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2025 Q3 Portfolio Perspectives1

by | Oct 21, 2025

Quality in Healthcare

The Healthcare sector has generally been regarded as a stable and defensive segment of the market.  This is of course unsurprising given that many of the products and services that Healthcare companies provide enjoy basically inelastic demand and are deemed essential for life and well-being. Year-to-date, however, this normally defensive sector has been the worst performing sector in the Index. This is largely due to attempts to reign in drug prices in the U.S., the potential impact of U.S. tariffs and the growth of GLP-1 drugs.

Policy attempts to change drug pricing in the U.S., as well as U.S. tariffs, have created a significant amount of uncertainty for many companies that generate revenues in the U.S. – the world’s largest healthcare market. In May of this year, the Trump administration issued an executive order attempting to bring down drug pricing to the lowest levels among ‘most-favored-nations’.  Meanwhile in late September, the administration announced it would impose a 100 per cent tariff on branded pharmaceuticals, unless the manufacturer is building a plant in the U.S..  This is not the first time that the U.S. has attempted to reign in drug pricing and currently international companies are actively working to navigate the challenges associated with U.S. tariffs.

Within the portfolio, we have seen a wide range of reactions to the aforementioned factors amongst our Healthcare holdings.  Nihon Kohden, a manufacturer and developer of medical electronic equipment, has been a performance laggard given the U.S. is a key growth market for them.  However, after meeting management in Japan this year and also hosting them in our office during the quarter, we believe they remain well positioned to continue taking share within the U.S. market from industry leaders GE and Philips given Nihon’s best in class products in conjunction with exceptional customer service. For Roche, one of the largest biopharmaceutical companies in the world, the reaction has been more muted.  This is likely due to the fact that their U.S. pharmaceutical revenues are largely derived from products manufactured locally.  Sandoz, a leading producer of generic and biosimilar pharmaceuticals, continues to perform well since being spun-out of Novartis (a holding that was eliminated in the quarter) in late 2023.  Sandoz remains well positioned for the upcoming wave of patent expiration on biologic drugs and perhaps has acted as a bit of “safe haven” within the sector as generic drugs have skirted any tariff-related announcements to-date.

An exciting and potentially disruptive theme over the past couple of years has been the emergence of the GLP-1 class of drugs.  While the ability to treat an affliction such as obesity is exciting, the market’s attempt to predict some of the secondary and tertiary effects associated with these drugs, has created bouts of share price volatility for various companies within the sector. For example, Smith & Nephew, a specialist in orthopedics, sports medicine and advanced wound care, was initially impacted by concerns that weight loss across the U.S. population would reduce the need for orthopedic procedures such as knee and hip replacements. We believe that scenario is highly speculative and dismisses attractive secular trends such as aging demographics in developed countries that choose surgery to maintain more active lifestyles, giving us an opportunity to further add to our position last year.

Meanwhile, Fresenius Medical Care (FMC), a global leader in kidney dialysis, was initially negatively impacted when a clinical trial evaluating Ozempic (a GLP-1 drug) in chronic kidney disease (CKD) patients showed early efficacy in slowing kidney disease progression. The stock later recovered as the market recognized while these drugs may delay the need for dialysis, they are also likely to extend the life of patients on dialysis, a potential net benefit for FMC.

The rapid success of GLP-1s has also attracted a great deal of competition with over 100 new compounds in development and this has put considerable pressure on the shares of market leader Novo Nordisk (“Novo”), a prior holding that continued to reside on our working list of investable ideas. After a sharp correction in its share price, we re-initiated a position in Novo over the quarter at what we believe to be a very attractive multiple.  While we acknowledge the increased competition and past company missteps, which ultimately led to the ousting of its CEO, we believe the market has unduly discounted: i) their longer-term pedigree in these therapeutic areas (diabetes and obesity); ii) its edge in oral anti-obesity treatment– Novo’s oral treatment will be the market’s first weight loss tablet with approval expected by year-end; and iii) the potential use of GLP-1s in a wide range of treatment areas beyond diabetes and obesity.

As is the case for the portfolio as a whole, our overall goal is to consistently build a portfolio of quality companies trading at attractive valuations and this holds true for our Healthcare names as well.  As per the chart below, we believe our healthcare names possess unique competitive advantages and financial strength, that enables them to build their market share and successfully adjust to changing political and industry dynamics. In aggregate, these holdings have an average projected ROE that is more than twice that of the broader EAFE Index and is achieved with a lower financial leverage.  At the same time, these holdings trade, on average, at a lower normalized P/E and a higher dividend yield than the Index too.  Historically, the Healthcare sector has faced many of the same pressures it faces today and has shown resilience, whether that be tariffs, drug pricing, patent cliffs or changes in technology.  We have historically viewed these periods as short-term challenges which create opportunities for long-term quality-oriented investors such as ourselves.

 

*Valuations based on September 30th pricing

 

[1] Source:  Sprucegrove, MSCI, FactSet

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