As a result of the corona crisis, investors suddenly look at healthcare companies very differently. ‘The pandemic has changed the perception of the sector in the eyes of the outside world,› says Lydia Haueter, manager of the Pictet Biotech Fund.
Since 2015, when [then presidential candidate] Hillary Clinton tweeted about what she thought were too high prices charged by manufacturers for their medicines, the sector had been under pressure. Until the end of last year, pharma companies were underperforming the market as governments exerted increasing pressure on medicine producers to lower their prices.
The coronavirus outbreak radically changed this: pharma companies are now at the top of investors› buy lists. ‘Companies that were condemned until very recently have suddenly become popular,› notes Haueter. ‘But in order to maintain that popularity, they must continue to behave. Pharma companies cannot afford to make big profits on the sales of for example vaccines in the future. They are being closely watched by society.’
Affordability of medicines is one of four criteria that Haueter and her colleagues use in assessing attractiveness. ‘In addition, we look at the medical necessity of a medicine, its efficacy, and its competitive position. The question is whether it is a unique drug or whether there is a lot of competition. We then add up all the scores of the individual drugs that a company puts on the market. We want to include the companies with the highest weighted average scores in our portfolio,› explains Haueter.
Hype
A vaccine or drug against Covid-19 does not necessarily give a company a high score. For example, there are currently more than eighty development paths for a Covid-19 vaccine. So there is a lot of competition between them. ‘Of these eighty, at most a few will be successful and developed further,› says Haueter.
Despite of this, companies developing coronavirus drugs or vaccines are incredibly popular with investors. ‘Any company that announces that they are working on something related to Covid-19 will immediately receive a few billion dollars in market cap. Some biotech companies have extremely high valuations, often based purely on headlines related to Covid-19.’
Remdesivir
Gilead Sciences is such a company. In the past few weeks, its share price spiked several times after President Trump once more recommended the drug remdesivir as an effective treatment against the coronavirus. Haueter: ‹But remdesivir does not cure the disease. It shortens the duration of treatment by no more than 30%. So we took profit each time the share rallied.’
However, there are also companies that are already really benefiting from the coronavirus. Like the Swiss company Roche, the largest producer of coronavirus test kits. Roche’s price has risen by almost a third in two months, and is now at a record high. And Haueter believes the stock has ‘further to go’. After all, the demand for corona tests is likely to remain high for years to come.
Roche is the largest single holding of the Pictet Health fund, Pictet’s other thematic fund that focuses on health, in addition to the Biotech fund. According to Haueter, the two funds have a ‹small overlap›, because the Health fund invests much more broadly in the theme of ‹health›. For example, it also focuses on prevention and invests in providers of medical devices. For example Unilever, which sells healthy food as well as Magnum ice cream, is included in its portfolio as well.
The Biotech fund only invests in companies that develop medicines. The boundary between biotech companies and pharma (in which Pictet Health invests) is blurry, Haueter admits. ‘Biotech companies, which are mainly listed in the US, are more niche companies that specialise in one particular area. The classic pharmaceutical companies (such as Roche, Pfizer, Novo Nordisk, Glaxo Smith Kline and Sanofi) are generally much more broadly oriented, although there is also a movement towards more specialisation among these companies. So you can’t really draw a clear line between biotech and pharma›. This is the area where the overlap (currently 10-15%) between the two funds’ portfolios is found.
Both Pictet Biotech and Pictet Health have outperformed the market this year, but the difference in performance between the two funds is nevertheless significant (see chart). The Biotech fund is one of few investment funds that have achieved a positive return so far this year, thanks to the corona effect.
Healthy rally
In fact though, the current biotech rally already started at the end of last year, with just a brief intermezzo in February and March due to the virus outbreak. It’s a rally that, according to Haueter, is largely driven by the same factors as the one between 2013 and 2015, which the infamous Hillary tweet ended abruptly.
‘The previous rally was driven by the successful launch of a small number of drugs. I now see something similar happening with the launch of potential blockbuster drugs, for example in the field of gene and sickle cell therapy,› she says. ‘For the biotech sector, it’s ultimately about scientific progress. What now happens in the field of gene therapy, for example, could lead to a sustainable rally of the biotech sector, similar to what we saw between 2013 and 2015. The inflow into our funds in recent months is also comparable to the previous rally.’
The Health fund invests only a quarter of its portfolio in pharma companies. Other investments of the fund have in fact been negatively affected by the coronavirus crisis, so this year the fund is down by 7%. Haueter explains that this applies, for example, to companies that manufacture medical devices that are used for non-essential operations. They have seen their revenues fall sharply. ‘The question is how long it will take for hospitals to return to normal, for example. The market currently expects this to be the case again by the end of the year.’