We analyze how the global health-care sector is faring in the face of the global pandemic.
- We believe the pharmaceutical sector’s defensive qualities should help the sector in the near term
- We think the medical technology sector should bounce back more strongly from the current crisis
- Health-care systems should see greater future funding levels as a result of the pandemic
Alongside the unfolding human tragedy, we are witnessing the impact of the coronavirus pandemic across all areas of the global economy, with the health-care sector bearing much of the immediate brunt. While there is still much uncertainty about how long the pandemic will last and what its lasting legacy will be, it is worth looking at the impact so far on health care, and how the different parts of the sector are likely to fare once we do eventually emerge on the other side.
At this time of great uncertainty, it is perhaps unsurprising that companies in the pharmaceutical sector are holding up reasonably well, given their defensive qualities. The demand for drugs is generally inelastic, although the pandemic will have some effect on drug launches, clinical trials, and certain therapeutic areas like primary care (given that many people will avoid the doctor’s surgery except in an emergency). There may also be some supply-chain issues as current global ‘lockdowns’ bite, but pharmaceutical companies typically maintain fairly high levels of inventory and do not generally rely on sole sourcing.
Those with chronic diseases such as asthma or diabetes will by and large continue to take their drugs and many may – quite understandably – stockpile them if they can, so they don’t run the risk of running out. This increase in demand could potentially drive a one-off boost in the current and next quarters, but we would expect it to even out over the course of the year. The likely headwinds for pharmaceutical companies are that new diagnoses of diseases will decline, as many patients will stay away from doctors unless their symptoms are severe, and doctors are unlikely to switch stable patients to new drugs or treatments.
By comparison, the revenues of medical technology companies are more directly vulnerable. A number of procedures are elective (planned in advance and routine) and the vast majority of these have already been cancelled in Europe and the US. The UK’s National Health Service (NHS) has already announced that all elective procedures will be cancelled for at least three months, while the American College of Surgeons and the US Surgeon General have recommended cancelling all elective procedures, but have yet to give a time frame. Meanwhile, in China, the world’s largest orthopedics company saw elective surgeries down 85-90% in February.
The good news for medical technology companies is that, in the main, these procedures are not lost but postponed, and as we are still quite early in the year, there is a reasonable chance that such companies will recapture much of their lost growth in the second half of the year. While medical technology firms do not disclose how many of their sales come from elective procedures, we would expect those with a greater amount of US exposure to prove more resilient overall.
We anticipate that pharmaceutical companies will perform their defensive function well over this unsettled period. As time progresses, however, and we start to see more clarity around when the worst of the pandemic starts to ease, we would expect the medical technology sector to offer the more attractive growth opportunities, as it should see a comparatively stronger rebound in fundamentals. It is worth noting that any rebound will not be V-shaped, simply because hospitals will not have the capacity (in terms of operating theatres, staff and available beds, etc.), to perform all the delayed cases at once. However, it is important to remember that this impact will be temporary.
While the pandemic is clearly a tragic situation which may have an impact on a number of us over the coming weeks and months, we believe that it will ultimately prove positive for the health-care sector as a whole. This is because it has highlighted how many health-care systems across the world have simply not invested enough, and have struggled to cope in the face of an albeit unprecedented global pandemic. Given the gravity of unfolding events, we would expect health-care systems to be safe from any funding cuts that could potentially result from a future recession. On the contrary, we would expect them to broadly see greater levels of investment over and above current levels.
Meanwhile, pharmaceutical companies, which have come under considerable recent political pressure (over drug pricing in particular) in some countries, are likely to play a critical role in finding a resolution to the current crisis. For this reason, we would expect to see reduced ‘heat’ on the sector, at least in the short term, as it will need all of its focus on working ‘for the greater good’ in the race to find a vaccine which can beat Covid-19.
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