COVID-19 has led to a new appreciation of the importance of healthcare in ensuring all members of society thrive. So where should investors be looking to find resilience in an industry facing enormous change?
In most recessions, healthcare has proved one of the most resilient sectors. In the financial crisis in 2007-2009, for example, healthcare spending rose while GDP contracted. But in 2020, the picture is different; while the global economy will shrink, healthcare spending could fall.
This reflects the way in which care is being allocated during the pandemic. Significant resources have been directed into dealing with it, but other non-urgent care has been deferred. Many patients have chosen to stay away from healthcare providers from fear of contracting the disease.1
The industry is trading at a lower valuation multiple relative to the market than in previous recessions
“The industry is trading at a lower valuation multiple relative to the market than in previous recessions – in 2000 and 2001, and 2008 to 2009, for example,” Matt Kirby, equities fund manager with responsibility for healthcare research coverage at Aviva Investors points out. “But this may not be justified.”
Positive spin-offs from therapeutic treatments, greater focus on immunisation as a primary health tool and consumers seeking to take greater control of their own health could all boost momentum.
It also looks as if some anti-pharma rhetoric might ease. This has been a hot button issue in the US, the world’s largest pharmaceuticals market, where treatment routinely costs more than in Europe and elsewhere. The last US presidential election was dogged by politicians from the left and right accusing the industry of aggressive pricing – ‘price gouging’ – but COVID-19 has shown the pharma sector is critical to providing effective health outcomes.
COVID-19 has highlighted the societal importance of pharmaceuticals companies
“COVID-19 has highlighted the societal importance of pharmaceutical companies, which have provided a continuous supply of essential medicines for patients, carried out extensive research and development activities, and worked on solutions that will ultimately support the re-opening of the global economy,” says Kirby.
It raises the question whether the pharmaceuticals industry will continue to be the villain that US politicians have painted it out to be.
Investment opportunities in healthcare: Research-focused large caps
All this suggests opportunities for investors prepared to look beyond the short-term. Large, research-focused companies who have demonstrated their social importance during the pandemic are a good example. Most have already navigated the worst of the lockdowns, enjoy diverse sources of revenue, generate plenty of free cash and pay attractive dividends.
Companies like Merck, for instance, which reported the impact from COVID-19 would be ‘immaterial’ in the first quarter of 2020. Fuelled by demand for its core oncology treatment Keytruda, annual revenue rose 11 per cent in its last full year results.2
However, trading in 2020 will be tougher. Like many other oncology therapies, Keytruda needs professionals to administer it and distancing will reduce the overall number of treatments that can be delivered. Longer term, growth should be fuelled by higher global rates of cancer diagnosis, giving the company potential to increase market share in current fields and expand into other under-served areas of treatment.
Meanwhile, Merck is putting its experience in vaccine development to the test. The company helped develop a vaccine for Ebola, another troubling zoonotic disease transferred from primates. It is now searching for a vaccine for COVID-19 – working cooperatively, and ultra-fast.
We are tasked with creating a completely new vaccine in one-tenth of the time we devoted to Ervebo
In a statement, the company’s R&D head Roger Perlmutter said: "We are tasked with creating a completely new vaccine in one-tenth of the time we devoted to [the Ebola vaccine] Ervebo, and we must plan to manufacture this vaccine at 1,000 times the scale."3
Increased vaccination demand?
Looking ahead, there may well be impetus for health authorities to pursue more assertive vaccination strategies. This could be another pillar supporting long-term revenue streams in the pharma industry.
Although vaccination schemes have markedly improved public health worldwide, before the pandemic there were growing numbers of people sceptical about the benefits. (See the results of polling carried out by the Wellcome Trust, highlighting low trust in parts of Europe, shown in red.)
Figure 1: Percentage of people who believe vaccines are safe by country and region
The decision not to be immunised is not just a personal risk decision; it may also increase the risks to others by allowing disease to spread. The question now is whether COVID-19 will help reduce the resistance to vaccination.
“We expect vaccine strategies to strengthen in the future,” says Sora Utzinger, responsible investment analyst at Aviva Investors. “Health authorities are likely to prioritise more comprehensive campaigns, targeting at-risk populations and those with direct patient exposure – doctors, dentists, nurses and carers, for example.”
Utzinger points out that vaccination rates vary substantially from country to country, but vaccination rates are particularly pertinent for frontline healthcare workers. Low rates can exacerbate outbreaks of disease, potentially increasing absenteeism among caregivers at critical times.
The vaccine market could grow as health authorities issue new guidance on vaccinations
“A study of ten Italian cities carried out in 2019 suggested vaccination rates among health workers were hovering between 20 and 30 per cent for measles, mumps, rubella, pertussis, chickenpox and influenza,4” she says. “Following the COVID-19 experience, it is fair to assume the vaccine market could grow as health authorities issue new guidance on vaccinations.”
Greater impetus to vaccinate could have a significant impact in large markets like the US. “We conducted an influenza market-sizing exercise, using the current vaccine price list from the US Centers for Disease Control and Prevention. If we assume an average price of $21 per dose and an 80 per cent vaccination rate among the industry’s (18 million) healthcare workers, that results in demand worth over $302 million, in just one market. It is quite clear how companies with approved vaccines might gain in this scenario,” adds Utzinger.
Manufacturing spin-offs in the vaccination chain
Merck is not alone as it seeks to develop an effective, safe and scalable COVID-19 vaccine, although it is one of the few with significant vaccine manufacturing capacity, and therefore a potential candidate to deliver any solution at scale.
The quest for a vaccine has led to an unprecedented level of collaboration
“There are a remarkable 124 vaccine candidates5 in assorted stages of development now,” says Kirby. “Some are using more traditional vaccine technologies, others adopting very novel methods. Regardless of the approach, the quest for a vaccine has led to an unprecedented level of collaboration, which could ultimately enhance earnings. These partnerships include the likes of Pfizer and BioNTech, Sanofi and GlaxoSmithKline, as well as Oxford University and AstraZeneca.”
New incentives announced by the vaccine alliance Gavi include volume guarantees for certain vaccine candidates before licensing, designed to encourage companies to invest in capacity. The plan is to make it possible to ramp up production of new treatments faster and improve access for lower-income countries.6
Contract development and manufacturing organisations (CDMOs) are preparing to build out at scale. Vial and syringe manufacturers are addressing bottlenecks and logistics companies are contemplating the numerous transportation and distribution complexities.
Some of the issues are long running. For example, difficulty managing peak demand for vials came to the fore in 2009, where the shortage of vials for swine flu treatment was flagged. COVID-19 could create demand for 1.5 to 2.5 billion vials,7 depending on the vaccination approach. (If COVID-19 becomes endemic, like seasonal influenza, demand could be higher.)
Delivering at this scale is a significant practical challenge; many vial producers have comparatively tight capacity and the process of producing and filling vials to stringently regulated standards can take months. “You cannot just squeeze out hundreds of millions of vials out of the market,” as Dietmar Siemssen, chief executive of the pharmaceuticals products producer Gerresheimer points out.
COVID-19 could provide a tailwind for companies providing fill-and-finish solutions
“We believe COVID-19 could provide a tailwind for companies providing fill-and-finish solutions,” says Kirby. “We are looking carefully at capacity issues and at blow-fill-seal producers, which use rapid-fill plastics rather than glass. Although some may have reservations about the use of plastic, this is a more energy efficient way to get treatments to the patient, and the containers themselves are more robust.”
Consumer health: A way to take back control
A third driver of growth could be consumer health. As consumers become more health aware, they may turn increasingly towards wellness aids, nutritional supplements and the like.
For risk analysts like Didier Sornette, a professor at the Swiss Federal Institute of Technology in Zurich, proactive health management tends to be omitted in discussions of disease.
The first barrier should be about building a society populated by healthy individuals with healthy immune systems
“What’s missing is an emphasis on the resilience of the individual,” he says, having analysed responses to COVID-19. “I would argue the first barrier should be about building a society populated by healthy individuals with healthy immune systems. We tend to be fatalistic about this, but we can do something about it.”
GlaxoSmithKline’s plan to accelerate growth in consumer health by partnering with Pfizer, with the aim of spinning off the combined unit via an initial public offering, is one example of how pharmaceutical companies are positioning for change. Ultimately, success will come down to moving the consumer perception of health from being disease-free, to taking responsibility for being well.
A note of caution
While efforts to develop a treatment for COVID-19 are expected to have multiple spin-offs, it is worth sounding a word of caution. Like influenza, COVID-19 is an RNA virus. It is not genetically stable; it mutates fast. The industry’s ability to develop vaccines against this type of pathogen have “underwhelmed” in the past,8 so anticipating a swift, positive outcome could be premature.
Nevertheless, the veracious spread of the virus has undoubtedly focused minds. Healthcare spending has become a priority and collaborative partnerships that might previously have taken months to agree and structure have been built rapidly. There is also more attention on health behaviours, and long-running practical issues that limit productive capacity are being addressed. These factors could underpin long-term revenue streams and have the capacity to endure.