Virus angst shines light on biotech opportunities Virus angst shines light on biotech opportunities\images\insights\article\medical-research-scientist-small.jpg March 6 2020 March 2 2020

Virus angst shines light on biotech opportunities

Efforts to treat and find a cure for Covid-19 likely to spur more innovation.
Published March 2 2020
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In the midst of the anxiety surrounding health and economic impacts from the latest coronavirus outbreak, the most positive action for investors—as history has repeatedly shown—is to avoid panic, look long term and consider opportunities. From our perspective as active growth managers, we believe the virus fallout presents a potentially strong catalyst in support of innovative health-care and biotechnology companies.

Over the past few years, investor sentiment around health care, particularly biotech, has been in a lull, a likely result of the uncertainty and raging political debate surrounding overall health-care spending. During this presidential cycle, that spending has become a defining issue. It’s not surprising given that health-care costs currently represent nearly 18% of U.S. gross domestic product, according to the Centers for Medicare and Medicaid Services—a percentage that is rapidly escalating along with an aging population. The political football over who pays and what should be covered is a recipe for gridlock, dampening interest when it comes to funding health-care innovators and creating investor hesitation.

As the world contends with the virus, Covid-19, the spotlight is shining on innovators that are responding to this crisis with advanced diagnostics and accelerated development of vaccines. Technology has evolved at such a rapid pace that vaccine testing and therapies can be created in just a third of the time they were in 2003, during the SARS coronavirus outbreak. Unfortunately, there is nothing like a crisis to raise awareness and create a sense of urgency. Ramped-up government spending to safeguard against diseases such as COVID-19 already is in the works and almost certainly will boost research and development budgets across the health-care sector.

But as we see it, the opportunities in health-care innovation go far beyond a reaction to this immediate crisis. Consider:

  • One third of all initial public offerings in 2019 were biotech/health care-related, a strong indicator of future growth potential. In addition, merger and acquisition activity is expected to accelerate over the next several years, further fueling opportunity.
  • Last year, health-care sector earnings per share grew 9% vs. S&P 500 growth of 1%, and 2020 consensus expectation is for 10% growth, according to J.P. Morgan.
  • If the economy slows or growth expectations decline for the year, as expected, investors likely will look to less cyclically sensitive names in the biotech/health care sectors that possess stable business models and aren’t reliant on GDP growth, oil prices or a favorable political climate.
  • Whether or not the economy is strong, hundreds of millions of people in the U.S. and overseas need a broad range of medications, treatments and medical devices to survive. The innovation in treating and managing diseases such as diabetes and cancer—among so many others—is tremendous and growing.
  • These innovations are not only improving health outcomes, they are also capable of driving down costs. Given that health care is American consumers’ second largest expenditure and possibly biggest worry, that’s a benefit even political rivals can agree upon.

Can sentiment surrounding impacts from Covid-19 become still more negative? Possibly, but we believe that we are approaching a bottom as likely fallout and even worse-case scenarios are widely aired and priced in. And while understandable, disease panics are usually overdone and typically create buying opportunities as they provide justification for more stimulus—either monetary or fiscal.

Even more significant, from our perspective, are the already favorable valuations of many high-quality health-care innovators. Combined with abundant catalysts for growth in the form of new technologies, health care and its biotech subsector potentially are ripe for opportunity as both disruption and increasing global demand take hold. For investors who have avoided this space, it may be time to take another look.

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Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

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Federated Global Investment Management Corp.