Portfolio Manager Andy Acker discusses how advances in health care have come into focus during the coronavirus pandemic and what that could mean for the sector long term.
- The health care sector has outperformed the broad equity market during the coronavirus crisis as investors reward companies using technology or advanced research to address COVID-19.
- The speed and global scale of the efforts to find a treatment or vaccine for the novel coronavirus are unprecedented.
- Although we are skeptical of the rally in certain biotech companies making headlines as it relates to the virus, we believe investor focus on the sector’s advanced technology could last long after the pandemic ends.
The equity sell-off amid the COVID-19 coronavirus outbreak has been remarkable for its speed and severity, with all sectors negatively impacted. But as in previous downturns, health care is showing some resilience: As of March 20, the S&P 500® Index was down 32% from its February peak, while the S&P 500 Health Care sector declined only 24%.1
Conventional wisdom says health care stocks tend to act more defensively during an economic contraction, as individuals continue to seek and/or need medical care. This time, it’s not a steady stream of surgeries or doctor’s visits that are helping prop up health care companies. On the contrary, social distancing and preparations for a surge of coronavirus patients have sidelined many of these routine activities.
Rather, investors are rewarding companies using innovation to aggressively develop vaccines or treatments for COVID-19 while firms helping facilitate remote medical care are also gaining favor. Investor focus on these trends has accelerated due to the crisis but could last long after the pandemic ends, in our view.
Health Care Stock Performance During the Crisis
Using New Technology to Repurpose Old Drugs
The scramble to develop treatments for SARS-CoV-2, the virus that causes COVID-19, has been remarkable for both its speed and global scale. So far, dozens of companies, scientific groups and institutions in the U.S., Europe, China and Japan have announced efforts to address the novel coronavirus.
One approach is to identify whether existing drugs could be effective against COVID-19. One candidate gathering significant attention is hydroxychloroquine (HCQ), a generic compound used since the 1940s for malaria. In a small clinical study in France, HCQ significantly shortened the course of the disease in coronavirus patients who received the drug. China and South Korea have also included HCQ in their COVID-19 treatment guidelines. Clinical trials are now underway to see whether the drug can deliver results consistently and safely. If the data are borne out, HCQ could have an enormous impact by helping to reduce the death rate for patients with severe cases, eliminate the virus more rapidly (and reduce its spread) and potentially work as a preventative agent for high-risk populations, such as doctors on the front lines.
Clinical trials are also underway for select antiviral drugs. One, remdesivir, was originally developed by U.S. biotech Gilead Sciences as a treatment for Ebola. So far, a handful of compassionate-use cases have delivered promising results, with larger clinical trials expected to report out in April. Another, favipiravir, an influenza drug developed by Fujifilm Toyama Chemical in Japan, showed an improvement in virus clearance during clinical trials – though results were most meaningful if the drug was administered soon after the onset of symptoms. (Data from trials using an existing HIV therapy, which showed no material improvement for severely sick coronavirus patients, also suggest that timing could be critical.)
Vaccine Development Accelerates
Meanwhile, the hunt for a vaccine is advancing at a breakneck pace. In February, U.S. biotech firm Moderna announced that it had sent a potential vaccine, mRNA-1273, for testing. The compound was developed in record time – six weeks – using the firm’s messenger ribonucleic acid (mRNA) technology platform, which directs a cell’s mRNA to produce disease-fighting proteins. Germany-based BioNTech is also pursuing a similar mRNA-based strategy in partnership with Pfizer. Meanwhile, several other biopharmaceuticals are quickly advancing vaccine research and/or initiating clinical trials.
It is important to remember that should a drug or vaccine get regulatory approval, the impact to a firm’s bottom line will depend on several factors, including the persistence of COVID-19: Will the virus fade away, as SARS did, or will it recur each year like the flu? The influenza virus has two key proteins on its cell surface that tend to re-assort each year, making it difficult for our immune systems to fully recognize them, resulting in annual outbreaks. In contrast, the coronavirus has one key surface protein and so far hasn’t mutated meaningfully. For this reason, we believe the coronavirus is more likely to be a one-time event.
As such, we remain skeptical of the rapid surge that some biotech stocks have experienced lately on news that they are pursuing the virus. Longer term, however, the COVID-19 crisis could help bring attention to innovative drug platforms, which, in our view, could amplify investor interest in these areas.
Meanwhile, telemedicine services are taking off. Both government and insurers are encouraging the technology’s use as an efficient and safe means to treat influenza and potential COVID-19 infections, easing the burden on the health care system. To that end, the Trump administration recently announced that Medicare would cover the cost of telemedicine services for the duration of the COVID-19 national emergency declaration. Similarly, health insurers are offering zero-dollar copays for telehealth visits. These steps should help drive up the number of telemedicine users and could change how consumers and insurers approach telehealth long term.
As encouraging as these advances are, it’s important to keep perspective. Although research is advancing quickly, human clinical testing cannot be rushed. A vaccine must be tested in thousands of patients to prove that it can be safe and effective for potentially millions of patients. Thus, it is likely we won’t have a vaccine for the general population for at least 12 to 18 months.
Meanwhile, the number of confirmed COVID-19 cases is rising rapidly, with strict social distancing and aggressive testing the best near-term solutions to slow the spread of infection. In the U.S., we have conducted nearly 290,000 diagnostic tests, but we think this is still inadequate.2 In our opinion, we need to be testing the population widely for surveillance (not just highly symptomatic patients), and we need faster response times: Most exposed patients are still waiting days for results. A rapid-response test developed by Danaher-owned Cepheid, which can deliver a diagnosis at the point of care in 45 minutes, was recently approved, and this should help.
Social distancing, for its part, is having significant economic ramifications, and we expect a severe economic contraction in the coming months. Although somewhat resilient, health care companies won’t be completely spared. For example, elective procedures are increasingly being canceled, weighing on the bottom lines of hospitals and medical technology companies. For biopharma companies, new drug launches will be slowed as sales reps cannot make direct contact with physicians. Finally, steps to curtail the spread of the virus could have a near-term impact on clinical trial enrollment and delay some drug approvals.
In other words, we think investors should expect continued volatility in the coming months. However, we believe the rapid pullback of equity prices has created some compelling opportunities. Longer term, we feel the sector’s unprecedented innovation addressing unmet medical needs will lead to attractive growth – a point we think is now being driven home by the global race for a coronavirus cure.
1Source: Bloomberg, data from 2/19/20 – 3/20/20.
2Source: The COVID Tracking Project, as of 3/24/20.
Subscribe for relevant insights delivered straight to your inbox