In the first of a video series on the scientific and investment implications of the coronavirus pandemic, Global Life Sciences Portfolio Manager Andy Acker and Biotech Analyst Agustin Mohedas discuss recent developments made to curtail the spread of COVID-19 and how they view the timeline for an eventual return to normalcy in the global economy.
- Some models follow a four-phase road map to economic recovery from the coronavirus pandemic. To limit the spread of COVID-19 and move through these phases, clinical testing will be essential, particularly as many individuals carry the virus without showing symptoms.
- The scientific community currently has multiple types of treatments and vaccines in development, but we will likely have to wait until mid-2020 before any therapeutics are available and until the second half of 2021 for an approved vaccine.
- While the most acute phase of the pandemic may soon be behind us, we believe it is unrealistic to expect economic activity to return to normal levels in the near term, and we attribute recent market rallies to an overly optimistic outlook.
- We have seen a substantial pullback in the healthcare sector, which we think has created more attractive valuations in the space. At the same time, some areas of healthcare are proving resilient, including pharmaceuticals that provide mail-order medication or injectables, such as insulin. Other areas, such as medical devices, could see demand rebound quickly once social-distancing measures begin to ease.
Mike McNurney: Hello, my name is Mike McNurney. Today I am joined by Janus Henderson Global Life Sciences Portfolio Manager Andy Acker and Biotech Analyst Agustin Mohedas.
One of the most important aspects of our investment philosophy at Janus Henderson is a deep understanding of the investment environment. Typically, that knowledge is exclusively for the benefit of our investment teams, but in this trying time we wanted to share our thoughts with you.
Agustin, I want to turn to you as the person who is, in many ways, spearheading Janus Henderson’s evaluation of COVID-19. Can you provide us with some insights into the current state of the disease?
Agustin Mohedas: Sure, Mike, and thanks for the introduction. As COVID-19, the pandemic, spreads throughout the world, we can really learn a lot from various countries and how they have handled the situation. Several countries in Asia were better prepared for this pandemic in part because they had faced pandemics like this in the past and have shown us what an ideal response looks like. China acted very quickly to implement population-based interventions, including shelter-in-place orders in Wuhan and other forms of social distancing throughout the country. South Korea quickly contained its epidemic through a robust case-based intervention system, which includes broad-based testing and isolating individuals who test positive, whether they are symptomatic or asymptomatic, and all of their contacts.
Now in Europe and the United States, the COVID-19 pandemic has been more severe, in part, due to a lack of a robust testing infrastructure from the early days of the pandemic and delays in implementing population-based interventions, like shelter-in-place orders. Now luckily, the pandemic appears to be peaking in Europe, with Italy leading the way here, and the United States appears to be about one to two weeks behind Europe.
McNurney: Agustin, we have heard about a four-phase road map to economic recovery. Please explain those four phases and what your model suggests in terms of when we might achieve some of those milestones.
Mohedas: Sure, Mike. Now our models for the COVID-19 pandemic in the United States are based on the experience of both China and Europe. And they show new cases peaking in mid-April and then tapering off through May to a low level of less than 1% new cases daily by June timeframe. This could allow us to potentially, in some states, begin reducing the restrictive measures that have been put in place to slow the spread of the disease.
Now, you mentioned a four-phase road map. Scott Gottlieb, the former FDA commissioner, and the American Enterprise Institute have put forward a four-phase road map for how we might reopen the economy. Now, right now we are currently in phase 1, which is the most economically restrictive. But this phase is required to significantly slow the spread of COVID-19, which requires an extreme form of social distancing. This lowers the infection rate of the virus, and we will eventually get the pandemic under control, as other countries have shown it is possible.
Now, our models predict we could enter phase 2 of the road map by June, which would allow for lifting of social distancing restrictions on a state-by-state basis. However, in order for this to happen, the capability to test and trace and isolate COVID-19 cases and their contacts is really essential. During phase 2, some of the social distancing measures that are currently in place will remain, and this will include limitations on the size of social gatherings and, for the most at risk – for example, people over age 60 – social distancing will continue to be important.
We can move from phase 2 to phase 3 when we have broad disease surveillance in place and have the ability to both treat and prevent COVID-19. Phase 3 will really require us to have a full armamentarium of therapeutics to treat the disease and lower the case fatality rate, and eventually a vaccine to prevent the transmission of COVID-19 through herd immunity. We are carefully tracking all drugs and vaccines in development, which could potentially be available by the middle of 2020, in the earliest case for some therapeutics, and in the second half of 2021, in the earliest case for some vaccines. Finally, after phase 3, we would enter phase 4, having successfully beaten the COVID-19 pandemic, and can reestablish kind of a normalcy in the economy and begin to rebuild our preparedness for the next pandemic.
McNurney: Andy, in the news we have heard a lot about the importance of testing and Agustin just talked about the importance of it in this Phase 1 of managing the disease. Can you tell us more about the developments on that front?
Andy Acker: Sure, Mike. So clinical testing is absolutely essential for getting this disease under control and understanding the depths of the problem that we are in. Right now, we are doing about 150,000 tests a day in the US, but this is still not enough. How do we know that? Because about 19% of those tests are coming back positive today. This compares to Korea that only had 3% of the tests coming back positive1. So that means we are really still behind. We are catching up; it looks like we are getting close to the number of new cases peaking. We do expect them to start coming down. But the reason we need these tests to be much lower in terms of the percentage coming back positive is that many people that have COVID-19 don’t actually know that they have it, and they actually have what is called asymptotic disease, or no signs or symptoms of the disease. So we need to really have enough testing so we can detect the people that have the disease that don’t know they have it, and that is really one of the essential elements in getting things back to normal.
We do have a number of companies that have developed new tests and diagnostics. This includes several companies developing high-throughput screening tests and also, importantly, point-of-care tests, some of which can give you results in as little as five minutes. So ideally, you know, if a patient wants to come in and get a medical procedure, the doctor and the patient can both be tested and get a rapid response and know that neither of them can affect or can infect each other. That is going to be an important element to getting things back to normal.
McNurney: Andy, in order to progress through the four phases that Agustin described earlier, we will need the scientific community to develop a therapy or vaccination for COVID-19. What does your research suggest are the most likely outcomes?
Acker: Sure, so there are actually four different kinds of treatments and vaccines that are being developed, and I can take you through those. So, first of all, we have direct-acting antivirals. These are drugs that will directly target the machinery of the virus that helps it replicate and hopefully kill the virus and save the patient. There are a few of these being developed, including an IV [intravenous] drug called Remdesivir from Gilead. That one is in the late stages of testing. It was initially developed as an antiviral for Ebola, but it has also been found, at least in preclinical studies, that it could be effective against this virus. And so that one is being tested. But that is an IV therapy that is given over five to 10 days, so that is likely to be used primarily for patients that are already in the hospital.
Another therapy that has been widely talked about and has gotten some use is a very old drug from 1945 called Hydroxychloroquine. And this was originally developed and has been used for decades for the treatment and prevention of malaria. Again, in these preclinical or in vitro studies, that drug looks like it could be effective at killing the virus, but so far, the studies, I would say, have been inconclusive. And so we are waiting for larger controlled randomised studies that will prove whether that therapy can actually be effected, and again, we expect to hear results in the next few weeks or potentially in the next month.
The next class of drugs would be anti-inflammatory drugs. And one of the things that we find is that people that ultimately succumb to this disease, it is often the immune system that gets over-activated and can actually harm the patient and cause lung damage that ultimately can become the cause of death. And so one of the things that you might have heard about is something called cytokine storms. So these immune cells trying to kill the virus start sending out these signals called cytokines, and that can cause this cascade that gets difficult to turn off. So one of the ideas is to test the therapy, which is currently used for rheumatoid arthritis, drugs that are in a class called anti-IL-6, with IL-6 being one of those cytokines. Those are being now tested from companies like Roche and Sanofi and Regeneron.
Then another class of drugs that we are looking at obviously would be the vaccines. And these are extremely important, because vaccines are given to healthy people to prevent catching this disease in the first place. And there are new classes of vaccines, including mRNA vaccines. The virus itself is made out of RNA, and so you have vaccines that are made out of RNA that are designed to stimulate the immune system. Some of those were developed in as little as six weeks, but unfortunately, you still have to go through the clinical testing to prove that these kinds of therapies are safe and effective. And so we think that is going to take probably at least 12 to 18 months until we have those widely available.
And then the last class of drugs would be drugs that are actual antibodies targeted to the virus to try to kill the virus or prevent an infection. And those could be useful for both treatment and prevention. So you could imagine healthcare providers on the frontline of treatment potentially getting a shot or an infusion of an antibody that would protect them against the virus. So all of these are being explored, and we do think that they are really necessary to get things back to normal, and we are going to start to see results in the next month or so.
McNurney: You are monitoring the economic and market implications carefully. What have you seen, and are you surprised by the recent rally given we are so early in this process of managing the disease?
Acker: So we have seen a substantial rally in the markets over the last few days and the last few weeks. And obviously, that feels good. However, I think part of it is optimism, because we are seeing what we were hoping to see, which is non-pharmaceutical intervention such as basically sheltering in place, has proven to be effective in every region of the world. And we are seeing that start to have an effect now in the US. Hopefully the number of cases in New York have peaked and we are hopefully close to the number of cases in the United States peaking.
So we are getting through the worst of the acute phase of this pandemic. However, we still have a substantial way to go. And even once we get through that acute phase, right now what is working is also, of course, very economically damaging and devastating to many small businesses in the country. And so although we are all kind of tired of working from home and we would like to get back and go out, go to restaurants and see our colleagues in person, I think having society get back to normal in the very short term is probably unrealistic.
We do think we have to go through these stages. We need much more availability of clinical testing. We need to do other things such as serology testing, where you are testing the blood for antibodies that can tell you if the patient has already been exposed, if the person has already been exposed to the virus and is probably immune, maybe those kinds of people can go back to work earlier. We need to monitor, we need to monitor perhaps with digital thermometers, where you can look around the country and see where there is potentially fevers breaking out and essentially hotspots that we could then try to monitor more closely. We need a lot more testing for the virus, so that we can actually test the asymptomatic people that don’t have any symptoms but could be spreading the disease. We need to track and trace all of their contacts and make sure we can isolate them. You know, there are still really a lot of things that have to happen before I think we can get back to normal.
So in the short term, we think there is going to be a devastating impact on economic activity. For many of our healthcare companies, we do think many of them will be more defensive. So, for example, pharmaceutical companies that are primarily driven by oral therapies that you can get in the mail, we think demand for those will hold up pretty well. HMOs [health maintenance organisations], which are the payers of healthcare services, although they have additional costs for treating COVID-19, that is also offset by a lot of the procedures that would typically happen that are being delayed.
For medical device companies, we think there will be a substantial impact on short-term demand, not just for elective procedures, but also for those that we would normally think of as less elective, like cardiac procedures. However, those will come back rapidly once things open up again. And then finally, injectable products that you can take at home, for example, for diabetics that need insulin, we do think demand for products like that will hold up pretty well.
So, overall … Oh, another area that I think is being impacted though is clinical trial execution, so patients, it may not be safe for them to come in for their treatments or for their monitoring for clinical trials. So we are seeing some of those being delayed. If there is a trial that hasn’t opened yet, those are being postponed. There is potential impact on regulatory decisions. So obviously the impact here is quite broad. We do think many of our companies are more defensive and will hold up better. We have seen a substantial pullback, which we think has created more attractive valuations in this space, especially as we look past this difficult period that we are in now. But I would say in general though, our concern is that there might be a little bit too much optimism about how quickly we can get things back to normal.
McNurney: Agustin, I want to come back to you. How does the information that you and the Janus Henderson healthcare team create inform the rest of the investors of the company?
Mohedas: The healthcare team at Janus Henderson is constantly, you know, keeping up to date on the latest in therapeutics, diagnostics, and epidemiology with respect to COVID-19 and we communicate that with the rest of the equity team through e-mails, obviously, and also a daily call that we do at 4:00 p.m. every day. And through this process, we field questions from other members of the team and also gather their inputs as they have unique insights into how the epidemic is affecting different sectors of the economy. And then we put that all together and hopefully create the most nuanced and up-to-date view possible.
McNurney: Thank you very much, Agustin, and thank you, Andy. As the COVID crisis evolves, we at Janus Henderson will continue to share our insights into the disease as well as the market and implications.
Note: 1. Source: The COVID Tracking Project; Worldometer; BBC, Coronavirus in South Korea: How 'trace, test and treat' may be saving lives, 2 March 2020. The opinions and views are as of 8 April 2020 and are subject to change without notice.
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