• Large-cap pharmaceutical companies performed strongly during the month, driven by solid earnings and the continued momentum for value stocks. Growth stocks underperformed, particularly medical technology and companies perceived as AI losers.
• M&A activity continued within the biotechnology sector, with the fund benefiting from the acquisition of Arcellx.
• In the near term, focus shifts from micro to macro as the earnings season draws to a close. The financial outlook for healthcare companies in 2026 generally exceeded expectations.

Monthly comment

The earnings season has so far been strong for the healthcare sector. Just north of 60 percent of sector companies have reported, delivering revenues and earnings which were roughly 2 and 4 percent ahead of consensus estimates, respectively. The 2026 financial outlook is encouraging, with particularly strong sales momentum for several key drugs across the portfolio.

The Supreme Court’s decision to strike down the broad tariffs imposed by the US against a number of countries last year  had some impact on the healthcare sector, although this was comparatively modest relative to other sectors given the healthcare sector’s relatively limited tariff exposure. The White House adapted to the Supreme Court’s ruling by implementing a uniform global tariff of 15 percent according to Section 122, which thus continued to be part of the market narrative. For healthcare, the medical technology sector possesses the greatest exposure to tariffs.

FDA announced reduced study requirements

During the month, FDA Commissioner Makary published an article in the New England Journal of Medicine, announcing that the FDA’s new default position would be that one robust pivotal study plus confirmatory evidence would be sufficient for the market approval of new drugs, thereby replacing the historical requirement of two pivotal studies.

US law has permitted approval based on a single adequate and well-controlled study with supporting confirmatory evidence since 1997 but, in practice, the FDA has been relying on two pivotal studies. Over the past five years, however, approximately 60 percent of new drugs have been approved based on only one study.

In other words, the FDA’s new position basically formalized what was already happening in many therapeutic areas, such as rare diseases. A more significant change will be the expansion to therapeutic areas that have historically almost always required two pivotal studies, such as immunology.

Although the FDA had previously signalled its desire to reduce the regulatory burden for new drugs and simplify the drug discovery and development process for biopharma companies, the announcement was nonetheless somewhat unexpected given the FDA’s recent rejection of a drug application citing the need for additional evidence.

From an investor perspective, the FDA’s new stance is encouraging, as long as there is regulatory consistency. Companies that elect to conduct only one study will be taking on greater risk should the FDA change its position in the future.

The FDA’s earlier interpretation requiring two independent studies was rooted in a safeguard mechanism designed to reduce the risk of a single positive study being a statistical fluke. The FDA now argues that advances in biology, trial methodology, and statistical science justify a departure from the two pivotal study standard.

Finally, the FDA further argues that reducing the number of registration studies required should lower the cost of capital for drug developers and, by extension, reduce the justification for high drug prices. It remains to be seen how this plays out in practice.

Dr. Claude and Mr. Hyde?

Anthropic’s launch of Claude Cowork and Claude Code did not go unnoticed by equity markets. Cowork was interpreted as evidence that AI tools are rapidly moving from assistants that support human work to systems capable of autonomously executing multi-step tasks. Code, in turn, democratises coding through so-called ‘vibe coding’.

Anthropic’s upgrades sent shockwaves through software stocks, which were sold off as investors questioned how AI challenges these companies’ economic moats. Stocks within the healthcare services sub-sector were also negatively impacted by this.

Reflections

Share price reactions on reporting days were considerably larger than expected for several of the fund’s holdings, which we believe was driven by the growing influence of quant funds and multi-strategy hedge funds, as well as a relative absence of generalist investors in the healthcare sector. During the month, at least one larger healthcare-focused specialist fund was liquidated in the US market, which likely triggered forced selling. The heightened volatility created temporary mispricings and, by extension, opportunities for patient investors in the healthcare sector.

Sharp swings in the inflation outlook

The inflation narrative shifted quickly from AI’s disinflationary, or even deflationary, force to the inflationary consequences of the US and Israel’s military conflict with Iran. The US dollar also reversed course and strengthened as the conflict escalated.

Whether or not the inflationary pressures stemming from the Iran conflict prove transitory will depend largely on the duration of the conflict, the behaviour of OPEC+, and whether the Strait of Hormuz remains open to traffic.

Over the longer term, AI development is likely to be the decisive factor for the inflation outlook. If the pace of AI-driven productivity growth continues at its current rate, or accelerates further, there are strong reasons to believe that the inflation outlook will fall significantly. The fact that more than 70 percent of all code written for Claude is now written by Claude itself represents a recursive milestone. Recursive, in this context, means something defined by itself: AI models are now meaningfully contributing to the construction of more advanced versions of themselves. This has no historical precedent in terms of the pace of innovation.

There are, however, reasons for thinking that the pace of AI development could slow. If scaling laws reach their limits, meaning that more compute and additional training data no longer yield exponentially better models, the pace of progress will decelerate. However, there are currently few signs that the marginal returns to further scaling are diminishing.

The buildout of data centres is constrained by the availability of power capacity and cooling technology, which constitutes an important bottleneck. The shortage of advanced semiconductors is also a limiting factor. Over time, regulation may also act as a brake, not least within healthcare, which is one of the most heavily regulated sectors in the world.

The pace of AI development is not only a technology question, but is also likely to be a central determinant of the trajectory of the broader economy, and thus the financial markets, in the years ahead.

For the healthcare sector, AI offers opportunities in areas including, but not limited to, diagnostic precision, drug development, administrative efficiency, and personalised care. Some healthcare companies fall into the category “AI-loser”, at least in the market’s current assessment. Among these are healthcare information technology companies and Clinical Research Organisations (CROs). The sector’s complexity and its strict patient safety regulations do, however, limit the pace at which AI can challenge the established players. Moreover, companies such as Veeva and IQVIA, to take examples from healthcare IT and CROs respectively, hold large amounts of proprietary data, which constitutes a critical economic moat (so called ‘systems of record’). Veeva’s platform is more likely to become a platform on which AI can be built, rather than something which AI replaces.

Encouraging data

A number of the portfolio’s smaller companies are set to report before the earnings season concludes. Market focus will then shift from company-specific considerations to macroeconomic factors, likely dominated by geopolitics and the interest rate and inflation trajectories.

We are encouraged by data indicating that the funding environment for biotech companies continues to improve, and we see a healthy pipeline of follow-on offerings and IPOs. Total financing for biotech companies through follow-on offerings more than doubled year-on-year in February while the number of biotech IPOs reached its highest level in over four years. Large pharmaceutical companies continue to pursue inorganic growth and increasing M&A activity bodes well for the sector.

The sector continues to trade at a discount to the broader market, an historical anomaly, and we continue our systematic work of identifying innovative and attractively-valued companies across our universe of stocks.