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Healthcare stocks – race for a remedy

Hunt for treatments and vaccines puts spotlight on pharmaceutical companies

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Kirsten Hastings

The chance to come up with a life-saving coronavirus vaccine offers pharma companies an excellent opportunity to brush up their sometimes tarnished credentials.

In the longer term, the outbreak of Covid-19 will accelerate secular trends such as the shift to remote treatment, known as telemedicine.

Healthcare stocks have recovered faster than most others from the ‘corona crash’. Healthcare funds were still 12% below their February peak this Easter, according to FE Fundinfo data, while the MSCI World is still 20% off its previous high.

“The majority of pharma and biotech companies have very resilient earnings, in spite of the economic slowdown associated with the Covid-19 lockdown,” explains Alex Gold, portfolio manager of the Fidelity Global Healthcare Fund.

However, it would seem that some segments of the healthcare sector are more resilient to the crisis than others. While companies producing relevant equipment, such as ventilators, have benefited from increased demand due to the pandemic, treatment of diseases other than Covid19 has all but ceased.

“Medical technology companies have been materially weaker than expected as the vast majority of surgeries in hospitals have stopped,” says Gold.

As a consequence, demand for products used in surgeries has decreased as well.

“And the ensuing economic recession does potentially mean that these companies not only face shortterm headwinds but also potentially a longer road to recovery,” Gold warns.

The race is on

Pharma companies, however, are busier than ever before as they race to develop a vaccine for Covid-19.

“I have listened to a number of calls with consultants over the past week, and it’s just a matter of time before somebody develops a vaccine,” according to Jon Stephenson, manager of the BNP Paribas Healthcare Innovators Fund. “It’s still too early to say which company has the best shot.

There’s still too much uncertainty on what the virus is and how to attack it,” he adds.

Fund managers are divided on whether the company that is first to develop a vaccine will actually benefit financially.

David Kägi, manager of the Robeco SAM Healthy Living Equities Fund, thinks it will. “The volume sold will be huge and the inventor of the vaccine will likely profit from a healthy licence fee, even if some of this volume will be manufactured by other parties,” he says.

But Emily Heaven, a healthcare research analyst at Newton IM, disagrees.

“It is debatable as to whether these companies will ultimately profit materially from their success,” she says.

“While pharmaceutical firms will have plenty of goodwill right now, they will also be acutely aware that the eyes of government and the general public are on them. They cannot be seen to be profiting too much from the current situation, when the broad consensus will be that any success should be for the greater good.”

Public relations

The biggest opportunity for pharmaceutical companies in developing a vaccine and effective treatments for Covid-19 is therefore not so much financial.

Rather, it can serve to boost the industry’s reputation, which has been tarnished by the US opioid crisis and a stream of bad publicity about double-digit price increases for essential medicines.

“Until very recently, pharma companies were under big pressure for overpricing their medicines. Now, they have prioritised efforts to attack this virus and this has changed the dominant narrative,” says Stephenson.

“The current crisis helps in showcasing the huge amount of innovation that is going on in the biopharmaceutical industry, and thus aids these companies politically. It shows the benefits of having strong pharma companies with the financial strength to pay for important innovation.”

Remote treatment

Fund managers believe Covid-19 is likely to boost innovation in the healthcare sector for several reasons. Primarily though, the sheer amount of money that is now mobilised to fight Covid-19 is likely to accelerate innovation in some fields, according to Stephenson.

“Take hospitals that are now pausing many surgical procedures because they are reconstructing a lot of their rooms for extended intensive care use. An intensive care bed needs extensive monitoring equipment. So, the coronavirus pandemic is accelerating the buying of this equipment, and it will continue to be used in post-surgical recovery wards once the crisis is over.”

But perhaps the biggest effect will be in the field of telemedicine: remote treatment through the use of apps or video appointments with doctors.

“This is a long-term secular growth trend that is now undergoing a massive acceleration because of the pandemic”, says Stephenson.

“In telemedicine, the patient typically downloads an app and sends their data to a nurse so that they can be monitored remotely. The current social distancing requirements accelerate the adoption of such technology.”

Cutting the costs

Newton’s Heaven notes telemedicine also has the potential of significant cost savings. This is increasingly important in a world where governments are being required to increase their spending on healthcare. And now they will also have to meet the cost of propping up faltering economies that have been severely hit by the pandemic.

“Treating patients with chronic conditions such as diabetes, Alzheimer’s, cancer or heart disease within hospitals is the most expensive and also the lowest-quality way to administer care,” she says.

An example of such remote treatment is a sticker that can monitor the glucose levels of diabetics for 14 days to ensure blood-sugar levels remain within a safe range, explains Heaven.

“This can be scanned via a mobile phone, and is a lot more pleasant and accurate than the traditional finger-prick testing many diabetics currently receive.”

Consequently, healthcare systems have already started to move people away from in-hospital care, but the effects of Covid-19 should help to accelerate this trend, Heaven concludes.

The speed of change

However, investment opportunities in this area are still limited and the telemedicine industry remains “incredibly underpenetrated”, says Stephenson, who has been invested in the subsector for about a year now.

“There’s only one such company listed in the US, and it’s called Teledoc. In addition there are a couple of private ones, some of which may come public in the near future,” he adds.

The clients of these companies are mostly insurance companies. Some of these have been running telemedicine services themselves for a while, such as Chinese insurance company Ping An.

The healthcare sector is typically not one that is used to undergoing radical change. As Heaven puts it, change typically “occurs at a glacial pace”.

But this time is different.

“We do believe that the current tragic events will act as an accelerator of several trends, just as we expect to see levels of funding to healthcare systems increase over time as well.”

Testing the limits

If there’s one thing governments around the world have learned from the coronavirus pandemic, it’s the need for quick testing.

“In the future, diagnostic testing will get more attention, and the testing infrastructure that is now being built will be maintained,” says Jon Stephenson of BNP Paribas AM. “Therefore, th coronavirus testing market is not a once-and-done opportunity, it will be a multi-year market, as this virus is here to stay.”

But it’s not just coronavirus testing that will continue to receive attention and funds.

“Testing on infectious disease in general will increasingly become a priority for governments,” says Stephenson. “Whether companies can benefit from this trend depends on their existing testing capabilities. Labs that depend on routine testing for non-infectious diseases such as cancer will see a net detriment to their revenues as money is funnelled elsewhere.”

Emily Heaven, research analyst at Newton IM, also believes pharma firms will continue to be much in demand.

She says: “Now that healthcare systems are recognising the importance of fast and reliable diagnosis, we would expect the companies that provide the components needed for this kind of mass testing, such as chemicals and swabs, to continue to see heightened demand for their products in the future.”

This article appeared in the May edition of Expert Investor magazine