Healthcare is having a solid year with earnings up double digits amid the strong economic recovery. But the Omicron variant may present some risk. Kim Parlee speaks with Tarik Aeta, Healthcare Analyst, TD Asset Management, about his outlook for the healthcare sector in 2022.
Yeah. So thanks, Kim, for having me on. So when it comes to Omicron, we're still in the early days. That said, we've gotten a lot more data. So first, we finally got those in-vitro tests from Pfizer BioNTech, which is basically where scientists run tests in the lab to see how well antibodies from the existing vaccines neutralize the virus. And the data is showing that two doses alone is not enough to neutralize the virus, but providing a third booster dose makes the vaccine nearly just as effective to Omicron as it was to the original Wuhan strain or to Delta. That said, two doses probably provides some protection against hospitalization and death, but two doses won't be as good in terms of stopping transmission or mild symptoms. So with this news, expect public health officials to accelerate the roll out of boosters versus previously when many were taking a wait and see approach. And second, the anecdotal data out of South Africa thus far suggests that this variant is milder. But this simply can be due to the fact that COVID has really been endemic now for almost two years. A large percentage of the population has either gotten COVID in the past or has immunity to vaccines, so that could also be explaining why hospitalization rates are lower. So I guess going forward, looking at more data, I'll be looking for two things. So first, I'll be looking at more in-vitro tests from Moderna and others, and we'll also get more clinical data in the weeks ahead. So we'll get a sense of how well the existing vaccines work in the real world versus simply in the lab. But that said, ultimately, unlike March of 2020, between testing, between the vaccines, antivirals, society is in a really good spot to tackle this new variant. So looking 12 months out, I'm very optimistic and by no means do I think we're restarting at step one.
Yeah, no, that's the one saving grace in having to go through this, hopefully a milder or a different variant again. I want to talk a bit about the sector overall. We know that the sector was really in the spotlight, of course, from March 2020 onward. When you look ahead, how do you see the sector positioned for 2022?
Yeah. So, yeah, so recap, 2021 was a solid year for health care. Sales are expected to be up this year 13% and earnings up a solid 25% year over year. That said, health care has lagged the broader market, especially since the summer, and it's because of recovery and industrials and financials and energy has just been so strong. But as we go into next year, that's probably going to moderate, and health care has a better chance at outperforming. So looking at 2022 consensus right now is calling for 5% earnings growth in health care. But many companies are being very conservative with guidance due to the uncertainties around the pandemic. So I think in reality, earnings growth probably will surprise to the upside, closer to 10% next year. And looking across the different industry groups, the medical device companies which make everything from pacemakers, artificial knees, surgical robots, are arguably in a good spot going into next year, given that there is a big backlog of elective surgeries in most countries. That said, the main risk here would be another wave from Omicron that crowds out hospitals once again, so that's something we'd have to watch.
Hmm, that's interesting. I know we've talked before, but really some of the things that drive the health care sector, of course, is demographics. We're getting older, whether we like it or not. And innovation, there's some pretty amazing things going on. What are you going to be specifically watching?
Yeah, so in terms of innovation, there's always a lot happening in the sector, but I'll be keeping an eye on a couple of things in 2022. So first in pharma and biotech, I'll be watching the mRNA companies to see if they're successful in leveraging the technology behind the COVID vaccines. So Moderna and Pfizer are working on vaccines for flu, RSV, CMV, Lyme disease. Many of those programs will post data next year, and I would expect also a lot of those programs to be successful. But a lot is already priced into some of the high flier stocks like Moderna or BioNTech. Second I'll be watching Novo Nordisk. So earlier this summer, they launched a new drug for obesity. It basically showed 17% weight loss in clinical trials. And given just a high prevalence of obesity globally, with over 650 million individuals impacted, there is a big unmet need here and that will be a very important product launch to watch. And last but not least, a third company I'll be watching is Illumina. They recently acquired a company called Grail. And earlier in the summer, Grail launched this early cancer detection test, which is able to scan for 50 cancers in a single test. Holding back adoption has been the fact that Grail only has data right now from a small 4,000-patient trial. But over the next 18 months, they will be getting data from three large trials, including one large 140,000-patient trial out of the U.K. So if they're successful here with this trial, I'd expect that to be a very important catalyst to drive adoption of the technology.
There's a lot of really interesting stuff there, Tarik. Listen, I've only got about 30 seconds, Tarik, but you are, of course, managing the Global Health Care Leaders ETF TDOC for those who aren't familiar. One of the ways to help mitigate risk, I mean, there's some big winners, but there's also some big losers in this space because of the nature of the work they're in. So maybe just tell us a bit about it, how it structured and how you look at companies and the filter you use.
Yeah. So we design the TD Global Health Care Leaders Index ETF to be a diversified one stop solution for investors looking for access to the global health care sector across pharma, biotech, medical devices, life science tools and health care services. And it has a unique cap methodology structure so the weights of the large mega-cap pharma companies are capped at 2%. And instead, the ETF is able to diversify out and invest in some of the higher growth areas like medical devices, life science tools and health care services. And as such, we believe that over time, the ETF is well positioned to provide strong returns.
Tarik, always a pleasure, thanks so much for joining us.
Thank you, Kim.