Last night, the large biopharmaceutical company, Gilead Sciences, announced that remdesivir, its antiviral drug for the treatment of patients with COVID-19, was approved by the US Food and Drug Administration (FDA). The drug, to be marketed as Veklury, is the only approved COVID-19 treatment in the US, and will be widely available in hospitals across the country.
This is undoubtedly good news for patients and hospitals, in that it can help patients recover faster and, in turn, helps preserve scarce hospital resources. On the face of it, it should also be good news for Gilead shareholders, and indeed, the stock is up 4% in early trading today.
This does not tell the whole story, however. Today’s move means Gilead shares are essentially unchanged year-to-date, compared to a gain of around 9% for the S&P 500, and the broader global index (MSCI World) up 5%. In fact, Gilead shares are down over 20% since their peak in April 2020, as early optimism for the opportunity for remdesivir has faded.
A similar story has also played out in the race to find a COVID-19 vaccine. Every other day, it seems, we read a news headline highlighting a promising trial, followed by another a few weeks later stating that the same trial has been paused following concerns around patient safety. In addition, even if a vaccine is approved tomorrow, the economic benefit for the successful company will likely be less significant than was previously expected, as many have pledged to offer a vaccine at cost (i.e. not to make a profit).
This highlights the ongoing battle that investors face when appraising drug companies. As we have written about before, the likelihood of bringing a new drug from the lab to a paying customer is about one in 10,000, whilst even predicting how successful a new product will be is also difficult. In our view, to make an investment decision under this cloud of uncertainty is not worth the risk, especially in the case of a COVID-19 vaccine or treatments.
The good news is that there is a more sensible way to play the boom in healthcare spending around COVID-19 – companies that supply diagnostics testing equipment (to tell if someone currently has or previously had the virus) and companies that are powering drug companies to develop treatments and vaccines.
On the testing front, Abbott Labs, a diversified healthcare company, saw demand in its Diagnostics division rise 39% in the third quarter, with COVID-19 testing across several formats contributing almost $900m in revenues in the period (roughly 10% of overall sales).
The global healthcare conglomerate, Danaher, saw organic sales growth of 14%, the majority of which was from COVID-related demand. Its testing business Cepheid grew sales by more than 100%, whilst Cytiva and Pall (businesses that help companies develop vaccines and treatments) achieved sales growth of 35% and 20% respectively. Advance orders for Cytiva and Pall rose a whopping 60%, suggesting further strong sales in the coming quarters.
Thermo Fisher, another leading healthcare supplier and one of our favourite ways to gain exposure to global healthcare, straddles both areas within its Life Sciences Solutions division, which doubled revenues in the third quarter. The company saw increased demand for testing kits, instruments, and reagents for lab-developed tests, as well as revenue from therapy and vaccine production supplies.
Whilst it might be tempting to dismiss these success stories as merely being in the right place at the right time, we think this is a dangerous mistake – After all, this is not the same as selling more toilet paper to desperate shoppers during lockdown. In fact, many of these products have been specifically designed for COVID-19, highlighting the dynamic R&D culture and operational excellence that we admired in these businesses long before the pandemic. We also believe that one of the lasting effects of COVID-19 will be increased spending by drug companies and healthcare systems to be ready in case of a future outbreak. This should bode well for the companies mentioned previously.
If you would like to discuss anything raised in this article in more detail, please don’t hesitate to get in touch.
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