Summary

• Strong start to the earnings season for the healthcare sector, supported by further Most Favored Nation deals, and continued positive momentum in biotechnology.
• The fund delivered strong results with positive contributions from all subsectors, led by biotechnology and medical technology.
• Exposure to biotechnology was increased, financed by reduced exposure to pharmaceuticals.
• We believe the sector is better positioned now than it has been for a long time, with favorable conditions ahead, although short-term market movements toward year-end remain difficult to predict.

Monthly comment

The federal government of the United States remained shut down throughout October, as Congress continued to struggle to reach agreement on budget appropriations for the new fiscal year. The deadlock primarily concerned funding allocation for healthcare and social support programs, with the Democrats demanding clearer guarantees for subsidies under the Affordable Care Act (ACA).

While the shutdown has now extended beyond one month, the impact on the healthcare sector has been limited. Most healthcare operations are classified as essential, ensuring continuity of critical services and payment.

Earnings season off to a strong start

The third-quarter earnings season began on a positive note, with strong performances from the major healthcare companies. Earnings from small- and mid-caps companies are expected in November.

• Pharmaceuticals: Overall, pharma companies delivered strong reports with positive growth, successful product launches, and effective cost control. Several major names reported double-digit earnings growth and continued progress in key research areas.
• Medical technology: The sector reported stable growth, supported by some currency tailwinds (measured in USD) despite negative tariff effects. Since May, the sector has been affected by market rotation, partly favoring biotechnology.
• Healthcare services: Providers noted slightly weaker volumes which was offset by pricing acuity, leading to increased demand for more complex products and services, such as cardiovascular and orthopedic procedures. Margins remained strong, with good capacity utilization and expectations of positive volume trends driven by the underlying demand.
• Biotechnology: Most biotech earnings are expected after the end of the month, and focus will remain on clinical updates rather than financial numbers.

Biotechnology the strongest sub-sector during the month

Biotechnology continued to perform strongly, while other healthcare subsectors showed more mixed performances. Pharmaceutical stocks surged early in the month, driven by positive signals from the MFN negotiations. Momentum then eased somewhat despite mostly positive quarterly reports, resulting in a more muted development. Healthcare services saw some profit-taking in the last two weeks of the month. The sub-sector has rebounded strongly since early August. UnitedHealth Group, a bellwether for the group, rose by over 40 percent from its August lows, though it was still down by 45 percent from last year’s peak. Medical technology showed the weakest performance during the month, with significant variation among companies whose stock prices fluctuated by around 20 percent for the major players. Selectivity was key rather than a broad sub-sector interest.

Progress in MFN negotiations

The Most Favored Nation (MFN) negotiations between the administration and the pharmaceutical industry made clear progress in October. The MFN framework aims to lower US drug prices by linking them to the lowest levels in other developed countries, while offering relief through tariff exemptions and incentives for US production and research. This development marks a shift toward a more protectionist pharmaceutical policy, combining price pressure with support for domestic innovation. After Pfizer signed the very first MFN agreement with the administration in September, AstraZeneca followed and announced its own deal with the administration in October. The agreement was largely similar to Pfizer’s and was received positively, as it was seen as a step toward more predictable conditions for pharmaceutical companies. More agreements are expected in the coming months, although some uncertainty remains.

Reflections

Congress needs bipartisan cooperation to approve temporary funding and reopen government operations. The Democrats are demanding an extension of the enhanced subsidies under the Affordable Care Act whereas Republicans have advocated for a continuing resolution without additional policy changes, linking budget approval to stricter border controls and reduced foreign aid. While a resolution is broadly anticipated, both the timing and the final scope of the agreement remain uncertain.

After months of political and regulatory uncertainty, conditions for the healthcare sector have gradually improved. Previous concerns about the MFN process have eased as uncertainty has abated.

Signs of broader investment appetite

We see signs of broader investment interest in the sector, supported by valuations as the sector trades at attractive levels relative to the market. However, there is a risk of temporary technical resistance during the last quarter of the year, due to tax-loss selling activities, as weaker stocks tend to come under additional pressure towards year-end. In the near term, FDA actions may also influence biotech sentiment if they are perceived as being more restrictive. Smaller biotechnology and medical technology companies would be most affected.

Despite seasonal factors and potential volatility stemming from an unpredictable FDA, we continue to view the overall outlook as skewed to the upside, with favorable conditions for the sector to continue its run from depressed levels.