Show Transcript
As the world grapples with the global emergency caused by COVID-19, the race to find a vaccine has cast a spotlight on the healthcare sector. Anthony Okolie speaks with Tarik Aeta, Healthcare Analyst, TD Asset Management, about the long-term implications the pandemic will have on the healthcare industry.
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- Tarik, let's start with the big picture first. How has the health care sector performed during COVID-19 from an investor perspective?
- Yeah. So if I were to use just one word to describe how companies in the health care sector have performed through COVID-19, that word would be resilient. And to show this, I brought a chart today. And this chart shows just how much each sector in the S&P 500 is expected to grow earnings this year.
And as you can see, just like in prior recessions, the health care sector has lived up to its reputation of being fairly defensive. In fact, earnings for the sector are expected to grow this year by just over 2%-- in line with technology, but well ahead of the 20% expected decline in S&P 500 earnings this year, which are being weighed down by energy, industrial and financial companies.
- And of course, one of the big questions on people's minds is-- in terms of a vaccine, how far along are we?
- Yeah. So not much has changed over the past month since we last spoke. The three front-runners are expected to post phase 3 results later this year, and those are going to come from Moderna, AstraZeneca and Pfizer Biontech. Biontech expects it can actually have phase 3 results as early as the end of October. And if successful, and the data proves out, the regulatory approval could come out later this fall.
That said, it's important to stress that supplies will be limited at first. And the FDA is also unlikely to approve the vaccine for low-risk individuals until we have at least six months of data. So as such, broad-based access for the public is unlikely to take place until the second half of next year.
- Talk to me about the winners and losers so far in the health care sector.
- Yeah. So one of the biggest beneficiaries coming out of the COVID pandemic has been the diagnostics and life science tools industry. On the diagnostic front are the companies that make COVID-19 tests, and these will remain well in demand all the way through 2021.
And on the life science tools side, this includes the companies that manufacture all the picks and shovels that are required to make vaccines-- ranging from giant bioreactor tanks, all the way to the raw materials. For example, Thermo Fisher Scientific-- the leading company in the industry-- is benefiting from both tailwinds. Not only are they making over 10 million COVID tests every single week but, on top of that, they are working with their pharma industry customers with over 250 projects to produce COVID-19 therapies and vaccines.
In terms of the losers, one industry that has been hit hard by the pandemic has been the medical device industry. And these are the companies that make implantable devices, such as pacemakers, artificial hips and knees and heart valves-- to name a few. And their earnings are expected to be down 16% this year. And this is because when the pandemic began, most hospitals canceled elective surgeries to make room for COVID-19 patients.
In fact, here in Ontario, the elective surgery backlog due to COVID-19 is estimated to be roughly 84 weeks now, with roughly 150,000 procedures having been delayed in the province alone. So while, obviously, this is negative for the industry in the short-term, that said, I'm not too concerned as these procedures have simply been deferred into the future rather than being outright canceled.
So as we go into next year, not only would I expect industry sales to return back to pre-pandemic levels, but sales could even surprise on the upside as we work through the massive backlog.
- OK. So given all of these moving parts, how have pharma and biotech fared during COVID-19? And do you see a vaccine, potentially, a boost to the industry?
- Yeah. So, overall, the earnings out of the drug companies have been fairly stable. And this makes sense, as most drugs are for chronic conditions. So industry sales have been pretty consistent throughout the pandemic. In terms of how meaningful a COVID-19 vaccine will be to the industry, it's still too early to say.
And there's a couple of reasons for this. So first of all, with over 180 vaccines under development, the vaccine market will be a very competitive one. Second, many of these vaccines are being sold at cost-- including AstraZeneca and J&J's vaccines. And this may keep pricing low across the industry.
And third, we don't know how durable these vaccines are. Should these vaccines only last a year, the vaccine market may end up being quite sizable, as you would need annual boosters. That said, if durability ends up being long-lasting, the opportunity for vaccines may end up being much smaller than what many are anticipating.
- OK. So given all these opportunities, what's your long-term outlook for the sector?
- Yeah. So when we take a step back and look at the big picture, COVID doesn't fundamentally change the outlook for the sector going forward. And this is because health care is really being driven by two multi-decade tailwinds. First is the continued growth and aging of the global population-- that's not changing anytime soon.
And the second driver of growth, which is arguably even more important, is continued innovation. And it is this innovation that continues to expand what is possible in the field of health care, ranging from robotic surgery all the way to new cancer drugs. So with the sector spending over a quarter of a trillion dollars every year-- globally-- on research and development, innovation will remain robust for the foreseeable future.
- OK. So certainly there are some opportunities there. Tell us about the headwinds for this sector.
- Yeah. So going into the November 2020 election, one area of concern is potential US drug pricing reform. And this is because there have been proposals from both Democrats and Republicans to give the US government either the power to directly negotiate drug prices or to index drug prices to the prices paid by other developed countries, such as Canada.
While this would be clearly negative for the pharma and biotech industry, we've seen many similar proposals fail in the past. That said, the difference this time is that we are seeing bipartisan support on this issue. So this is a risk that, I think, will be worth watching in the months ahead.
- There are definitely some interesting things to watch looking ahead. Tarik, thank you very much for your time.
- Thanks, Anthony.
[MUSIC PLAYING]
- Yeah. So if I were to use just one word to describe how companies in the health care sector have performed through COVID-19, that word would be resilient. And to show this, I brought a chart today. And this chart shows just how much each sector in the S&P 500 is expected to grow earnings this year.
And as you can see, just like in prior recessions, the health care sector has lived up to its reputation of being fairly defensive. In fact, earnings for the sector are expected to grow this year by just over 2%-- in line with technology, but well ahead of the 20% expected decline in S&P 500 earnings this year, which are being weighed down by energy, industrial and financial companies.
- And of course, one of the big questions on people's minds is-- in terms of a vaccine, how far along are we?
- Yeah. So not much has changed over the past month since we last spoke. The three front-runners are expected to post phase 3 results later this year, and those are going to come from Moderna, AstraZeneca and Pfizer Biontech. Biontech expects it can actually have phase 3 results as early as the end of October. And if successful, and the data proves out, the regulatory approval could come out later this fall.
That said, it's important to stress that supplies will be limited at first. And the FDA is also unlikely to approve the vaccine for low-risk individuals until we have at least six months of data. So as such, broad-based access for the public is unlikely to take place until the second half of next year.
- Talk to me about the winners and losers so far in the health care sector.
- Yeah. So one of the biggest beneficiaries coming out of the COVID pandemic has been the diagnostics and life science tools industry. On the diagnostic front are the companies that make COVID-19 tests, and these will remain well in demand all the way through 2021.
And on the life science tools side, this includes the companies that manufacture all the picks and shovels that are required to make vaccines-- ranging from giant bioreactor tanks, all the way to the raw materials. For example, Thermo Fisher Scientific-- the leading company in the industry-- is benefiting from both tailwinds. Not only are they making over 10 million COVID tests every single week but, on top of that, they are working with their pharma industry customers with over 250 projects to produce COVID-19 therapies and vaccines.
In terms of the losers, one industry that has been hit hard by the pandemic has been the medical device industry. And these are the companies that make implantable devices, such as pacemakers, artificial hips and knees and heart valves-- to name a few. And their earnings are expected to be down 16% this year. And this is because when the pandemic began, most hospitals canceled elective surgeries to make room for COVID-19 patients.
In fact, here in Ontario, the elective surgery backlog due to COVID-19 is estimated to be roughly 84 weeks now, with roughly 150,000 procedures having been delayed in the province alone. So while, obviously, this is negative for the industry in the short-term, that said, I'm not too concerned as these procedures have simply been deferred into the future rather than being outright canceled.
So as we go into next year, not only would I expect industry sales to return back to pre-pandemic levels, but sales could even surprise on the upside as we work through the massive backlog.
- OK. So given all of these moving parts, how have pharma and biotech fared during COVID-19? And do you see a vaccine, potentially, a boost to the industry?
- Yeah. So, overall, the earnings out of the drug companies have been fairly stable. And this makes sense, as most drugs are for chronic conditions. So industry sales have been pretty consistent throughout the pandemic. In terms of how meaningful a COVID-19 vaccine will be to the industry, it's still too early to say.
And there's a couple of reasons for this. So first of all, with over 180 vaccines under development, the vaccine market will be a very competitive one. Second, many of these vaccines are being sold at cost-- including AstraZeneca and J&J's vaccines. And this may keep pricing low across the industry.
And third, we don't know how durable these vaccines are. Should these vaccines only last a year, the vaccine market may end up being quite sizable, as you would need annual boosters. That said, if durability ends up being long-lasting, the opportunity for vaccines may end up being much smaller than what many are anticipating.
- OK. So given all these opportunities, what's your long-term outlook for the sector?
- Yeah. So when we take a step back and look at the big picture, COVID doesn't fundamentally change the outlook for the sector going forward. And this is because health care is really being driven by two multi-decade tailwinds. First is the continued growth and aging of the global population-- that's not changing anytime soon.
And the second driver of growth, which is arguably even more important, is continued innovation. And it is this innovation that continues to expand what is possible in the field of health care, ranging from robotic surgery all the way to new cancer drugs. So with the sector spending over a quarter of a trillion dollars every year-- globally-- on research and development, innovation will remain robust for the foreseeable future.
- OK. So certainly there are some opportunities there. Tell us about the headwinds for this sector.
- Yeah. So going into the November 2020 election, one area of concern is potential US drug pricing reform. And this is because there have been proposals from both Democrats and Republicans to give the US government either the power to directly negotiate drug prices or to index drug prices to the prices paid by other developed countries, such as Canada.
While this would be clearly negative for the pharma and biotech industry, we've seen many similar proposals fail in the past. That said, the difference this time is that we are seeing bipartisan support on this issue. So this is a risk that, I think, will be worth watching in the months ahead.
- There are definitely some interesting things to watch looking ahead. Tarik, thank you very much for your time.
- Thanks, Anthony.
[MUSIC PLAYING]
