Written by Dr. Daniel R. Omstead
Portfolio Manager, Tekla Capital Management
November 30, 2020
We are definitely living in interesting times. In fact, I don’t know how much more “interesting” things can get. We are in the middle of a global pandemic the likes of which we have not seen in a hundred years. Globally, more than one hundred and sixty million people are estimated to have been infected by the Covid-causing coronavirus. More than 1,295,185 people have succumbed to this epidemic, including more than 242,435 Americans. From April through June 2020, U.S. GDP had decreased by an annualized 32.9% while record unemployment claims were recorded. It is doubtful that these occurrences could have been imagined just a handful of months beforehand. Nor could the associated lockdowns and work from home activities be contemplated, at least by us. The personal, professional and commercial toll of this pandemic across many sectors has had a great impact on the U.S. economy and will be felt for a long, long time. Among others, the entertainment, accommodation, food service and travel sectors have been particularly hard hit and may never be the same again. It has been suggested by McKinsey and others that the most hard-hit sectors could take more than five years to fully recover.
Amidst this broadly distressing situation, there are some sectors and parts of the economy that are doing well. The stock market has rebounded nicely in general and the sectors described above notwithstanding, the economy is making a comeback. GDP was up an annualized 30% by the third quarter of 2020. The healthcare sector, in particular, has retraced its losses nicely. This sector’s prospects appear promising to us and others. McKinsey, for example, predicts that healthcare will be among the fastest to return to pre-Covid levels. Separately, we are encouraged by the third quarter public company reports we have seen to date.
Our optimism is not without some caution. We recognize that healthcare faces headwinds but feel that there are more factors favoring the sector than opposing it. The challenges have been well chronicled: a key issue is that drug prices at the individual and system level are perceived to be too high and both political parties have expressed strong interest in decreasing drug costs. We quarrel with this characterization and have cited studies that demonstrate the opposite view, but we accept that it is the prevailing lay opinion.
We counter this view with several encouraging points. As a practical matter, we do not think that the near-term legislative emphasis will be on reducing drug prices. Irrespective of which party ultimately succeeds in the elections, we believe that the focus for some time to come will be on stimulus and on helping the individuals, industries and sectors that have been damaged by the pandemic, not on decreasing drug prices. In the meantime, we think the drug and biotech sectors will be able to show that their products are well worth what they cost in terms of sparing productivity losses, morbidity and mortality.
More importantly, we are encouraged by the continued financial, scientific, clinical, regulatory and commercial progress the healthcare sector has demonstrated in 2020. According to CBInsights, the third quarter of 2020 set a record for global healthcare investment, in terms of both deals completed and dollars raised. There have been numerous scientific and clinical accomplishment in 2020. As an example, note that since the Covid epidemic began earlier this year, a host of healthcare/biotech companies have initiated the development of testing, vaccine and therapeutic products aimed at the Covid virus. At least four companies are nearing completion of pivotal clinical trials to evaluate Covid vaccines. One company has reported encouraging early results. The industry seems poised to have multiple tests, vaccines and therapeutic modalities approved for assessing, treating and preventing or lessening the severity of the Covid virus within a year of the initially reported U.S. coronavirus cases. More generally, despite the challenges presented by the Covid epidemic, the industry has submitted, and FDA has approved, more than 40 new drug entities/uses in 2020. These developments are the basis for optimism about the sector.
Furthermore, we think a substantial case can be made for optimism about the future of investing in healthcare. Some subsectors such as medtech are already back to or near pre-Covid sales levels and others are heading in a similar direction. The IPO and secondary markets, drivers for both future growth and sentiment, have been strong. And the healthcare stock market itself, particularly the biotech sector, has been competitive. In aggregate, these positives make us optimistic.
Given the proximity to the U.S. election and its potential impact on and importance to the healthcare sector, we think some commentary is appropriate. At the moment (mid November 2020), it seems most likely that Mr. Biden will be elected as U.S. President and the Republican party will maintain a majority in the U.S. Senate. These results would produce a “split” government. In our view, while the outcome is hypercritical to many individuals for many reasons, we think that healthcare will be all right irrespective of the actual election outcome be it a split government or even a (Democratic) sweep. The healthcare industry is a key to addressing the Covid pandemic and to our “return to normal” and, as such, is more a part of the solution to what ails us rather than part of the problem. The sector is innovation focused and few are opposed to innovation. And, of course, the sector’s main goal is to produce products that improve quality of life and reduce morbidity and mortality. And for what it is worth, many of the largest and most well-known pharma and biotech companies are cheap, trading at a discount to the broad market.