David Kimberley
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Updated 04 Aug 2023
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Disclosure – Non-Independent Marketing Communication

This is a non-independent marketing communication commissioned by Bellevue Healthcare. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.

Were someone from another planet to have visited the UK for the day in early July, they could have been forgiven for thinking the NHS was some sort of deity that people in this country worship.

Westminister Abbey held a service to honour the healthcare service’s 75th anniversary. A children’s choir sang ‘Happy Birthday, NHS’ on television. Buildings across the capital were illuminated with the familiar blue that is used to print those three fabled letters.

Regardless of whether you participated in these celebrations, it is hard to argue that the NHS is not experiencing some major problems today. NHS data shows there are 7.5m people currently on the health service’s waiting list. This is more than 10% of the entire UK population. People in the UK have also doubled their private spending on healthcare over the past 30 years, according to research undertaken by the Financial Times last year – hardly a sign that their demands are being met by a service that’s free at the point of use.

This is not for a lack of funds. Government spending on the NHS has risen almost every year since its ‘birth’ 75 years ago. The budget for the service is up almost 40% compared to a decade ago, or a generous 3.2% annualised increase.

Much as we may enjoy thinking they are, the NHS’s problems are not unique. Across the world, longer-living populations and shrinking birth rates are combining to put extreme pressure on healthcare systems. Governments, either because they are unable or unwilling to for electoral reasons, are increasingly struggling to pay for these services via higher taxation.

This leaves us all in a difficult position. As the peculiar NHS celebrations and strain on the service illustrate, there is widespread support and demand for healthcare. But the failings of the service, as is the case around the world, will be increasingly hard to prevent due to a lack of government funding. The result is that healthcare systems increasingly resemble a car with a malfunctioning engine and a tank that’s close to empty – even if the driver doesn’t run out of fuel, the whole thing is going to break anyway.

This is a point that Paul Major and Brett Darke, managers of Bellevue Healthcare (BBH), have repeatedly highlighted, noting that demand for healthcare services is only growing, but service providers have been unable to provide acceptable levels of service in response. This is despite the fact that increases in healthcare spending continue to outstrip GDP growth in developed countries – something that is unsustainable long-term.

BBH does not invest solely with this dynamic in mind, but it is hard not to see it acting as a tailwind for the types of companies the managers invest in. Paul and Brett run a concentrated portfolio with a maximum of 35 stocks and invest in healthcare companies with no constraints on market cap, region, or sector.

Some of these companies have developed products that cater to rising demand but also serve to cut costs. For example, Axonics, currently one of BBH’s largest holdings, has developed a device to treat people with overactive bladders. Millions of people suffer from this problem, so there is clear demand for the device, but it also reduces the need for surgery, which in turn cuts patient risk and costs. Indeed, research in the Journal of Urology published in 2019 found that widespread adoption of Axonics’ technology could save the US healthcare system $12bn over a 15-year period, the lifespan of the device before it requires recharging.

Other companies in the BBH portfolio cater to the operational side of the healthcare sector. As Paul and Brett noted in their May factsheet, less than a quarter of US healthcare workers are frontline staff. The majority are in more bureaucratic roles, whether managing finances or patient files. Evolent Health, another major BBH holding, fits into this category, as part of the business focuses on making software that healthcare providers can use to manage things like payments, customer relations, and claims processing.

These two businesses reflect a key component of what BBH aims to do, namely invest in companies that both help the healthcare sector reduce costs and provide novel or superior treatments for existing ailments. As we’ve already seen, the combination of rising demand for healthcare and an inability to cater to it should make this something of a secular growth trend.

And yet valuations for companies in the portfolio have come down over the past 18 months, as higher rates and other seemingly interminable macro factors came into play. It is hard to ignore these factors totally, but their actual impact on the underlying portfolio appears to have been muted thus far. That is probably because they have little bearing on the products and services those companies provide.

For example, one major holding in the BBH portfolio is Appelis Pharmaceuticals, which makes an injectable called SYFOVRE that can be used to prevent permanent vision loss. It seems unlikely that the Bank of England hiking rates or Russia invading Ukraine will make people not want to use a product that stops them from going blind. Indeed, SYFOVRE was approved by US authorities in February of this year, and sales have risen substantially for the company since then.

Despite the growth potential that companies like Appelis offer, BBH has seen its discount widen over the past 18 months. Having traded, on average, at a premium to NAV every year since launch in late 2016, the trust’s shares averaged a -3.2% discount in 2022. In the year to 26/07/2023, the trust’s shares averaged a -7.2% discount, with a discount of -5.7% as at that date.

BBH sits at an interesting juncture as a result. The trust is itself at a discount, and many of its holdings have arguably been hit by indiscriminate selling. With the long-term tailwind of higher demand and the need for novel solutions to cut costs not going away, a return to less volatile macroeconomic conditions may mean that investors see a two-fold benefit as the trust’s discount tightens and the underlying holdings benefit from a change in sentiment.

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