Vaccines. Treatments. Diagnostics. The scientific community is throwing everything it can at tackling coronavirus. It is also working at an unprecedented pace – condensing research and trials into months when they would normally take years. Indeed, time is of the essence. To date, there have been more than 4m confirmed cases of Covid-19 – the illness caused by the virus – and at least 290,000 deaths. Meanwhile, to flatten the curve of infection, billions of us have spent the past few weeks in lockdown. But if imposed for too long, such policies could cause health problems of their own.
Under stay-at-home orders, and facing the prospect of an economic recession, many investors have turned to the stocks directly battling the virus – viewing these as paving stones on the exit route out of Planet Pandemic. The share price trajectory of US pharma giant Gilead (US:GILD) epitomises such an approach – rising by a fifth year to date, despite ups and downs along the way in line with volatile news about the progress of its ‘Remdesivir’ drug. Appeasing the bulls – at least for now – the group achieved emergency authorisation in America on 1 May to use its therapy in Covid-19 patients.
The other side of the coin
However, healthcare is not a homogenous industry. Among its various subsectors, there are companies that aren’t involved in the battle against coronavirus. And far from simply passing them by, for some of those companies, the disease has proven detrimental – pausing their operations and squashing their revenues. Medical devices specialist Smith & Nephew (SN.) is a case in point.
Such hiatuses reflect the fact that resources have been reoriented towards the frontline, with non-urgent procedures postponed. On top of that, either for fear of overburdening hospitals or of contracting the virus, fewer people are visiting the doctor. In March, England’s Accident & Emergency admissions were down by 29 per cent year over year to 1.53m. This reduction was highlighted by tele-radiology group Medica (MGP) in early April, when it cited a significant drop in cases being outsourced by NHS clients.
Even so, we must assume that routine care will eventually resume. Pent-up demand and patient backlogs should kick-start businesses hit by the virus. If that theory holds true, a number of stocks could potentially be undervalued at current prices. Patience is the keyword here, though, as it remains impossible to gauge how protracted this crisis will be.
Elective procedures
Smith & Nephew – which specialises in surgical equipment and advanced wound care – endured acute pain last month, with underlying revenues contracting by 47 per cent. This followed on from a first-quarter revenue decline of 7.6 per cent to $1.1bn (£0.9bn). The group had already cautioned that second-quarter sales and the first-half trading margin would be “substantially down” from 2019.
Still, there were glimmers of positivity. Elective procedures have started again in China, various US states and some European countries. And chief executive Roland Diggelmann noted that “we are ready to step up and support customers” as demand improves.
But reflecting the sheer uncertainty of the situation, analysts’ responses have been mixed. Goldman Sachs is “somewhat more cautious” about the pace of recovery as restrictions ease – citing persistent headwinds from higher unemployment and social distancing. Meanwhile, Shore Capital remains bearish, noting that “governments are very, very sensitive to any evidence of a resurgence in virus cases”. Non-essential surgeries could face a stop-start return.
On the other hand, bullish Berenberg contends that Smith is “past the worst”. And more broadly, the broker believes that medical technology offers attractive investment attributes – including robust margins and high barriers to entry, facilitated by a backdrop of intense regulation. It also highlights sector fragmentation, creating M&A opportunities.
Diversification benefits
Those trends could prove favourable for healthcare giant Abbott Laboratories (US:ABT), too. Indeed, Abbott exemplifies the fact that even the companies actively involved in suppressing coronavirus may also be facing disruption. While the group has issued three specialist Covid-19 tests, its routine diagnostics volumes and its own medical devices segment have been hit by distancing measures.
That said, Abbott’s strength arguably lies in its diversification – its ability to lean on one side of its operations when others flag. Despite a slowdown in some areas, first-quarter revenues edged up 2.5 per cent to $7.7bn. The same trait of diversification can be identified in the likes of drug makers AstraZeneca (AZN) and peer GlaxoSmithKline (GSK) – both of which are fighting the virus, but which also command wide-ranging empires.
Looking past the crisis
Arguably, the drivers propelling healthcare’s evolution before coronavirus – including a focus on innovation – should still stack up when it ends. Moreover, the pandemic has shone a spotlight on the important work being done across the industry – potentially helping to catalyse those drivers in the long run.
Dr Trevor Polischuk, co-portfolio manager of the Worldwide Healthcare Trust (WWH), says that his team decided early on “we were not going to chase the next vaccine, the next cure or treatment for Covid-19”. Rather, “we were going to focus on our best ideas”, asking “what stock did we like pre-pandemic that we would like post-pandemic?”.
Dr Polischuk highlights Merck (US:MRK), whose drugs stimulate patients’ own immune systems to fight tumour cells. He notes that this class of ‘immuno-oncology’ drug has gone from zero commercial sales to $25bn in five years. Merck has sold off during the pandemic, but Dr Polischuk’s team stuck with it.
Dr Polischuk also points to Japan-based pharma name Takeda. With investors growing concerned about heavily-indebted companies, Takeda’s shares suffered in March. The group is highly-levered after its acquisition of British business Shire last year. Still, “we believed […] the disruption from the pandemic was going to be minimis”. The shares have since shown signs of recovery.
More broadly, Dr Polischuk says that “because of the incredible reaction the healthcare industry has had to thwarting this pandemic, its perception has never been better right now” – from the view of the public, government and investors. Concerns last year around drug pricing and the US election have “all changed” – taking the sector from a “laggard” to “being one of the leaders” in 2020.
