Monthly Commentary
July 2017

The healthcare sector lagged broader markets as it suffered from profit taking and exposure to dramatic currency moves during the month. Importantly, second quarter results have been robust across the board, highlighting strong underlying fundamentals. Earnings revisions are an important valuation metric for healthcare and we believe that they are heading in the right direction. For July, the Trust was down 2.4%, which compares to a 1.4% decrease reported for the benchmark (Morgan Stanley Global Healthcare Index).

Following what felt like modest progress in June, with the Republican leadership in the US producing a draft healthcare bill that could repeal and replace the Affordable Care Act (also known as Obamacare), July witnessed the Bill coming to a dramatic halt. At least three Republicans – John McCain, Susan Collins and Lisa Murkowski – voted against the Bill, which needed a simple majority to pass through the Senate. The so-called “skinny” repeal, would have scaled-back some of the more controversial provisions that exist in the current legislation, but failed to navigate its way through the Senate. Whilst disappointing and frustrating for many, the political debate has swiftly moved on with the focus now appearing to switch to tax reform. This is something that we will follow with great interest.

With no change to the status quo in terms of healthcare reform in the US, we should now be in a position to re-focus on the fundamental drivers that exist within the Healthcare sector; namely innovation and earnings momentum. Starting with innovation and clinical read-outs, I don’t think it too controversial to argue that July was very mixed in terms of key clinical read-outs. Starting with AstraZeneca, the much anticipated Phase III study in first-line lung cancer, the so-called MYSTIC study, yielded disappointing initial results. The company’s novel cancer treatment, a combination of two drugs known as Imfinzi and Tremelimumab, did not meet a key primary endpoint, that of progression-free survival (i.e. the length of time after treatment that a patient lives without their disease getting worse) compared to chemotherapy. The MYSTIC trial continues, with overall survival data expected in 2018, but the risks of commercial success do appear to have increased materially. The market is also starting to question the sustainability of AstraZeneca’s dividend.

On a more positive note, US biotechnology company Vertex, reported compelling data for its novel treatment for cystic fibrosis, VX-440. The asset, in combination with two other therapies, demonstrated improvements in lung function and other measures in patients with cystic fibrosis. The dramatic results were warmly received by the market, with Vertex shares trading adding more than 20% to their market-capitalisation in the proceeding days trading.

In terms of the portfolio, positive contributors during the month were Alexion and Becton Dickinson. Alexion has responded to a solid set of financial results and a constructive strategic review, whilst Becton Dickinson moved higher as the market continues to appreciate Becton’s proposed acquisition of Bard. Detractors in the quarter were HCA Holdings and Merck KGaA. HCA posted an underwhelming Q2’17 and nudged down FY’17 guidance, whilst Merck KGaA was under pressure during the period given increasing uncertainty surrounding the company’s Performance Materials unit. In terms of changes, we have added Vertex following the compelling data in cystic fibrosis and have reduced our exposure to Merck KGaA.

On the small-cap side of the portfolio, Summit and Portola were positive contributors for the Trust, whilst Quotient and Revance were negatives.  Portola continued its advance after approval of its first product the previous month whilst Summit bounced back with the biotechnology sector, which outperformed in July.  Quotient struggled after it was announced that the CEO intended to sell a small portion of stock, whilst Revance suffered from profit-taking after a strong move in June.  In terms of purchases/sales at the small-cap end of the portfolio, HMS Holdings is a new holding for the Fund whilst the position in Brookdale Senior Living was sold from the Fund.

We continue to be constructive on the healthcare sector, with the Q2 earnings season displaying strong, underlying fundamentals with the only fly in the ointment being quite marked currency fluctuations. In the short-term, we believe the relative weakness offers an attractive buying opportunity for the rest of the year as we continue to believe that the sector offers defensive, secular growth, a reasonable level of earnings visibility and carries valuations that are attractive on both an absolute and relative basis.

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. 

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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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