Press release of May 4, 2020

Defensive stocks for stormy weather

The Asian healthcare market is entering another period of fast growth. Japan continues to demonstrate technology leadership in healthcare, while China is emerging as a new laboratory of healthcare system innovation in the wake of concerted action to modernize and reform its national health system. Chinese healthcare companies are particularly likely to become stronger in the aftermath of the coronavirus pandemic. Portfolio Managers Oliver Kubli and Remo Krauer from Bellevue Asset Management are focused on the most promising investment opportunities in the Asian healthcare universe.

Asia was the starting point of the global coronavirus outbreak. The Covid-19 pandemic is accelerating the adoption of digital technologies across the region's healthcare industry. During the lockdown in China, for example, Ping An Healthcare, Alibaba Health and other Chinese online healthcare providers reported a surge in virtual doctor consultations and this has given the trend towards digitization in healthcare more momentum.

Defensive qualities in times of market turmoil

BB Adamant Asia Pacific Healthcare and BB Adamant Emerging Markets Healthcare (80% Asia exposure), two of our regional strategy funds, have performed very well year to date (as of April 30), both in absolute terms and relative to the broader market. Measured in USD, the two funds have gained 11.9% and 9.7%, respectively, whereas the broad Asia-Pacific stock market has retreated by 14.4% and the broader emerging market index is down 17.1% year to date.

Healthcare's outperformance of the broader market has been particularly evident since mid-March when stocks began to recover from the steep market sell-off. A major reason for this is the increasing visibility of the generally solidly financed healthcare companies in the eyes of the investment community as well as the broader public. Meanwhile the pandemic has demonstrated quite clearly just how important a well-functioning healthcare system is. Drug developers and providers of medical technology are being viewed as solution-makers who will get us through the crisis.

Asian companies with treatments for Covid-19

Innovent Biologics is a Chinese company that is developing a monoclonal antibody drug as a vaccine for COVID-19. Takeda Pharma, a Japanese firm, and its Australian partner CSL are using a well-established technology to develop a hyperimmune immunoglobulin medicine that would boost the ability of a body's immune system to fight Covid-19. Wuxi Biologics and Samsung Biologics have state-of-the-art pharmaceutical manufacturing facilities. Dr Reddy's, a company in India, produces an old anti-malarial drug that is currently being investigated as a potential treatment for Coronavirus disease. The Japanese drug maker Chugai has initiated a clinical trial of Actemra, a drug already approved for patients with autoimmune disease, as a last line of defense against severe immune overreactions that have often led to the death of Covid-19 patients. The Asian healthcare sector is also attracting attention as a global supplier of medtech and diagnostic products, ranging from personal protective equipment to respirators and test kits. Mindray, for example, is a Chinese manufacturer of ventilators that also sells its products to customers in the US. The Malaysian company Top Glove manufactures 73 billion rubber gloves a year and is now expanding its annual capacity to 90 billion.

China - a laboratory of innovation

Chinese healthcare companies are likely to emerge from the corona crisis stronger than before. Recent developments confirm that the Chinese government is pushing in the right direction with its efforts to improve the efficiency, quality and integrative approach of the country's healthcare industry. The biomedical and medical device industries are among the 10 industries that have been prioritized in the government's "Made in China 2025" plan. Some of the policies and measures the Chinese government laid out to promote structural growth in these industries were borrowed from the German government's Industry 4.0 development plan. A basic objective of this 10-year plan is to move the country higher up the value chain. Beijing wants to increase the domestic content of core materials or processes in the designated industries to 70% by 2025.

Strategically and financially, the government is calling all the shots. It successfully introduced nationwide drug tenders and centralized drug procurement processes that have lowered the prices for generics. The resulting savings are being channeled into research and development. These investments will pay off during the coming years: In 2018, domestically developed drugs protected by patents accounted for 40% of all drugs in the Chinese market; this share is projected to stand at 65% in 2023.

Innovent, one of the stocks in our investment portfolio, is a prime example of a Chinese biotech success story. Innovent has built up a pipeline of candidates for the treatment of cancer and autoimmune, cardiovascular and other diseases. Its oncology drug Sintilimab approved in December 2018 by China's regulatory authority was the country's second domestically developed immunotherapy for patients with classic Hodgkin's lymphoma. Sintilimab also showed positive efficacy data as a combination therapy for patients with lung cancer. Wuxi Biologics, another stock in the portfolios of both funds, has become an internationally leading contract manufacturer for multinational companies and it has developed a proprietary technology platform.

Japan - the demographic laboratory

No other country has a higher percentage of citizens aged 65 or older than Japan, and that is a boon to the country's healthcare sector.

Eisai, a pharmaceuticals company, boasts the world's deepest pool of research data on Alzheimer's disease. If the US FDA gives the green light sometime this year, Eisai and its US partner Biogen could begin to market the very first drug that actually slows the progression of Alzheimer's disease. Other Japanese companies such as Astellas Pharma, Chugai Pharma and Daiichi Sankyo are active in oncology, gene therapy or rare hereditary diseases.

Medical technology is another field in which Japanese companies are leaders, with products ranging from stents and catheters to medical imaging systems. Olympus, one of the largest positions in our Asia Pacific Healthcare Fund, has undergone a strategic and financial transformation over the past several years. The company is a global technology leader in endoscopy with a world market share of 70%. Thanks to its latest generation of endoscopy solutions, Olympus will generate high growth in the coming years. This will be fueled by innovations such as a platform for 3D gastrointestinal endoscopes that will leverage technology for enhanced visualization of blood vessels and lesions as well as AI-assisted detection and characterization applications.

Current fund positioning

In the current market environment, the valuations of our fund investments are at historical lows. This is particularly the case for the Chinese stocks in the portfolios. The average sales growth for the companies in our BB Adamant Asia Pacific Healthcare Fund (LU1587984847) over the next three years is an estimated 20.8%. The fund's average PEG ratio, which is obtained by dividing the P/E ratio by estimated earnings growth, is 1.3. China, the country with the largest weighting in the fund, has a PEG ratio of 0.9 and estimated average sales growth of 37%.

The stocks in the portfolio of the BB Adamant Emerging Markets Healthcare Fund (LU1585228452) are also very attractively valued. The Chinese stocks in this fund's portfolio have an average estimated sales growth of 36% and a PEG ratio of 0.9, while the total portfolio has a PEG ratio of 1.1 with estimated average sales growth of 29.3%. Chinese stocks account for an even higher 59% share of this fund's total investments.

For further information:
Bellevue Asset Management AG, Seestrasse 16 / P.O. Box, CH-8700 Küsnacht/Zurich
Tanja Chicherio, Tel. +41 44 267 67 09, tch@bellevue.ch

www.bellevue.ch

Bellevue Asset Management
Bellevue Asset Management and its sister company StarCapital based in Oberursel outside Frankfurt, Germany are part of Bellevue Group, an independent, Swiss financial group registered in Zurich and listed on the Swiss Exchange SIX. Bellevue was established in 1993 and is a leading investment boutique specialized in healthcare equities and traditional as well as alternative investment strategies with assets under management of CHF 10.6 billion.

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