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Institutional Perspectives

It is unusual for the pace of the U.S. economic recovery to depend on a handful of key health initiatives, but we believe that is the case today.

Read time: 9 minutes



In Brief

  • We believe the biggest potential upside driver to the U.S. economic recovery would be a medical breakthrough in the form of new therapeutics to treat the COVID-19 virus.
  • The nation’s healthcare systems are adapting to an accelerated pace of change caused by their experience with the pandemic, and those changes will be long lasting, in our opinion.
  • The U.S. government has provided generous support, in our view, which has stabilized the markets during the first phase of this crisis.  But we’re really hopeful that human ingenuity will get us through to the other side of this crisis.

 

In May 2020, Lord Abbett’s healthcare specialists participated in a conference call to provide an investment update on the COVID-19 virus, its impact on the U.S. healthcare system, and their perspective on the path to reopening the U.S. economy. The panel included Matthew R. DeCicco, CFA, Managing Director & Portfolio Manager; Devesh Karandikar, Portfolio Manager; Samantha Shevins, Research Analyst; and Samantha Scher, Managing Director, U.S. Institutional.

Among their areas of focus regarding responses to the virus were:

  • Widespread testing
  • Contact tracing
  • Treatment capacity in hospitals
  • Medical breakthroughs in therapeutics.

Following are highlights of that call.

DeCicco: The healthcare crisis posed by COVID-19 is challenging and unprecedented for many reasons. Notably, it is unusual for the pace of the recovery and the reopening of the economy to depend on a handful of key health initiatives. But that was apparent earlier this month [May 2020] when positive news from a vaccine developer triggered a sharp rebound in the equity markets. As one would expect, the stocks most levered to an economic recovery moved the most.  On the fixed income side, the yield curve steepened and credit spreads narrowed.

Today, we want to give you a progress report on four key initiatives in the healthcare sector: widespread testing, contract tracing, treatment capacity in hospitals, and the new therapeutics.

First, let’s provide an assessment of where we are today. As you can see in Figure 1, the U.S. economy is reopening gradually, with different states at different stages in that process. All 50 states are open to some extent for the first time in two months. By early June, we estimate that 95% of the U.S. population will be living in a state with a least a gradual reopening.

 

Figure 1. The U.S. Economy is Reopening Gradually, With Different States at Different Stages in the Process.

Source: Kaiser Family Foundation. Data as of May 15, 2020.

 

The COVID-related data we track, using seven-day moving averages, indicate that new hospitalizations and new ICU admissions are both moving in the right direction – downward.  In fact, 30 states now have a test positivity rate below 10%, and 75% of the U.S. economy is in states with declining new case counts.

Consensus expectations are that the U.S. economy will recover rapidly in the second half of 2020, and that recovery will continue in 2021 at a more gradual pace, with a return to pre-COVID-19 levels of GDP in early 2022.

In our opinion, in order for those consensus expectation to be met,  without a second wave of infections or a repeat of shelter-in-place orders,  three key healthcare initiatives– testing, contact tracing, and treatment capacity – need to demonstrate progress over  the short run.

We believe the biggest potential upside driver to the consensus view of the economic recovery would be a medical breakthrough in the form of new therapeutics – the fourth initiative we’re discussing – which would help states manage COVID-19 enough to allow the resumption of near-normal economic conditions.

We believe the biggest potential upside driver to the consensus view of the economic recovery would be a medical breakthrough in the form of new therapeutics – the fourth initiative we’re discussing – which would help states manage COVID-19 enough to allow the resumption of near-normal economic conditions.

That frames the levers for the bull and the bear case, respectively.  Good progress on the first three initiatives could mean that the consensus view for economic recovery is too pessimistic, which would be positive for risk assets and equity markets. Falling short on these initiatives would mean the hopes for economic recovery are too optimistic, which would be bad for risk assets and equity markets.

Let’s take a closer look at the first three initiatives (Figure 2).

 

Figure 2. Falling Short on These COVID-19 Initiatives Could Potentially Weaken Economic Recovery

Source: Lord Abbett.

 

The first important initiative is infrastructure to support widespread testing,

There are two types of testing: diagnostic to detect disease and serology (or antibody) to detect immunity to disease, post exposure.

Diagnostic testing, after a slow start, is going well in the United States with over 350,000 tests per day on average in the week of May 11.  On May 20, that number was over 400,000 per day.  And the positivity rate is consistently running less than 10%. The positivity rate is important because if that number gets too high – say, 15% or 20% -- that means that not enough testing is taking place. What we’d like to see over the next few weeks and months is the number of testings to rise and the positivity rate to remain below 10%.

Antibody testing is improving.  There are very good tests available from Abbott and Roche that were just approved that have substantially low false negative rates.  But in general, antibody testing is somewhat behind schedule.

The second important initiative is contact tracing.

Once patients have been diagnosed, they need to be tracked, in order to stay on top of new outbreaks and to limit them. This is critical in suppressing a second wave. The mobile devices that we all use would be effective for contact tracing, if individuals allow it. Scientific literature indicates that about 60% participation by a population is required for contact tracing to be effective.  We’re close. Survey data in the United States and Europe indicate that 45-50% would agree to allow their phones to serve as tracing devices. (The results are higher when considering only the areas hit the hardest.)

One of the technology options available today is a digital contact tracing system called Exposure Notification, developed by Apple and Google. The system will be rolled out in App stores soon, and Apple 13.5 software update will include an opt-in.

I’m cautiously optimistic about the technology but less so when it comes to people accepting it.

Karandikar: The third key initiative – hospital capacity and preparedness to treat new patients – pertains to revenues, costs, and cash flows at the health system level.

Let’s look at capacity first. About 19% of ICU beds in the United States are filled with Covid-19 patients [as of May 15, 2020] and that compares to 29% just two weeks ago. The New York City metro area today has 57% of its ICU beds filled with COVID-19 patients, down from 150% about a month ago. That’s a significant improvement in both cases.  The concern remains that these trends may reverse as states begin to reopen.

In terms of revenues, reimbursement remains a challenge. Even with the boost in Medicare
payments for COVID patients provided by the CARES Act, hospitals are expected to lose $2800 per patient, with some losing as much $10,000 per case.

And not only is there pressure on revenues, but costs are increasing as well.  Hospitals are experiencing sharp increases in prices for some equipment. As an example, masks that usually cost 50 cents are now going for $6 each. This is creating cash flow issues. Hospitals cannot use endowment funds to offset the cash crunch, as many of those funds are directed for specific purposes. Providers have tried to offset some of the revenue headwinds by utilizing telemedicine, off campus and interim services and treatments. But these have offset only a small portion of the loss in revenues.

There have also been some innovative approaches on the cost side:

For example, Stanford Health and Resolink, which is a supply-chain risk-management company, collaborated to launch a trading platform for hospital suppliers in partnership with United Parcel Services.  Other health systems have created on-line resources to share observational data and treatment best practices.

Managed care companies such as United Healthcare and Blue Cross Blue Shield plans have paid claims earlier with less pushback, to assist hospitals and providers with the cash flow issues.  Hospitals also have extended terms with vendors. They’ve put capital expenditure plans on hold, and they’ve reduced salaries at the executive and management level.   

The CARES Act has provided some funding, although there has been some confusion around the program.   Nonetheless, as of last week, $50 billion has been disbursed to providers with potentially another $75 billion in the works.

The good news is that hospitals are beginning to see a rebound in volumes.  HCA Healthcare, the large publicly traded hospital company, recently stated that inpatient surgeries are running down 15% year-on-year while outpatient procedures are down 20%.  But that’s a considerable improvement from April when trends were down 50% and 70%, respectively.

What will a gradual reopening of the health system require?  Hospitals and other providers will have to provide adequate personal protection equipment and provide testing for staff as well as patients.  They will have to schedule adequate cleaning time between surgeries and procedures; set hours that are manageable for staff; and ensure that procedures that are rescheduled are based on need and not on revenue.  It is estimated that almost a quarter of procedures canceled in 2020 will not be occurring until 2021.

Along the way, there will be key data points and milestones that we will be measuring, as seen in Figure 3.

 

Figure 3. Careful Monitoring of Progress in Combating COVID-19 Will be Necessary

Source: Lord Abbett.

 

My last point here is that the nation’s healthcare systems are adapting to an accelerated pace of change caused by their experience with the pandemic.  Infrastructure changes, the use of technology and predictive analytics, adjusting our sources of supplies, the increased involvement of government– will all be a part of the future.  We believe they will be long-lasting changes.

What are the upside drivers to what we’ve discussed so far?  We believe that advancements in therapeutics, the fourth initiative on our list, can change the slope of the curve.

Shevins: In our view, the duration of the disruption to the healthcare system and to the economy overall is really going to be shaped by how quickly pharmaceutical and biotech companies can develop a vaccine or other impactful therapeutics.  Drugs will play a really important role in helping doctors manage the disease.  Ultimately though, the only way the COVID-19 virus will be defeated is with the development of an effective vaccine or vaccines or if we reach a level of herd immunity in the population.

We believe there is reason for optimism, because right now there are over 100 vaccine programs in development worldwide. We’ve seen the pharma and biotech community come together with their best technology platforms and their best science to work on this.  We’ve seen tremendous collaboration between government organizations like the Food and Drug Administration, the National Institute of Health, and global organizations such as the World Health Organization, as well as public and private partnerships, such as the Gates Foundation and the Milken Institute.

I spend a lot of time watching the COVID-related drug programs and their development because we think that progress in this area will be very important to the market and will help us to determine whether the bull case or the bear case is more likely.

COVID-19 drugs in development fall into four categories: anti-virals, immuno-modulators, therapeutic antibodies, and vaccines.

Anti-virals are drugs that basically prevent the virus from reproducingThey reduce the viral load in a patient’s system, moderating symptoms. Tamiflu is an example. Anti-virals are most effective when they are administered early on in the course of a disease, and when they can be given orally so that doctors can prescribe them easily and broadly across the population.

A few weeks ago, we learned that a trial of Gilead’s Remdesiver showed positive results when administered to patients with severe symptoms of the virus. The drug resulted in a significant reduction in the time to recover, from 15 days to 11 days. And that four days’ difference is important to hospitals that were having capacity constraints and were being overwhelmed by the crisis. This was especially the case in virus hot spots.  It also showed positive trends in terms of survival, increasing the probability to 12% from 8%. There will also be data from other anti-viral trials in June. So there’s more to look forward to, and the market will build confidence from there, we think.

Immuno modulators are drugs that work to reduce the body’s inflammatory response. When patients advance to the most severe stage of COVID-19, organs outside of the respiratory system, including the heart, also can respond negatively. Research suggests that the leading cause of COVID-related death is acute respiratory distress syndrome (ARDS), which is a broadly systemic reaction to the virus. There are several so-called IL-6 inhibitor drugs in phase 3 clinical trials right now, one from Roche and one from Sanofi. Each of these drugs is already approved to treat other diseases that have symptoms similar to ARDS.

Therapeutic antibodies are the body’s defenders against potentially damaging invaders.  I believe Lord Abbett really has differentiated itself because we’ve been more constructive on its potential than have others. Mt. Sinai has been taking plasma from recovered patients and using that to treat sick patients. The root of the idea is to give sick patients short-term immunity to the virus, because the plasma of a recovered patient has created antibodies that the sick patient can use.  The main limitation has been scaling it up, because when you take plasma from a patient you’re limited in terms of how many other people it can help.

But, going forward, that may no longer be an issue. Biotech is now able to isolate the best antibody from a recovered patient’s plasma, clone it, and manufacture a version of it on a much larger scale.  Past efforts to target viral infections using this type of approach have been successful in two diseases: Reflex Sympathetic Dystrophy (RSD) Syndrome and Ebola. That gives us reason to believe that the odds of success will be high. There are several pharmaceuticals that are putting programs into clinical trials in June, and I think we will to start to see the “proof of concept data” in the summer and fall.

Vaccines have a two-fold appeal. First, unlike therapeutic antibodies, they provide long-term immunity.  A vaccine actually reprograms your immune system, so that if you come in contact with a virus or an antigen, your immune system will retain the memory of how to fight it. Second, vaccines are preventative measures and, as such, can be given to healthy people before they get sick.

June, summer and early fall are going to be very busy periods in terms of data readings and we expect these developments will influence the market.

A final thought: the U.S. government has provided generous support on both the monetary and fiscal side, which has stabilized the markets during the first phase of this crisis.  But we’re really hopeful that human ingenuity will get us through this crisis on to the other side.

In Summary

The discussion ended with a summation of the four key points made by the healthcare specialists in the conference call:

  • The pace of the U.S. economic recovery will depend on the success of key healthcare initiatives – testing, contact tracing, and improved capacity to treat newly infected patients;
  • Hospital capacity and preparedness will be essential;
  • Therapeutic innovation could have a significant impact on the slope of the economic recovery; and
  • Key medical and alternative data will be better guideposts to monitor recovery than traditional data.

 

Forecasts and projections are based on current market conditions and are subject to change without notice. Projections should not be considered a guarantee.

This article may contain assumptions that are “forward-looking statements,” which are based on certain assumptions of future events. Actual events are difficult to predict and may differ from those assumed. There can be no assurance that forward-looking statements will materialize or that actual returns or results will not be materially different from those described here.

Glossary of Terms

The CARES (Coronavirus Aid, Relief, and Economic Security) Act is a $2 trillion stimulus passed by the U.S. Congress in March 2020, to blunt the impact of an economic downturn set in motion by the global coronavirus pandemic.

The information provided herein is not directed at any investor or category of investors and is provided solely as general information about our products and services and to otherwise provide general investment education.  No information contained herein should be regarded as a suggestion to engage in or refrain from any investment-related course of action as Lord, Abbett & Co LLC (and its affiliates, “Lord Abbett”) is not undertaking to provide impartial investment advice, act as an impartial adviser, or give advice in a fiduciary capacity with respect to the materials presented herein.   If you are an individual retirement investor, contact your financial advisor or other non-Lord Abbett fiduciary about whether any given investment idea, strategy, product, or service described herein may be appropriate for your circumstances.

The opinions in the preceding commentary are as of the date of publication and are subject to change. Additionally, the opinions may not represent the opinions of the firm as a whole. The document is not intended for use as forecast, research or investment advice concerning any particular investment or the markets in general, and it is not intended to be legal advice or tax advice. This document is prepared based on information Lord Abbett deems reliable; however, Lord Abbett does not warrant the accuracy and completeness of the information.

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