3 Key Points in Our Outlook for Healthcare

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Damien Conover: We're looking at the healthcare sector today. In the backdrop of a major market pullback due to the coronavirus, I think it's important to note that there are some defensive attributes of healthcare. So while the whole market has come down about 6% over the last 12 months, healthcare's only come down about 3%, and I think that's showing some of the defensive characteristics of healthcare.

I'd like to highlight three key points for our outlook for healthcare. First has to do with the coronavirus, and it has to do with the coronavirus in the near term. In the near term, what we're anticipating is the coronavirus is going to make a lot of people very, very sick. These very sick folks are going to start to crowd out some of the more elective procedures and likely new drug launches that just won't get the attention of doctors or patients. In the near term, the coronavirus will have somewhat of a dampening effect on healthcare overall.

On the long term--so this is the second key point, is the long-term impact of the coronavirus--we anticipate that by 2021 the coronavirus will have receded in its impact and we will start to see growth move back toward normal. We think that's largely due to governments enforcing social distancing, and importantly, new drug and vaccine treatments that will come out that will largely help us put the virus behind us.

The third key point that I think is important to keep in mind when thinking about the healthcare space, is what's happening in the U.S. healthcare policy debate. This has taken a little bit of a backseat to the coronavirus, but it's important. What we've seen lately is that it's very likely that the Democratic nominee for president will be Joe Biden, and he brings a much more moderate approach to reform in healthcare. We think that'll likely help the managed care organizations and the drug manufacturers, which have been under some pressure over concerns about major policy reform.

In aggregate, we see the healthcare group undervalued by close to 15%, with the drug manufacturers representing the most undervalued industry within the healthcare sector. A couple of names that we think are significantly undervalued are Pfizer, very diversified, should be able to weather the storm of the coronavirus. Roche, similarly to Pfizer, has a lot of diversification in areas of unmet medical need, which should hold up particularly well. Lastly, BioMarin also looks significantly undervalued, and this is a company focused on rare diseases which, again, should hold up very well.

In aggregate, while there have been some pressures from the coronavirus, we think that these pressures will be more mild over the long term, and we anticipate the U.S. policy environment to be less critical toward the drug manufacturers and managed care organizations. In aggregate, we see healthcare undervalued, with the drug manufacturers as the most undervalued industry within the group.