As Industry Focuses On Pandemic, Will Vital Procedures Make A Comeback?

After a few years hanging out quietly on the sidelines, the Health Care sector roared back to prominence this year as COVID-19 ravaged the globe. Suddenly, vaccines and antibodies catapulted into the headlines, drawing attention to biotech and pharma amid a race to treat or prevent the virus.

While Health Care doesn’t lead the sector scoreboard this year, it’s holding its own. On one particular week in late June, four of the top-performing S&P 500 stocks were pharmaceutical or biotech companies.

The pandemic also upended the sector in other ways, with possible long-term impacts on everything from future merger and acquisition (M&A) activity to the Food and Drug Administration’s (FDA) approval process. There’s also concern that with all the focus on COVID-19, companies could be losing money on procedures like joint replacements that aren’t getting done. 

That said, investors awaiting Q2 Health Care earnings aren’t necessarily focusing as much on dollars and cents. Instead, many await updates from firms on the front lines of the fight against the virus, with so much of the industry’s firepower trained on a single enemy like never before.

Biotech in Spotlight as Vaccine Fight Picks up Steam

Some of earnings to consider watching this time around for potential news on virus trials, treatments, and research include Moderna Inc (NASDAQ: MRNA) and Gilead Sciences, Inc (NASDAQ: GILD) in the biotech space and Pfizer Inc (NYSE: PFE), Eli Lilly & Co (NYSE: LLY), and Johnson & Johnson (NYSE: JNJ) in the pharmaceutical arena.

GILD has a treatment called remdesivir which is already being used against COVID-19, while MRNA last month shared positive early results from a virus vaccine study. Investors who don’t normally pay much attention to biotechs might tune in when these two report in the next few weeks.

Many analysts say a vaccine would likely be the gold standard to let society get back toward more normalcy. More than 100 COVID-19 vaccine projects are being studied, according to the World Health Organization (WHO), in what’s pretty much an unparalleled scenario. Other major companies working on vaccines include JNJ and PFE.

“The vaccine opportunity is probably the biggest, much more so than a treatment, and Moderna appears to be a leader but it’s hard to tell who will come out ahead,” said Kevin Huang, senior equity research analyst at CFRA, an independent investment research firm. “Some companies are working on more traditional vaccines, and others, like Moderna and Pfizer (in a collaboration with BioNTech (BNTX),  are focusing on a messenger-Ribonucleic acid (mRNA) vaccine, which is much easier to manufacture.”

With mRNA, the body essentially becomes its own weapon against the virus. This type of vaccine also can sometimes have quicker development timelines.

Typically, Huang said, a vaccine can take 10–15 years to reach the market. With COVID-19 a clear and present danger to the world’s health, Huang thinks the timeline for Moderna’s vaccine could be under two years, which is extremely fast. A Phase III study is expected to start in July, leading to a possible 2021 approval.

“The FDA has really sped up their process for COVID-19 related things,” he noted. 

Treatment Updates Also Awaited

Companies like GILD, LLY and Regeneron Pharmaceuticals Inc (NYSE: REGN) are addressing the treatment side, with LLY recently saying it might have a drug authorized for use by September and that it has three antibody treatments in development, according to a recent New York Times report. 

LLY’s drugs belong to a class of biotech medicines called monoclonal antibodies widely used to treat cancer, rheumatoid arthritis and many other conditions, the report said. A monoclonal antibody drug developed against COVID-19 is likely to be more effective than repurposed medicines currently being tested against the virus.

All of these companies will probably deliver updates on their progress when they report earnings in the coming weeks, and good news from any might have an impact on their shares. For instance, as of July 14, MRNA shares have more than tripled year-to-date, REGN is up about 70%, and GILD is up 18%. On the pharma side, LLY is up 25% but PFE and JNJ haven’t really seen a boost.

Health Sector Lags, While Biotech Outpaces Market

Looking at the Health sector as a whole, it was down slightly year-to-date as of mid-July, but up nearly 23% over the last three months. That might sound kind of pedestrian considering the S&P 500 Index (SPX) rose 30% over the same period. However, drilling down a bit more, the Nasdaq Biotechnology Index (NBI) is outpacing the SPX, up more than 50% from its March low (see chart below).

FIGURE 1: BIOTECH SHINES: The Nasdaq Biotech Index (NBI—candlestick) has been a solid performer year-to-date, outpacing the S&P 500 Index (SPX—purple line) as many investors focus on hopes that a vaccine or treatment for COVID-19 might come out of the biotech space. Data sources: Nasdaq, S&P Dow Jones Indices. Chart source: The thinkorswim® platform from TD AmeritradeFor illustrative purposes only. Past performance does not guarantee future results.

That arguably reflects investor optimism about a treatment or vaccine emerging from the biotech sector. The so-so performance for Health Care as a whole, however, might be the result of some concerns that tell the other side of the COVID story for many companies.

Two health sector industries that might be in the spotlight for less than bullish reasons include the orthopedic and cardiovascular device makers. Shares of companies like Stryker Corporation (NYSE: SYK) and Medtronic PLC (NYSE: MDT) have treaded water or lost ground this year in part because fewer patients are getting procedures due to the crisis. This might have a negative impact on these firms’ bottom lines.

“COVID is expected to hit elective procedures very hard in Q2,” Huang said. 

What Will it Take for Elective Procedures to Rebound?

Some companies said on their Q1 calls that they saw a 40% drop in elective procedures during April, with joint replacements taking the biggest blow, he added. This could have ramifications for SYK and JNJ, with both holding big positions in the orthopedic segment. One question their executives might face on Q2 calls is when these procedures might pick up.

“People will be closely watching how quickly elective procedures return, and that depends on two things: Capacity at health care facilities and people’s willingness to go into a healthcare setting,” Huang said. 

While joint replacement procedures appeared to wane during COVID, diagnostics firms might get a boost. The pandemic has created some new opportunities in medical technology, including testing for COVID-19 antibodies. It’s also allowing some companies an opportunity to have devices like glucose monitors be used for remote monitoring in hospitals, as health facilities try to limit contact between health care workers and patients. Firms that might benefit from the FDA’s temporary guidance allowing this new use include Abbott Laboratories (NYSE: ABT) and DexCom, Inc. (NASDAQ: DXCM).

There’s been a lot written about the strange trend where hospitals are seeing less patient traffic for typical emergencies like heart attacks as the crisis continues. That’s possibly weighing on shares of cardiovascular device companies like MDT and Boston Scientific Corporation (NYSE: BSX), but there’s a chance procedures could come back quickly once the pandemic dies down.

“You might see a sharp increase in procedures as people reschedule procedures they’d deferred,” Huang said. “Some of these you can put off, but chronic conditions often become worse over time.”

The procedure slowdown also could have an impact elsewhere.

According to a recent Barron’s article, “Fixed-cost businesses like hospitals are facing headwinds with the cessation of elective procedures.” The article added that spiking unemployment means people could be losing access to health care,  which could be another potential headwind for the industry. Those under 65 who lose their jobs and health care insurance can still get care through the Medicaid program, but government payers generally reimburse at a lower rate than commercial insurers.

Tough Quarter Seen for Health Care Facilities

Health system stocks like HCA Healthcare Inc (NYSE: HCA) and Tenet Healthcare Corp (NYSE: THC) have taken a beating since the COVID-19 pandemic began, though their stocks started showing signs of life again recently. Tenet said last month that admissions to the company’s hospitals in the first half of June reached 90% of levels before the coronavirus disrupted operations. Hospital surgery counts reached 95% of those pre-crisis levels, The Wall Street Journal reported. However, rising caseloads in parts of the country threatened that progress.

Investors in this particular part of the health arena might want to listen closely on Q2 earnings calls to find out if these companies have seen any improvement in business over the last month or two, and their outlook for Q3.

Q2 Earnings

In Q2, Health firms in the SPX are expected to report a 14% drop  in year-over-year sector earnings per share, compared with approximately a 44% annual decline for all sectors in the SPX, according to research firm Fact Set. 

That’s not exactly a glowing performance. Still, considering everything the corporate world has gone through the last six months, it’s not all that bad, 2020-wise.

 In fact, the 14% anticipated decline is good enough to put Health Care in fourth place on the Q2 sector performance list, according to FactSet’s estimates. In this environment, maybe the definition of “healthy” earnings is getting a little cosmetic surgery.

TD Ameritrade® commentary for educational purposes only. Member SIPC

Image by Darko Stojanovic from Pixabay

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