A Global Pandemic and the U.S. Health Care Sector
The Investment Conversation: A Global Pandemic and the US Health Care Sector
Narrator: Welcome to a special edition of Lord Abbett’s Investment Conversation.
Soundbite: Now, to Coronavirus…
Narrator: On February the 11th, 2020, the World Health Organization named the disease that would heavily impact world markets and redefine our daily existence on this planet
Soundbite: …And it is COVID-19. Co, C-O, stands for Corona, as you know, V-I stands for virus, D- for disease, so COVID.
As part of our 2020 Midyear Outlook, we’ve spoken with a group of our thought leaders about COVID-19, its impact on the Health Care sector, and the global economic recovery.
I'm Matthew DeCicco, portfolio manager on the Innovation Growth Equity team.
I'm Heidi Lawrence, I'm an analyst here at Lord Abbett. I've been covering health care for about 15 plus years with a specialty right now covering life science tools and diagnostics.
I'm Samantha Shevins. I'm a health care analyst on the innovation funds at Lord Abbett. I've been covering biotech and pharmaceuticals for 20 years now on Wall Street.
I'm Devesh Karandikar. I'm the portfolio manager of the Lord Abbett Health Care fund and also an analyst on the Growth Equity Team. I've covered medical devices and health care services for over 20 years, starting in 1999.
My name is Murali Ganti and I cover health care on the taxable fixed income side. I focus primarily on providers, managed care, and services, across the three major asset classes in fixed income, in leveraged loans, high-yield, and investment grade. I've been covering the sector since 2001.
Narrator: As you can imagine, with a combined 75 years’ experience covering the health care sector, the group is laser-focused on four key initiatives that they believe will impact the economic outlook over the next several months.
Matt: The four that we are tracking are-- widespread testing, contact tracing, the capacity to treat patients in our hospitals, and therapeutics for COVID-19.
Narrator: Matt calls them “the four T’s”: Testing, tracing, treating and therapeutics.
Matt: We believe that the success of these initiatives will have a critical impact on the pace of the economic recovery. As of today, the consensus view is that the reopening is expected to lead to a strong and steady economic expansion.
Matt: The first three key health care initiatives that we're tracking -- that is testing, tracing, and the capacity to treat patients in our hospitals-- if that goes well, that is critical to mitigating the second wave risk.
A return to a national lockdown leading to a much slower recovery, the consensus expects, would be negative for risk assets and equity markets.
On the other hand, a big upside potential to the consensus view is a medical breakthrough on the therapeutics side that would allow for re-opening the economy faster than anticipated.A faster recovery would be positive for risk assets and equity markets.
Narrator: So now that we’ve identified both potential downside and upside for markets, we’ll shift to the first T: Testing. Heidi Lawrence shared the latest stats for the United States:
Heidi: We've seen the seven-day moving average in new cases flat again. Test positivity rates continue to move down to 9%. And the recent daily positive rates have hovered around the 4% to 5% range, but has recently up-ticked to the higher end of this range. Unlike a couple weeks ago when we were seeing new hospitalizations, ICU admissions, and testing all moving in the right direction, we are now seeing states with growth in both new cases and hospitalizations in early June rise, as well as higher-than-average positive testing rates in states including Arizona, Arkansas, Utah, North Carolina, and South Carolina.
And now Texas too is seeing a modest uptick in hospitalizations, along with a more meaningful uptick in new cases. States where new cases grew in the past week comprised about 40% of the total US population, but less than 20% are in states with increases for both new cases and hospitalizations.
Narrator: In this environment, Heidi says the focus is shifting to different methods of cost effective testing.
Other methods to support PCR testing, including antigen testing and potentially pooling of test samples, which are both more cost-effective ways of testing.
Narrator: We should mention here that PCR stands for “polymerase chain reaction” and PCR testing is considered to be the “gold standard” when it comes to detecting the COVID-19 virus. Anyway: Back to Heidi.
Heidi: We are increasingly optimistic that we can double our current capacity of 500 tests a day with these new approaches. Current estimates range from needing one to three tests a day to get back to work and school, all the way back up to 20 million tests a day, which seems a little high in our view. One of the challenges we need to address is the lack of coordination to get that testing to the regions of the country most in need and finding safe places to test. This will be critical in the fall, but we are definitely more prepared to address this issue than we were during the first wave.
Narrator: Heidi’s statement is supported by the latest testimony from Admiral Brett Gerwais, Assistant Secretary for Health, at the U.S. Department of Health and Human Services.
Soundbite: Federally-qualified health centers serve over 29 million people across the nation. They provide care to one in five of those uninsured. One in five rural Americans. One in three living in poverty and one point three million homeless. Again: To assure we reach these most vulnerable among us.
Heidi: We also need to shift our mindset a bit from rationalizing the testing to exclusively high-risk individuals, to what has been described as a more adaptive or customized approach to testing.
You know, different settings might have a higher or lower risk tolerance, and therefore different testing needs.
For example, if you're working at a nursing home, your tolerance level for less sensitive antigen tests may be too low, therefore nursing home administrators would most likely use the highly accurate PCR test daily or weekly.
If you're serving a low prevalence, low risk population you might employ a tactic where you perform low cost antibody testing and use this information to continuously assess a population's level of immunity, and increase social distancing measures accordingly.
And so you're saving some money this way. Finally, if your employees are public-facing then you may employ a different diagnostic toolset for those folks than you do for s-- for the people in the back office. The key is not to find every single infection, but to try to avoid an outbreak.
In terms of the debate over immunity and reinfection rates: Those seem to be waning with a recent study coming out of Mount Sinai supporting the fact that individuals infected with COVID do produce antibodies, in contrast to studies coming out of Asia suggesting otherwise. But we're awaiting more data over the summer, and corresponding guidelines on what levels antibodies constitute immunity. And I'm increasingly believing that there's some level of immunity transferred to a COVID patient, but whether it's six months or 18 months is still a question.
Narrator: Tracing – the second T – is critical when it comes to suppressing a second wave. But, as Matt noted, contact tracing isn’t widespread enough to be impactful.
Matt: While Google and Apple have launched their exposure notification apps for-- hones, utilization is not intuitive and adoption thus far is low. So if tracing does not improve, that increases the likelihood that more patients will get infected and will show up in our hospital systems.
Narrator: So if that second wave does come, how prepared are hospitals for more patients in need of care? Devesh offers his thoughts, starting with critically important ICU wards.
Devesh: about fifteen percent of ICU beds are being utilized by COVID patients and even in states like New York where we saw peak utilization of 150% of ICU beds, now that's actually fallen to the low 20s.
So when you ask about the question regarding how prepared will these facilities be if there's a second wave, I think hospitals have taken the preventative step of, firstly, infrastructure changes… which is, they've created dedicated rooms, potentially dedicated entry ways and wings, to stave off a second wave and not needing to shut down again. The other thing that they've focused on is ensuring they have adequate PPE, personal protective equipment, and other supplies that have been utilized during COVID treatments. The elective procedures will start coming back. I think hospitals have also thought about how they would bring these procedures back. Thinking about more time between cleanings, which procedures to stage back first, making sure it's on a need basis and not a revenue basis and there's also been a concern with how to deal with extended hours, so whether there's enough labor force, but I think hospitals have done a great job addressing this.
So as they've added hours, they've also added potentially days, weekends and evenings, but they've all definitely addressed this in order to take on the capacity and take on procedures that have been deferred since March and April.
So with that all being said, they definitely addressed and thought about the second wave and would be very well prepared if there was a rise in cases again.
Narrator: OK, so we know that if a second wave comes, hospitals will need methods for treating patients. That brings us to our third “T” – therapeutics. Biopharma specialist Samantha frames the crisis in terms of how the duration of disruption to the health care system and the economy overall will be shaped by how quickly pharma and biotech can innovate.
Samantha: Drugs can play such an important role in helping doctors better manage this disease. Right now there are over 100 programs in development worldwide, which is really exciting.
We're seeing all of biotech and pharma come together with new technologies and their best scientists, we're seeing government organizations collaborate, like the FDA and the National Institutes of Health, and important public-private partnerships, like the Gates Foundation and the Milken Institute. I spend a lot of time researching the COVID drug programs in development because I think their progress will be important for the market.
Narrator: To break it down for us, Samantha says she separates drugs in development into four broad buckets: antivirals, immunomodulators, therapeutic antibodies, and vaccines.
Antivirals are drugs that prevent virus from replicating and reduces symptoms. They're really most effective when they can be given early in the disease course. We had the first piece of good news in this pandemic about six weeks ago when the NIH announced positive results from a trial of Remdesivir in severe hospitalized patients.
It was able to reduce the time to recovery from 15 days to 11 days. When you think about how overwhelmed the health care system was and how capacity can strain the hospitals were, the ability to get patients better and out of the hospital by four days is really meaningful. And so I think about Remdesivir as an important first tool in doctors' toolbox to manage the disease.
Unfortunately, it's given intravenously which I think will limit its broad appeal. There's another drug that Merck recently in-licensed that's going into phase two, that's an oral antiviral. We should have data by the end of the summer, and if that's successful I think it can be used on a much wider scale.
Narrator: Which brings us to our second category: Immunomodulators.
These reduce the inflammatory response, and when patients develop advanced COVID, literature suggests that they tend to die from something called acute respiratory distress syndrome, which is really an inflammatory response.
There are two approved drugs on the market, one from Sanofi and one from Roche, which treat very similar symptoms to acute respiratory distress syndrome in different disease settings. So early proof of concept data with those drugs and COVID were very encouraging and are both in phase three trials, with data expected in the month of June.
I think that could be an important second tool in doctors' toolbox to managing the disease.
Narrator: Samantha says she and the Lord Abbett team have a differentiated view on the third class, therapeutic antibodies.
We're extremely constructive on this category. If people have been following the work done at Mount Sinai where they've been using plasma from recovered patients to treat sick COVID patients, this concept is an age-old, tried and true practice. Because recovered patients have developed antibodies to this disease, and that's what allowed them to get through it.
Unfortunately, the amount of blood that's extracted from any one patient is really limited in how many patients it can help benefit. And biotech has taken a very modern approach to this by isolating those antibodies and then producing them synthetically, so they can scale up and manufacture on a much wider-- basis. And so there are four or five large pharmaceutical and biotech companies pursuing this, going into the clinic this month and over the summer.
And I think by the early fall we could start to see data from those trials. The reason I'm so excited by this is past efforts in other diseases using this approach have been very successful, and I think it's a bridge to a vaccine. I think it can be used for health care workers and at risk populations in that period of time until vaccines are broadly available to the general population.
Narrator: The fourth bucket, vaccines, is one we hear a lot about in the media.
Because vaccines can be prophylactic, meaning they prevent somebody from getting the disease-- and they generally create or induce lifelong immunity. There are several programs that have been designated by the US government-- under the auspices of Project Warp Speed. They'll be going into phase three trials this summer, and hopefully we'll have data within eight to nine months.
Narrator: Another topic that is certainly top of mind in the age of the coronavirus pandemic: Health Insurance. Murali says this is an especially important issue, particularly if you consider the U.S. unemployment rate, hovering around 13.3%
You know, if you look at the stats, roughly half of Americans get health insurance from their employer so it's a pretty meaningful number relative to other forms of health care coverage.
So far estimates suggest over 16 million workers have lost their employer-based coverage since mid-March, and if you add their dependents as well that number is actually 27 million. So obviously there's a potential that that number could grow.
But you know, the good news is, though, that out of that 27 million, just under half will qualify for Medicaid coverage, and another 30% will likely qualify for marketplace subsidies through the Affordable Care Act. But that still leaves another 20%, or roughly six million people, who won't be eligible either under Medicaid or the Affordable Care Act, and would therefore have to pay the full cost of coverage or remain uninsured.
Narrator: Are there alternatives? Murali says options like COBRA and short-term health plans can be expensive or only provide limited coverage.
Given that this is an election year, there generally is to shore up some health care protections, but whether that is incorporated into new legislation or into another round of stimulus remains to be seen.
So short-term it's basically status quo where we work within the contours of our existing system, and any large-scale changes to health care policy really happening after the elections.
Narrator: When it comes to a longer-term view, Devesh has a few observations about supply chains and the changes in how care is administered.
Devesh: Over the past decade there's been a trend towards a lower number of vendors in order to consolidate purchasing. Given the COVID pandemic and the lack of supplies, this trend could reverse to ensure supplies, especially as it pertains to PPE. We've seen the cost of masks in certain cases move from 50 cents to six dollars; in order to mitigate this risk, I think providers will likely look towards alternative sourcing, potentially moving supply chains away from only China to other geographies. Another trend that is likely to accelerate is providing care in alternative settings. Telemedicine and virtual care is likely to be a major shift even though telemedicine has been available for many years, utilization rates have been low since incentives were not there. Several items have changed allowing for quicker adoption. Firstly, reimbursement rates, in certain cases, have seen a parity with office visit reimbursement. Also infrastructure, be it bandwidth for video security and privacy has all been updated. The alternative settings would also be in terms of outpatient facilities, clinics and urgent care facilities. These will see increased utilization as patients are fearful or apprehensive to go to an inpatient facility.
These changes require capital and capabilities and therefore we will likely see further consolidation as the well-capitalized providers continue to take share, either through M&A or build-out of service lines.
Narrator: Just an aside here: M&A stands for “mergers and acquisitions”, which describes ways companies can consolidate, by either merging together or being acquired by another company. Now back to Devesh.
You'll also see slightly better partnerships with medical device manufacturers and government regulators. The first example is ventilators, where we saw various manufacturers being approved on an accelerated timeline.
Narrator: Devesh says another consideration is a shift in capital expenditures – how hospitals spend money. For example, hospitals may rethink adding a new wing and instead add new technologies. And, as Heidi notes, there are other developments with potentially positive implications for some of the companies she follows:
I also think that we're going to see an increase in funding-- specifically from the NIH and other organizations in the areas of infectious disease, virology. And this could benefit a lot of the names in our group, including life science tools, diagnostics-- the pharmaceutical companies, biotech, and the CROs.
Narrator: “CRO” stands for “contract research organization”. They’re companies that provide clinical trial and other research support services for the pharmaceutical and biotechnology industries. Now, on to the next question: What about regulatory changes to the biopharmaceutical industry? The team’s tracking this quite closely. Samantha shares her thoughts on one area in particular.
There's a division of the Department of Health and Human Services called BARDA. It's the Biomedical Advanced Research and Development Authority, and it's really a part of the government that was designed to lead our nation and protect them from chemical, or biological, nuclear threats. And so this agency's been really proactive in funding a lot of the manufacturing scale-ups for the vaccine programs and development.
Because this is usually a rate-limiting step once you've gone through positive clinical trials. And so they've given out significant fundings to several companies, including Moderna, Sanofi, Johnson & Johnson, and the Oxford/AstraZeneca vaccine collaboration. So I think on one hand, when I think about regulation, I think if any of those vaccines are successful in coming to market I don't think they'll really be able to set price in the normal competitive marketplace like you'd expect, because they took government funding.
So I think that's one implication of having ties to the government. On the flipside, I think the FDA has been extremely proactive and reached out to industry, meaning pharma and biotech, very early on, when the crisis hit in March, to offer guidance and flexibility on how to conduct clinical trials during this pandemic.
And it provided alternative means of monitoring patients, administering drugs. There even was some room to make changes to statistical plans in consultation with the FDA. I think that flexibility and the overall desire to get drugs to market faster will continue after this pandemic ends, and will really be a positive lasting effect in terms of regulation.
Narrator: On the equity side, Matt says another topic the group has discussed is the availability of financing for key constituents in the health care industry.
We've seen some of the smaller medical device companies and biotechnology companies access the equity markets to raise capital.
Narrator: So how are fixed income markets functioning for the health systems and hospitals that need access to capital? Murali weighs in here.
Well, I think the fixed income markets continue to remain favorable, really driven by robust technicals. Early on during the pandemic in late March and early April, you know, you had companies that were scrambling to maintain financial flexibility as they preemptively drew down on their revolvers and credit and placed new debt all as liquidity-enhancing measures. You had capital structures that were fully loaded with recovery scenarios, really only measuring liquidity through the end of 2020 with no real visibility into '21 and beyond.
Since then, though, the reversal has largely been driven by an enormous amount of stimulus coupled with an accommodative Fed. Add to that broader signs of demand stabilization in late April and into early May, and we've seen spreads come in quite drastically, really across the credit spectrum from leveraged loans, to high-yield, to investment grade debt.
I think investor appetite for health care paper, especially hospitals, remains strong.
And that's really driven by the government backstopping the sector with multiple rounds of assistance, both in the form of grants and low interest loans. While markets have been quite resilient, really driven by technicals, I think once we get a better sense of what the second half of the year looks like, valuation should track more closely to fundamentals.
Narrator: To wrap things up, what are the key Coronavirus developments investors should be watching out for over the next few months? Heidi says testing rates will definitely be on her radar.
We'll be watching what the positive testing rates are in each region, and you know, we feel that if those can go down or stay at 3% to 5% ranges-- then that would be-- we'd feel better about-- the level of transmission.
You know, if we approach herd immunity in some states-- in 50% to 60%-- and some states might get there faster than others-- given they've already seen the brunt of COVID-- then maybe we'd feel a little bit more comfortable and encouraged. And then finally, obviously if we got a vaccine.
Narrator: Those are just some of the insights the team has on the health care industry. You can always get more on this and other topics by contacting your Lord Abbett representative and by visiting Lord-Abbett-dot-com. In the meantime, we’re glad Matt, Heidi, Samantha, Devesh and Murali could share their thoughts on COVID-19 in this special edition of The Investment Conversation. Thank you for joining us.
Sources: WHO Daily Press Briefing on Novel Coronavirus. https://www.who.int/emergencies/diseases/novel-coronavirus-2019/media-resources/press-briefings/8#]: World Health Organization; . License: CC BY-NC-SA 3.0 IGO
White House Coronavirus Task Force Members Testify on Federal Response to Pandemic. https://www.c-span.org/video/?473229-1/white-house-coronavirus-task-force-members-testify-federal-response-pandemic]: CSPAN; . License: https://www.c-span.org/about/copyrightsAndLicensing/
The investment professionals in this podcast cited information from the following sources:
The April 3, 2020 Edition of the McKinsey and Company Covid-19 Briefing materials on Global Health and Crisis Response
The Evercore I.S.I. COVID Tracker, Data as of June 10, 2020
The Kaiser Family Foundation
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