Ahead of a difficult quarterly earnings reporting season, there is good reason to look at Health Care again. The sector lagged last month as investors looked for companies with more cyclical sensitivity to participate in economic recovery. However, from here economic hopes may be dashed among a rising wave of new virus cases. In which case, Health Care’s defensiveness, demonstrated by its low beta and low volatility of share prices, deserve more attention.
The nature of Health Care products, services and broad customer base help insure relatively stable earnings growth. Compared with the rest of the market, the sector has experienced limited downgrades to earnings forecasts so far this year (as seen in the chart below). Full-year earnings are expected to be flat to marginally down, which compares very favourably with market earnings declines of 20%+.
Finding COVID-19 Cures
Many companies feature in the search for COVID-19 treatments, which will be essential to allow full economic activity and eventually profitability. The simplest area is testing for the virus. Months on, there is still significant unmet demand for PCR diagnostic and serological testing. Health Care companies supply the reagents as well as other resources necessary for testing kits. The companies most often mentioned in relation to testing are Roche and Abbott Labs.*
Vaccine development for COVID-19 is more complicated. The time expected until an effective vaccine can be found, tested, manufactured and delivered is still 12 to 18 months from the starting date, despite unprecedented levels of research activity. The US or European-listed public companies that appear closest with their novel mRnA or traditional vaccines are Moderna, AstraZeneca (in partnership with Oxford University) and Pfizer (with BioNTec).*
Following those companies are more than 100 entities involved in the second wave of vaccines, which may be more effective and robust, and therefore ultimately more useful; GlaxoSmithKline Merck, Sanofi and Johnson & Johnson are all involved and plan to start human trials shortly.* There needs to be more than one successful vaccine to care for the needs of a global population.
In terms of a cure, this may come from a combination of therapeutic options, rather than just one drug. Therefore, many names are in the frame. Gilead Sciences’ antiviral treatment, Remdesivir, is the most advanced; it works by stopping the virus from replicating and is already being used on a limited basis by hospitalised patients in the US.* Eli Lilly, Regeneron, AstraZeneca and GlaxoSmithKline are also making headlines with their mid-stage studies of anti-COVID-19 antibody drugs.
Investors no longer expect extreme profits from the winning therapies, with supply during the first year possibly being sold at cost, but treatment success will support long-term growth and cash flow of the businesses.
Quality & Growth
Given the need to support Health Care companies and find a path through the pandemic, we expect the US presidential candidates to be much less aggressive regarding insurance coverage and drug pricing than in past election campaigns.
With US regulatory fears reduced, investors can focus on other issues, such as:
The sector’s defensive, superior earnings growth.
Quality characteristics of high returns and relatively low debt/equity.
Relatively robust cash flow to help service dividends.
Highest risk-adjusted returns of any US sector over the last 10 years.1
Investors can consider buying the whole Health Care sector to capture the beneficiaries of increased government spending, growing themes of medtech and biotech and COVID-19 treatments, rather than trying to find the one success story. All of the companies mentioned with full listings are held in SPDR MSCI World Heath Care UCITS ETF.2
3-Month Change to Estimated 1-Year EPS Growth by MSCI World Sector(%)