordance with the AIFMD for marketing to professional investors in any member state of the EEA. However, such approval may be sought or such notification or registration may be made in the future. Therefore this document is only transmitted to an investor in an EEA Member State at such investor’s own initiative. SUCH INFORMATION, INCLUDING RELEVANT RISK FACTORS, IS CONTAINED IN THE COMPANY’S OFFER DOCUMENT WHICH MUST BE READ BY ANY PROSPECTIVE INVESTOR.

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.

Third-party Data: Some information contained herein has been obtained from third party sources and has not been independently verified by Polar Capital. Neither Polar Capital nor any other party involved in or related to compiling, computing or creating the data makes any express or implied warranties or representations with respect to such data (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any data contained herein. 

Holdings:  Portfolio data is “as at” the date indicated and should not be relied upon as a complete or current listing of the holdings (or top holdings) of the Company. The holdings may represent only a small percentage of the aggregate portfolio holdings, are subject to change without notice, and may not represent current or future portfolio composition. Information on particular holdings may be withheld if it is in the Company’s best interest to do so. It should not be assumed that recommendations made in future will be profitable or will equal performance of the securities in this document.  A list of all recommendations made within the immediately preceding 12 months is available upon request.  This document is not a recommendation to purchase or sell any particular security.  It is designed to provide updated information to professional investors to enable them to monitor the Company.

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.

Information Subject to Change: The information contained herein is subject to change, without notice, at the discretion of Polar Capital and Polar Capital does not undertake to revise or update this information in any way.

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. 

Country Specific disclaimers: The Company has not been and will not be registered under the U.S. Investment Company Act of 1940, as amended (the "Investment Company Act") and the holders of its shares will not be entitled to the benefits of the Investment Company Act. In addition, the offer and sale of the Securities have not been, and will not be, registered under the U.S. Securities Act of 1933, as amended (the "Securities Act"). No Securities may be offered or sold or otherwise transacted within the United States or to, or for the account or benefit of U.S. Persons (as defined in Regulation S of the Securities Act). In connection with the transaction referred to in this document the shares of the Company will be offered and sold only outside the United States to, and for the account or benefit of non U.S. Persons in "offshore- transactions" within the meaning of, and in reliance on the exemption from registration provided by Regulation S under the Securities Act. No money, securities or other consideration is being solicited and, if sent in response to the information contained herein, will not be accepted. Any failure to comply with the above restrictions may constitute a violation of such securities laws.

FACT SHEET

Click the link below to download this month's fact sheet:

DOWNLOAD

Important Legal Information

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.

By clicking on the buttons below, you are confirming that you are viewing this website from the UK and agree to the terms and conditions detailed below.

Private Investor Professional Investor

The information contained within this website is issued by Polar Capital Global Healthcare Trust plc (“PCGH”) and its wholly owned subsidiary PCGH ZDP PLC and is provided for reference purposes only. Nothing herein is intended to be construed as an offer, invitation or inducement to engage in investment activity, or investment advice or recommendation, in relation to the shares of PCGH or its subsidiary, and should not be relied upon as such by any person. Prospective investors should take advice from their financial or other professional advisers before making any investment decision.

The information contained within this website is intended to be used for reference purposes only by persons in the UK. Nothing on this website is directed at any person outside the UK where the publication or availability of such information is prohibited or restricted. In particular, the information contained within this website is not intended for, and must not be accessed by or distributed or disseminated to, directly or indirectly, in whole or in part, persons resident or physically present in the United States of America, including its territories and possessions, any state of the United States and the District of Columbia (together, the "United States"), Canada, Australia or Japan, and does not constitute an offer to sell or the solicitation of an offer to buy or acquire, any securities PCGH in the United States, Canada, Australia or Japan.  PCGH is an Alternative Investment Fund (“AIF”) under the Alternative Investment Fund Managers Directive 2011/61/EU (“AIFMD”) managed by Polar Capital LLP the appointed Alternative Investment Fund Manager (“AIFM”). Polar Capital LLP is also the AIFM for PCGH ZDP PLC which is an AIF in its own right.  In relation to each member state of the EEA (each a “Member State”) which has implemented the AIFMD, shares may only be offered or placed in a Member State to the extent that a fund is permitted to be marketed to professional investors in the relevant Member State in accordance with AIFMD or as the shares may otherwise be lawfully offered or placed in that Member State (including at the initiative of the investor). As at the date of this document, neither PCGH nor PCGH ZDP PLC have been approved, notified or registered in accordance with the AIFMD for marketing to professional investors in any member state of the EEA.

Neither the securities of PCGH nor the securities of PCGH ZDP PLC referred to on this website (the "Securities") have not been and will not be registered under the US Securities Act of 1933, as amended (the "Securities Act") and may not be offered or sold in or into the United States or to, or for the account or benefit of, US persons (as defined in Regulation S under the Securities Act) absent registration under the Securities Act or pursuant to an applicable exemption from, or in a transaction not subject to, the registration requirements of the Securities Act and in compliance with any applicable securities laws of any state or other jurisdiction of the United States. Neither PCGH nor PCGH ZDP PLC will be registered under the U.S. Investment Company Act of 1940, as amended, and investors in the Securities will not be entitled to the protections of that Act.

PCGH and PCGH ZDP PLC are managed by Polar Capital LLP; Polar Capital LLP is not responsible for the content or accuracy of any information contained within this website.

If you are unsure about the meaning of any information provided on this website, please consult your financial or other professional adviser. Neither PCGH nor PCGH ZDP PLC can offer investment advice.

General Risk Warning

Please remember that past performance of an investment is not necessarily a guide to future performance. The value of an investment and the income from it can fall as well as rise as a result of market and currency fluctuations and you may not get back the amount originally invested. The market value of the shares of PCGH and the shares of PCGH ZDP PLC may not reflect the underlying net asset value of the investments held by PCGH.

PCGH is able to borrow to raise further funds for investment purposes if the fund manager and the board of directors consider that it may be commercially advantageous to do so. This is generally described as “gearing”. An investment trust which has made investments as a result of gearing may have a more volatile share price as a result; gearing can increase shareholder returns in rising markets but conversely can increase the extent to which the value of the funds attributable to shareholders decreases in falling markets.

Tax assumptions may change if the law changes, and the value of tax relief (if any) will depend upon your individual circumstances. Investors should consult their own tax advisers in order to understand any applicable tax consequences.

The shares of investment trusts may trade at a discount or a premium to Net Asset Value for a variety of reasons including market sentiment and market conditions.  On a sale you could realise less than the Net Asset Value and less than you initially invested.

Disclaimer

PCGH and PCGH ZDP PLC  believe that the information displayed on this website is accurate as at the date of publication, but do not guarantee the accuracy or correctness or timeliness of any information and disclaim all representations and warranties, whether express or implied, to the extent permitted by applicable law and regulation. Further, the information displayed may be amended at any time and without notice. By continuing to use this website, you agree to this exclusion to the extent permitted by applicable law and regulation, of any and all liability for any direct, indirect, punitive, consequential, incidental, special or other damages, including, without limitation, loss of profits, revenue or data arising out of or relating to your use of and our provision of this website and its content. If you are dissatisfied with any aspect of this website, or of its contents, your sole and exclusive remedy is to discontinue use of this website.

PRIVACY POLICY

You may visit this website without providing any personal information about yourself. Our servers may collect and hold domain name information of visitors to this website but this information is held only for the period that you are using the website and will be used on an anonymous, aggregated basis only for the purposes of measuring the use of and to improve the content of this website.

“Cookies” are used to process and record information concerning your visit to and use of the Website and identify you when you visit the Website and to enhance your experience of the Website. “Cookies” are small pieces of information that your internet browser places on your computer’s hard drive. “Cookies” may be used for remembering user names and preferences, tracking click streams and in the future for presenting users with personalised versions of the Website. You have the option of setting your browser to block “cookies”. Please refer to the "help" function of your internet browser for instructions. In some cases blocking “cookies” may reduce the functionality of the Website or prevent access to it depending on your chosen internet browser options. If you continue without changing your settings, it will be assumed that you are happy to receive all cookies on the website. However, if you would like to, you can change your cookie settings at any time.

Any personal information which you communicate to Polar Capital, for example your name or email address which you may provide if you contact Polar Capital by email, will be held and processed in accordance with the requirements of the Data Protection Act 1998 and will be used only for the purposes of dealing with and responding to any such communication or fulfilling any other obligation which Polar Capital owes to you. If you have any questions in relation to the information Polar Capital hold about you or use of that information, please feel free to contact your Polar Capital representative. You have the right at any time to request a copy of the personal information which Polar Capital holds about you (subject to payment of a small administrative fee) and to correct any inaccuracies.

This Privacy Policy may be updated from time to time. You will be advised within this website of the last date on which any updates have been made. If you choose to bookmark pages within this website for future use, you agree that it is your responsibility to check whether any updates have been made since you last visited this website.

This website contains links to websites operated by third parties. We are not responsible for and make no representation or warranty as to the privacy practices of those third parties.

By accepting these terms and continuing to use this website you agree that any personal data you may supply to Polar Capital may be held and processed in accordance with this Privacy Policy.

Use of this site is subject to our site disclaimer and legal statement.