Update and New Holdings - Teleflex and Haemonetics

Gareth Campbell - Fund Manager

4 December 2020

Market Review

The US election and recent announcements of positive vaccine results have had a large impact on stock markets, with the strongest performance coming from businesses likely to benefit from a return to normality. A combination of high valuations and an expectation of positive vaccine news has resulted in some changes in the portfolio over the last month.

US Election

There has been a lot of noise and misinformation but on 14 December the United States electoral college will formally determine the next President, which barring any dramatic events looks very likely to be Joe Biden. Unless the Democrats win both of Georgia’s senate seats in January the Republican party will retain control of the senate, this severely limits the breadth of changes expected by a Democrat President. We believe the market rally on this news is based on a view that limited changes are generally good for equity markets and less fiscal stimulus means interest rates are likely to remain lower for longer.

Positive Vaccine News

The collective efforts of global therapeutic companies combined with data they had released over the last few months meant we were very hopeful of seeing some positive vaccine news before the end of 2020. Over this time, we have been adding to some of our favourite businesses that will benefit from a return to normality, including CAE, Booking.com and Compass Group. Our view was rewarded on 9 November after Pfizer announced their impressive vaccine results, as all three businesses returned over 18% in just one day. Past performance is not a guide to the future.

HL Select Investment Philosophy Unchanged

As we shifted more of the portfolio to benefit from a cyclical recovery and a return to normality, we did so applying the exact same Select Investment Philosophy, for example CAE, Booking.com and Compass Group are all respective global leaders in their industry, they have little debt, generate strong free-cash-flow and we expect will have improving returns on capital over the long term.

New Holding – Haemonetics

Haemonetics is the global leader in blood and plasma management solutions. It provides equipment, consumables, software and services to each part of the blood supply chain. Its main product is tied to the collection of human plasma, an irreplaceable ingredient in multiple therapeutics.

Why did we invest?

The plasma industry has been growing 8% per annum for the last 5 years and we expect this to continue as the number of patients increases, plasma used per patient increases and new therapeutics are approved (Over 750 new plasma-derived therapeutics currently in clinical trials). This supports high industry growth rates for Haemonetics’ largest business.

Plasma collection requires sophisticated devices to be installed at a clinic and then containers, collection equipment and other consumables are used for every donation. Haemonetics business model has very high recurring revenue as the majority of devices are given to customers for free and then monetised through long term contracts for consumables and software. At Select we value these business models highly as they have historically shown very consistent results and the large installed base of equipment helps strengthen barriers to entry.

Haemonetics’ main competitor in plasma is Fresenius, they are a much larger company but are primarily focused on dialysis. In plasma, Haemonetics are more than twice their size. We are attracted to businesses that have dominant market share and a main competitor whose strategic focus is elsewhere.

In 2016 a new CEO completely changed Haemonetics’ long-term strategy and replaced many of the executives. Since then their execution has been excellent and the focus on operations, free cashflow and return on capital leaves us with increased confidence in the management team.

Supply will match demand

The plasma collection industry has struggled in 2020 as donations in the US (the largest source market for plasma) have fallen due to lockdown restrictions, people being unwilling to risk going to donation centres and generous financial support packages, which given donors are paid in the US this has reduced the need for people to supplement their income with weekly plasma donations.

However, the demand for plasma is largely unchanged and at some point, supply will need to increase again otherwise patients won’t get their treatments. Therapeutic companies have been using safety stocks to treat patients, but this will need to be replaced, so revenue associated with lost donations in 2020 has likely just been delayed 12-24 months.

New Product Cycle

Haemonetics have a new product called NexSys, which along with their software improves the yield of plasma from each donation and reduces the time taken per donation. This should improve plasma clinic profitability so Haemonetics are looking to charge an additional fee per consumable for this technology. We believe the additional revenue and high gross margin contribution from these sales will be transformative for Haemonetics’ profitability over the next 5 years.

New Holding – Teleflex

Teleflex is a US based medical technology business focused on vascular, interventional, anaesthesia, surgery and urology markets.

Why did we invest?

Teleflex is a business we have followed for years, over the last decade it has used acquisitions and divestitures to transform from a multi-industrial conglomerate into a fast-growing medical technology business.

Teleflex sell a diverse set of products but is overwhelmingly focused on products used in an emergency setting and products with a low average selling price. This places it in a better position than most competitors, as emergency procedures have less cyclicality and the low selling price means less risk from price deflation, which we think is increasingly likely in the US healthcare market over the long-term.

Urolift is a key product for Teleflex and is used to treat enlarged prostates, a common condition in older men. The product is 10 years ahead of the competition, is growing very quickly and has much higher margins than the company average. We believe they are still very early in the growth cycle for this product and that it will be an increasingly important growth driver for Teleflex over the next decade.

Sold – IDEXX Laboratories and West Pharmaceuticals

Selling a great business is always challenging, as they are hard to find and there is no guarantee you can buy it back in the future at a lower price than you sold it for. However, after an exceptional period of performance from both IDEXX and West Pharmaceuticals we increasingly struggled to see how these great businesses would continue to be great investments.

We still believe IDEXX laboratories is one of the best healthcare companies in the world and has at least a decade of growth at or above current levels. However, at almost 70X p/e we believe that this future growth is increasingly accounted for in the current share price.

West Pharmaceuticals is now viewed as a 10%+ revenue growth business, and although we can see why growth rates have accelerated from historic averages, we think there is a greater chance of disappointing these higher expectations.

The share price has benefitted from expectations of additional revenue tied to a coronavirus vaccine. Although both the vaccine and associated revenue are positive news, we are unsure to what extent they might repeat. So, we don’t believe it is right pay as high a multiple for any vaccine related profits.

West Pharmaceuticals has been our best performing investment since the launch of the fund, contributing 2.71% to performance and delivering a 114% return. IDEXX Laboratories has contributed 0.95% to performance and returned 75% since being added to the fund in March 2020.

Sold – Varian

Varian was added to the portfolio in June, and as we are very positive about growth in the radiotherapy industry, we also bought shares in their main competitor Elekta.

In August, Varian agreed terms to be acquired by Siemens Healthineers. We had mixed feelings about this news, as although we were happy with the immediate share price reaction, we were at the same time disappointed to be losing a business with high conviction in their long-term growth opportunity.

Varian's shares returned 33% during the period of our ownership and contributed 0.79% to total fund performance. We used the proceeds to increase our position in Elekta and our new holding Haemonetics.

Sold – Live Nation

Live Nation started the year as one of our highest conviction ideas, but with a business tied solely to live events it has been hit very hard by coronavirus restrictions. In the second quarter of 2020 they even had negative revenues in their ticketing business refunds outweighed new sales.

We continued to hold the business despite the industry challenges as we were confident the business had the cash to survive and given the importance of live events to musicians’ income, that live events would return for a very strong year in 2021. This meant our change in intrinsic value was far less impacted than the share price.

A large part of our investment thesis was based on digital ticketing and data, this had been progressing well but with no events for a year this has also delayed the realisation of our investment thesis, limiting near term expectations.

With negative cash flow every month events don’t take place Live Nation was the most at-risk business in the fund to any delay or disappointing vaccine news.

After very strong performance following the positive vaccine news on 9 November, we no longer thought the risk/reward in Live Nation was compelling enough to justify owning it. We used the funds to increase the holdings of our highest conviction ideas.

Unsurprisingly Live Nation has been one of our worst investments in the portfolio since we added the position in July 2019, it contributed -1.05% to performance and returned -12%.

Past performance is not a guide to future returns. Source Lipper IM 30/11/20

N/A - data for this time period isn't available.