Blog: Paul and Brett’s Alpha December 2021

Paul Major, Brett Darke – Portfolio Manager

The monthly BBH factsheet and commentary is always thought provoking and elicits a wide range of responses and views, here at the Trust we thought it would be a good idea to make the portfolio management teams commentary available in form of  rolling 12 month blog, as always any comments and observations are welcome.

December 2021


What a strange world we find ourselves in, even relative to the past few years. Let us begin with the pandemic. We now have a highly transmissible but largely benign dominant strain, even for those who remain unvaccinated (note – many of these will by now have prior community SARS-CoV-2 exposure, whether they know it or not); we are sure most of your acquaintances that are known to have been infected with Omicron had very mild or no symptoms – a large proportion of the positive cases so far have been children picked up by routine school tests.

We cannot know how much of this reduced severity is due to prior exposure (through infection or vaccination) and how much is due to the virus attenuating, but in the end that does not really matter: we are where we are.
Whatever any government will say now, it is undeniable that the true nature of this strain was evident from the data coming out of South Africa in mid-December. The virus is now endemic in most countries, so contract tracing approaches are no longer effective or worthwhile, yet we persist in spending millions on them.

Even in countries that think human rights are nonsense and your every move is tracked (China), they keep having untraceable community outbreaks, delicately handled by mass imprisonment of entire cities. It is nothing if not disproportionate and presumably all for the glory of the (spectator-free) Olympics in a few weeks’ time. Zero COVID strategies are not working, and travel restrictions/red lists make no real sense anymore either (unless you are China, apparently. At least this way you don’t need to explain why lots of diplomats want to boycott your ‘prestigious’ event).
We also know that vaccination status has little impact regarding onward Omicron transmission. Given that the protection against infection (not serious illness – we’ll come back to that) seems to wane at six months or so and the strain is much more want to reproduce in the upper respiratory tract, the risk of infection and onward transmission is no longer the reason to argue for vaccination.

However, governments everywhere seemingly want to try to blame the unvaccinated for the continuation of the pandemic (Très bon Macron. Imbécile). This is not only scientific nonsense, it is socially dangerous to ‘other’ any group in society, with transmission rates so high and vaccine efficacy of limited duration, the eradication of community transmission is probably now an unrealistic concept for this virus; we are going to have to live with it. With these inconvenient facts in mind, let’s not even get started on vaccine passports, where there is (unsurprisingly) robust evidence showing that they offer no incremental protection.

Governments clutch at straws to try to make us all feel that ‘they’ are doing something to protect us. Wear a “face covering” they say, without directing you to wear the only sort clinically proven to work (FFP3 masks). It is sad to see old and presumably vulnerable people wandering around behind what is in effect a plastic “spit shield” in the forlorn hope it will protect them from an airborne pathogen. It also makes no sense to ask people to walk into a pub or restaurant wearing a mask, to then take it off once seated and spend several hours breathing in your friends’ faces at the table. Doesn’t it all seem so odd when you write it down and look at it in the abstract?

Meanwhile, the evidence grows that the virus particles only live for a matter of minutes in the kind of dry air found in air-conditioned spaces or outside, which probably explains why you are far more likely to catch the virus from your friends or family than a stranger. You do, quite literally, need to be in each other’s faces or shouting.

Here in the UK, we deserve a special award for spending billions of pounds on the mass usage of demonstrably unreliable lateral flow tests in schools. It is a matter of debate how well these rather poor tests even work against Omicron on the mass adoption of this approach) and the money spent on making children test relentlessly could have put a HEPA quality air filter in almost every room in every school in the country. Then our children would not need to suffer open windows and could presumably lose the masks completely.

Given the previous comments regarding the proximity of contact needed to enable transmission unless you are projecting your voice, another UK award could be merited for churches. You must wear a mask in church, except when you are singing! You really cannot make this stuff up, its Pythonesque. One could be forgiven for thinking that the government isn’t serious about all these rules… Party on!

Whilst we are handing out gongs for self-destructive, nonsensical or ideologically driven policies (perhaps we can throw an awards party: just a hundred or so guests – everyone can bring a bottle), we should also put a shout out for the forthcoming vaccine mandate for NHS frontline workers. We have already seen the damaging impact of such a mandate in care homes. Quite why it was thought necessary when staff were tested multiple times per week, wore full PPE and all the residents were vaccinated is beyond us, especially when non-vaccinated family members were free to visit as they wished!
All this decision has done is to exacerbate an already emerging staffing crisis in social care, which places further pressure on the NHS through bed blocking. What has the Government learned from this process? Nothing! It plans to do the self-same destructive thing to the health service, which was hardly coping well at the best of (pre-COVID) times, in part due to a longstanding shortage of frontline staff.

One can but wonder at the stupidity of it all, or maybe not with this shower in charge. Yes, people catch COVID (and other things) in hospital. They still will, even when this mandate is enacted. You cannot have a service where millions of people interact at close quarters on a daily basis and not expect highly virulent pathogens to get into the system. We have never managed to make hospitals disease free up to now, why think there is a realistic hope with COVID?

When the world around you makes so little sense, it is no wonder that the stock market is also seemingly more irrational than usual. The madness will subside at some point and eventually people will tire of all the residual double-speak around COVID and yearn for a return to normal. For this to really take hold though, people need to feel reassured and that starts with the governments of the world changing their intentionally scary messaging.

Beyond the fear

So how does one “unscare” the population? This question has been a recurring theme of our missives for these past two years. The anatomy of fear is nothing if not persistent. A good place to start might be to present some alternative facts. Not the Trumpian sort, but the re-casting of data to present the current reality in a more sympathetic light. Here are some suggestions:

1) Cases: let’s stop talking about cases and move to symptomatic infections. If you are not ill, then you are not ill. We don’t count cases of the common cold (mainly because we couldn’t). Related to this point, limit the availability of lateral flow tests to people who feel unwell. The case numbers will come down soon enough and nothing will actually have changed across society.

2) Vaccine efficacy: let’s also stop talking about antibodies. These are one facet of the persistent immunological response to a known pathogen. As we discussed in detail last month, the protection from severe illness requiring hospitalisation and antibody titres are not linearly correlated and all the speculation about how much less effective current vaccines would be against Omicron based on antibody experiments proved pretty much useless (as expected: current vaccines work well enough).

Let us instead only talk of the risk of severe illness at different levels of vaccination (zero, one, two or three jabs) to whatever the current dominant variant might be. For Omicron, the Pfizer double jab reduces hospitalisation risk by >70% and this rises into the high 80s with three doses. This is what people need to know: one clear objective fact encapsulated in a few simple numbers.

3)  Hospitalisation data: we need to provide more detail on hospitalisation reporting. Data from other countries (e.g. the US, South Africa for Omicron, Canada), who are being much more upfront about the situation on the ground, shows that a substantial minority of “COVID hospitalisations” are in fact people who are in hospital via an elective or emergency entry for an unrelated condition who were then found to have an asymptomatic SARS-CoV-2 infection or who contracted the virus in the hospital after admission.

These are known as incidental or nosocomial infections respectively and for those areas reporting them, they typically account for more than 30%of hospitalisations (with 60% being the highest figure we have seen).

We understand that, once you are a COVID patient, you must be monitored etc., especially if you are vulnerable for other reasons, so there is an argument from the hospital’s perspective not to differentiate on the “how” of the infection. For the public though, this matters greatly. People need to be able to comprehend their personal risk for getting seriously unwell and it is much lower than they currently appreciate.

Perhaps if the government were to articulate risk as a positive number?Per Neil Ferguson’s 22 December paper, the new message could be: “99.78% of people who contract Omicron do not end up in hospital”. We would need a footnote of course to point out that “since we are not capturing all of the cases, the real percentage not going to hospital is actually higher than this”.

4) COVID Deaths: sticking with this theme, we also need to change the way we record deaths, especially in the UK. Old people die disproportionately in the winter. They always have done. Every death is a tragedy, but it is also a certainty. Simply reporting the number of people dying within 28 days of a positive test, when we have so many asymptomatic and incidental infections/hospitalisations offers a misleading picture.

Boris Johnson’s attempts to play up Britain’s first Omicron death (13th December 2021: reportedly the first such fatality in the world, despite this variant emerging in less developed countries months beforehand) was nothing short of outrageous in our view. The lack of detail around this case surely tells you all you need to know; it is very unlikely they died because of Omicron, but rather with it.

The differences in reporting standards are evident by comparing two countries of comparable demography and then examine the rate of COVID deaths versus total excess deaths compared to pre-pandemic levels. The ratio should look similar between countries, but they do not, which suggests very strongly that we are not making “apples to apples” comparisons here in terms of COVID deaths. All of these nuances likely combine to give a misleading impression of how many people have actually died due to COVID itself. Again, this matters because it is key to the ability to understand personal risk.

The Government should also make more of the fact that the case fatality ratio (i.e. your risk of dying after testing positive for COVID) is somewhere around 30x lower than it was at the start of the pandemic. Part of this is the much-referenced ‘denominator problem’ (if you test more people and pick up more asymptomatic cases, of course the perceived mortality rate will drop because these people are not going to die if they are not unwell). We are testing 1.3m people per day at the moment, versus ~70,000 per day in the summer of 2020. All other factors being equal, that alone would drop the case fatality rate 18-fold.

Many people are still haunted by those images from Italy early on in wave one of overflowing hospitals and people dying on gurneys. That was a horrific tragedy, but we are dealing with a different medical approach to a different virus in a largely vaccinated population. Per the data on the risk of hospitalisation mentioned previously, it is night and day from where we were in early 2020. Echoing the positive approach suggested for hospitalisation data: “99.9% of people who catch Omicron don’t die” seems quite a nice thing to able to say, no?

5) Risk factors: finally, we need to help people understand where they are most at risk from catching the virus (or giving it to someone else) and so they can modify personal behaviour if they feel this is appropriate. We cannot continue down this path of viewing everyone else as a risk all the time; we are simply not conditioned to live sanely in a perpetual state of hypervigilance.

The Government should be broadcasting facts about real risks. For instance, it is absolutely fine to pass by someone unmasked in the street outside. You don’t need to jump into a bush (or worse throw your children into a bush) when someone is coming past. We are still amazed when out and about that people seem to think it is wiser to step off the pavement and into traffic (often without looking) than it is to walk past someone in the fresh air.

We also need to educate people better about modifiable risk factors. After age, obesity remains the single biggest risk factor, not least because it exacerbates baseline cardiovascular load, making any restriction on oxygen saturation much worse. The media is still full of stories about “healthy” people who have died of COVID without mentioning what is obvious from the photos – they are grossly overweight.

The US CDC has attributed 30% of COVID hospitalisations in America to obesity. In other words, US hospitalisations would have been 30% lower if the infected people had a BMI within normal range. Losing weight is thus arguably more protective than getting a booster jab. Instead of worrying about trying to contain a now-endemic virus , let’s help people lose weight and get fitter. It will pay healthcare dividends for decades to come.

Onward and upward

At the risk of sounding like a broken record, all we can do is to continue to objectively (but not dispassionately) look at the longer-term outlook and the company-specific merits of potential holdings and try to build a portfolio that will accrete value over the longer-term. We remain convinced that we own the right companies to bring this to fruition, even if market sentiment currently suggests otherwise.

The 2022 JP Morgan healthcare conference has proved reassuring and frustrating in equal measure. Broadly speaking, the updates from portfolio companies have offered few surprises. They have been both positive and in line with expectations . In some cases these have triggered relief rallies, as the market can discount that low probability worst case scenario that was hanging over a company for reasons that still make no sense. Here are some examples:

Our top ten holding CareDx, whose share price declined from $73.6 to $39.1 (which gave us our re-entry point having sold out on a full valuation) and then recovered back to $46.3 since mid-October 2021, all around the false premise that its revenue per commercial test sold declined, when it clearly did not. This misperception was untenable following its Q4 release, when revenue per test was in line with prior periods.

Accolade, another portfolio company whose share price declined >50% on the premise that it would report a weak calendar Q4 (fiscal Q3) and guide down for the year ahead. When this did not occur, the shares rallied back almost 30%. In both cases, the pain for long-term investors may end up being short-lived, but that does not make it any less real.

But the opposite can also happen: Sarepta, another top ten holding has just released data confirming that its gene therapy for children with Duchene Muscular Dystrophy offers both durable disease modification and consistent efficacy. When the market was first looking to results from the trials for this drug back in 2020, the shares traded >$170. The initial results were confounded and the shares have oscillated around the $80 level since (which gave us our entry point). The company’s reward for resolving the confounding issue and clearing up the (now very positive) efficacy outlook? A double-digit fall in the share price in the immediate aftermath of the data presentation.

These are just a few maddening examples of an unforgiving and irrational market dynamic that has persisted for several months. It will pass though and logic will reassert itself; it always does. This works both ways too, as a cursory glance at the much more realistic share prices of exited portfolio holdings such as Teladoc (72% off its 2021 high) or Pacific Biosciences (71% off its 2021 high) will attest.

We remain optimistic not because we are optimists, but because we are realists.

We always appreciate the opportunity to interact with our investors directly and you can submit questions regarding the Trust at any time via:

As ever, we will endeavour to respond in a timely fashion.

Paul Major and Brett Darke