Most of the United States remains on social restrictions while awaiting possible medical solutions to COVID-19, which has infected over two million people to date globally. The ability to determine immunity to the virus, as well as viable treatment options and ultimately, a vaccine, are needed before social restrictions can end. These are critical first steps to give visibility to the duration of this crisis and its potential impact on economic activity and ultimately, to allow investor confidence to return. There are over 260 programs currently in testing. It is important to note that production is ramping up on many of these options without full-scale clinical trials having been completed. It is difficult to determine what has real potential and what is more noise, and given the fluidity of the situation, that is likely to be the case in the near term. Nonetheless, it is important for investors to understand and keep top of mind.
In the near term, testing is critical to determine which parts of the population can safely return to work and which sections need to continue to physically isolate. There are currently two options for testing:
- Molecular diagnostic testing (PCR) is currently in use and is 98% accurate, with an optimal result turnaround time of 24–48 hours. The US has the ability to perform 400,000 tests per day, but the demand is for over one million tests per day. Roche, Abbott Laboratories, and Cepheid are manufacturing the tests, and production is scaling up for millions of tests per week.
- Antibody/serological is the other testing option and can identify those who have already been exposed. Recent estimates show that 25% of people who have COVID-19 are asymptomatic. The antibody appears in bloodwork about four to five days post-infection and appears to give immunity for approximately one year. At this time, the Food and Drug Administration (FDA) is allowing the use of serology tests without formal FDA review. Becton Dickinson is the dominant player, and along with several other companies, it is ramping up to provide large-scale testing within the next few months.
Accurate testing is also critically important to fully understand the segment of impacted people. This will give us better insight into how the virus spreads and a better understanding of the true fatality rate. To date, the virus is seen as having a higher fatality rate than those of similar diseases. How that holds as we get a better sense of how many people have been impacted will help give insight into what levels of containment may be necessary.
With no cure currently available, there are several therapeutic options being used and explored:
- Antiviral treatments have been the first line of defense against COVID-19, as they can reduce the intensity and duration of the infection. However, they are neither a cure nor a prevention, and it is not known if antivirals work effectively on all segments of the population. Phase 3 clinical studies have begun on Gilead Sciences’ Remdesivir, which was originally developed to treat Ebola. Initial trial results should be available by the end of April.
- Anti-inflammatories include existing repurposed drugs that seem to inhibit overactive immune systems. Late-stage clinical trials have begun for Roche’s Actemra, which is being used in China for patients with severe complications. Trial results of Regeneron’s Kevzara should be available by the summer.
- Antibodies include both monoclonal and cocktail. Antibody drugs specifically attack the protein in the virus and have worked on patients with Ebola, MERS, and SARS. Several firms, including Regeneron, are looking at the summer for preclinical trials.
Vaccines are both the most hoped-for solution and also the riskiest. The typical paradigm for vaccine development involves multiple years of development and trials. With COVID-19, development is happening in overlapping phases to shorten timeframes, and large-scale manufacturing would be concurrent with clinical development. There are multiple early-stage trials in process, both in the US and in China. Any vaccine would need to be both effective and safe to proceed. Both novel and traditional vaccines are being investigated:
- Novel – The leading candidate in the US is the mRNA vaccine from Moderna, and a healthy volunteer study began in March. This approach, which uses a piece of COVID-19’s genetic code, or messenger RNA, has not been previously approved by the FDA, and safety issues are a concern. Moderna has the most optimistic timeline, with the possibility of dosages available for frontline health care workers by Q4 2020 and broader distribution available by Q1 2021.
- Traditional – Johnson & Johnson is working on a version based on the same technology used for its Ebola vaccine. The company hopes to conduct human testing in the fall, with the capacity to mass-produce broadly one billion doses by mid-2021.
The near-term way out
Without a cure or a vaccine currently available, diagnosis is critical when considering a return to normalcy. Discussions about individuals returning to work would need to include identifying those who have immunity and administering both the PCR test and the serological test. While both tests have issues with false negatives, it is hoped that using the tests together will provide a higher level of accuracy.
Some cities and companies are discussing ways to reduce social distancing once a peak in new cases has been reached and proper surveillance infrastructure (similar to what is used for the flu) has been put in place.
In this environment, how are we approaching investment analysis, and what are some interesting opportunities? There are many factors at play, including the impact the virus has had on the economy and the probable global recession. It is a key factor in our macro positioning, both for broad risk assets and for sector allocations in model portfolios, such as holding an overweight to health care. In our active equity strategies, we have held positions in several of the companies discussed above for some time based on their long-term fundamentals, including their overall development pipeline and portfolio of drugs, as well as their specific relevance to COVID-19 diagnosis and treatment. Looking past the immediate response, here are some of the themes we are monitoring:
- The move from private insurance to government programs: with so many unemployed individuals, many will move to government insurer programs, which have a lower reimbursement level. The financial impact of this will need to be examined for insurers, hospitals, and pharmaceutical firms.
- Future investments: particularly in hospitals, many of which were ill-prepared and will require huge expenditures. This can be a more sustainable opportunity for equipment suppliers.
- Security of supply: manufacturing will likely become more localized to reduce any future disruptions in the supply chain.
- Telemedicine: is likely to continue to be popular even after social-distancing rules have been relaxed.
- Drug pricing: political issues surrounding drug pricing that have contained valuations will likely go away in the short term.
- Market dislocations: including companies that are being punished now, as their products/services are not essential, but are likely to recover once the pandemic subsides.
At State Street Global Advisors, we are keeping an eye on long-term fundamentals and look for diversification, management quality, and balance sheet strength — in addition to sustainable return and growth. This health crisis will have winners and losers, even within health care, so it is important to understand those long-term fundamentals when committing capital. We are monitoring fiscal and monetary policies as we work through these challenging times, mindful of the continued uncertainty of the situation, but we are also looking at opportunities that the market dislocation has created.