Views expressed are those of the authors and are subject to change. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. For professional or institutional investors only.
- The coronavirus pandemic has expanded, resulting in severe societal, economic, and investment impacts. We believe health care has been a helpful source of defensive investment exposure relative to most sectors so far in 2020.
- Even within the sector, however, not all health care companies have been, or will be, similarly affected. We therefore suggest a highly selective approach to opportunities.
- Our long-term outlook remains favorable. Powerful secular tailwinds continue to drive innovation, growing health care consumption, and an increasing focus on value-based health care delivery. As the COVID-19 crisis underscores, the significance of health care globally will only expand.
- In our view, the US Democratic primary’s recent move to the center lowers the risk of substantial reform, but new regulations are still possible.
THE GROWING CORONAVIRUS PANDEMIC HAS FUELED SIGNIFICANT INVESTOR UNCERTAINTY AND MARKET DECLINES. And while health care is by no means totally immune to these near-term impacts, we believe investment opportunities in the sector remain very compelling. Secular demand continues to be strong, driven by increasingly wealthy and aging populations and accelerating innovation. Crucially, the sector also offers a deep and varied opportunity set with robust alpha potential for bottom-up stock pickers.
Still, investors have many questions about the coronavirus, the implications of the upcoming US election, the status of innovation, and evolving industry dynamics.
How does the coronavirus pandemic impact the health care opportunity set?
The pandemic’s effect on health care stocks through the first quarter of 2020 has been varied. Performance within biopharmaceuticals was bifurcated. Companies expected to play a role in either developing or partnering to deliver a COVID-19 therapy or vaccine outperformed on a relative basis. At the same time, many innovative small-cap drug stocks underperformed as a result of the uncertainty surrounding how the current health crisis might impact their ability to start or complete important clinical trials. While lower-priority trials may be delayed, we believe therapy candidates in critical areas of need are likely to progress.
While a number of companies are working on antiviral and vaccine candidates for COVID-19, our view is that a vaccine will not be available in the US this year. In addition, the economic benefits from any such therapies remain unclear, particularly given the uncertainty of both the duration of the pandemic and of a potential vaccine’s allowable payment terms. We are therefore more interested in businesses that, along with their potential to contribute solutions to the fight against COVID-19, have wider portfolios of attractive therapies and assets. We’ve seen some progress being made in identifying possible therapies for the treatment of the most acute COVID-19 cases as well as antibody combinations that could conceivably provide some amount of temporary immunity while we await an approved vaccine.
What are the regulatory implications of the upcoming US presidential election?
Former Vice President Joe Biden has emerged as the presumptive Democratic nominee. Given his more moderate profile, we believe this would, in isolation, lower the probability of significant US health care reforms like Medicare-for-All. However, we are mindful of the impact that COVID-19 may have on voter sentiment. While we believe major reform is still unlikely, the potential for smaller-scale subsidies or executive orders targeting drug pricing remains. Notably, we think any such changes would likely not impact differentiated new therapies addressing severe conditions in areas of unmet need. Our focus, therefore, continues to be on innovators across a wide range of critical areas, where regulators are encouraging the development of solutions for unaddressed patient needs.
In keeping with that focus, we favor biopharma and medical technology firms that develop novel products and service companies whose offerings facilitate the transition to a more value-based, data-driven, and outcomes-oriented health care delivery model.
What is the state of health care innovation today?
Though we have deep respect for the risks of coronavirus and the uncertainty of regulations, we believe health care continues to offer a robust opportunity set, in particular due to thriving innovation.
In 2019, there were 48 new drug approvals in the US, marking one of the highest levels in the last decade. Many of these were for first-in-class drugs with the potential to drastically impact people’s lives. As noted above, regulators appear to be supportive of this progress. The explosion of innovation in gene therapy, oncology, and other key areas is helping to offer new solutions to populations with huge and previously unmet needs.
We believe our team’s edge continues to be understanding what solutions will work scientifically, what advancements entities will be willing to pay for, and the size of the end-market opportunity.
What drove 2019’s mergers and acquisitions (M&A) activity? Will it continue?
Importantly, much of this scientific progress is happening at small- and mid-cap companies. And with the growing possibility of regulatory change and the increased use of generics/biosimilars threatening margins, their potential was not lost on large company managements in 2019. Large-cap companies with flexible balance sheets were therefore looking to build out their pipelines and made a sizable number of acquisitions of small- and mid-cap innovators with valuable intellectual property.
While we do not invest in any company on the hope of a takeout and M&A activity is likely down until the end of the crisis, we believe this ongoing phenomenon illustrates the evolving dynamics at both the scientific and business levels within the health care sector.
Despite the current environment of uncertainty, we remain optimistic in the enduring case for health care driven by lasting secular trends. As the market evolves over the coming months, we’ll share further updates on major health care themes.