The coronavirus outbreak and the effects of COVID-19 have gone deeper and wider than most people would have expected. That applies just as much to markets as anywhere. Whether it’s a tech sector that is supporting our new work from home or re-rating as expensive EV/Sales multiples make less sense; a healthcare industry under the spotlight to find a vaccine, a cure, or provide treatment to patients; or various parts of the financial sector that have shown acute strain as the economy goes into the freezer for a few weeks, at least, there are no real safe havens or quiet zones.
Healthcare is most obviously implicated by the fight to contain the outbreak and treat people who have COVID-19. The industry has long attracted investors who believe in the gamechanging nature of new treatments, but has also drawn criticism from those who believe the industry’s practices are exploitative. A pandemic makes the ‘you see who’s swimming naked when the tide goes out’ saying feel quaint for the sector, and it has certainly been a gutcheck for all involved. So where do biotech and healthcare firms go from here, and what should we all know about potential cures and treatments?
We posed those questions to a group of Marketplace authors who cover different parts of the sector. Our panel features:
What do you make of potential treatments for COVID-19, in terms of their viability, when they might get to market, and whether there is any commercial potential around them?
Bret Jensen, author of The Biotech Forum: I think remdesivir by Gilead Sciences (GILD) is likely to be the first new drug to be approved to treat COVID-19 and May seems like the right time line for that to get the ‘thumbs up’ from the FDA who is doing a great job expediting approval of new COVID-19 tests and speeding up development timelines to combat this outbreak. Regeneron (REGN) and Sanofi (SNY) are testing a promising RA drug called Kevzara. Hopefully, we also see some positive results from using existing anti-malaria drug hydroxychloroquine in a two-drug combo pack. This just started to be used heavily in NYC on March 24th.
Bhavneesh Sharma, author of Vasuda Healthcare Analytics: The treatment under development that I expect to get to the market the fastest is Gilead’s remdesivir. I am however skeptical about a significant upside for Gilead’s stock from this level considering the efficacy shown by off label therapies like a combination of hydroxychloroquine, azithromycin, and zinc in treating COVID-19.
Chris Lau, author of DIY Value Investing: Dr. Anthony Fauci, director of the National Institute of Allergy and Infectious Diseases since 1984, did not expect any new treatments for this round of the pandemic. Investors should exercise care buying speculative stocks. Despite the risks, DIY marketplace guide users buying CytoDyn (OTCQB:CYDY) did well. Conservative investors may bet on Gilead’s Remdesivir that has a good chance of success.
Terry Chrisomalis, author of Biotech Analysis Central: Doctors are already prescribing hydroxychloroquine plus azithromycin to potentially help severely ill COVID-19 patients. Matter of fact, the FDA has already approved hydroxychloroquine for emergency use for these patients. The reason why this drug is good for COVID-19 is because it provides the ability to inhibit immune response. That’s important, because COVID-19 causes acute respiratory distress syndrome or ARDS, because a patient’s immune response is severe against the lungs. That causes the air sacs or alveolus of the lungs to flood with fluid and it becomes hard for oxygen to be delivered to red blood cells. Another belief is that hydroxychloroquine also inhibits viral replication as well. Azithromycin is believed to help with pneumonia.
As far as potential treatments in development, I believe that Gilead’s remdesivir may potentially offer some therapeutic benefit. That’s because this drug is a nucleotide analog which blocks a particular enzyme that is required for viral replication. Hydroxychloroquine has already been approved by the FDA for emergency use. Remdesivir may also get the greenlight for use, should several studies to be reported in the coming weeks turn out with positive data. As far as vaccines go, it will be roughly 12 to 18 months. That’s because it will take time to randomize several hundred patients and then test safety and efficacy. Especially, if you want to make sure that there are no long-term negative side effects. Plus, you have to be able to produce millions of doses, which may take some time to ramp up. As far as profitability may go, it is likely that a good amount of revenue will be made, but that depends where it is priced at. In addition, it depends on the seasonality of this virus also.
Avisol Capital Partners, author of The Total Pharma Tracker: Three approaches – vaccines, antivirals, symptomatic, mainly late-stage acute respiratory distress syndrome (ARDS). Multiple approaches within antivirals and symptomatic as well. No science expert should be comfortable discussing viability of preclinical medicine. Emergency approvals may see some meds in market by end-2020. Some commercial potential, but more important is the spike in stocks working in the area purely out of market sentiment.
BioSci Capital Partners, author of Integrated BioSci Investing: There are a lot of companies making vaccines and antivirals for COVID-19. Due to the robust demand and lower regulatory hurdle for Coronavirus, I expect both antiviral and vaccine to come out before year-end.
The consensus timeline for a vaccine seems to be no earlier than September 2021. What are you watching for as interim steps?
Bret Jensen: Given dozens of drug makers are pursuing a vaccine for COVID-19 there will continue to be a flood of news on numerous names on a weekly basis. I am not watching any particular concern that closely, therefore. I am concentrating on firms that are testing drugs to reverse worst symptoms of the virus (above) and when/how the economy will restart, particularly in large states like Texas and Florida that are seeing few fatalities/confirmed cases compared to states like New York, New Jersey and Washington.
Bhavneesh Sharma: Moderna (MRNA) is my best pick for COVID-19 vaccine considering their mRNA platform and early efficacy. They have already started dosing patients and expect the vaccine to be available for high-risk people like healthcare workers in the Fall this year. I believe that an effective vaccine against this virus is a must as soon as possible since reinfection has been reported in improved cases from China and epidemiologists are suggesting that the virus could mutate and re-surge in the Fall even if social distancing measures are able to contain it in the short term.
Chris Lau: Our DIY Top Idea Holdings include Moderna. The flood of money into vaccine developers will offset the drop in our other value investing ideas.
Terry Chrisomalis: In terms of what may be achieved in the short-term is evidence that a therapeutic or vaccine has a pronounced effect compared to placebo. I believe that if a vaccine does report on highly positive interim data for COVID-19, it may produce the potential for talks with the FDA and possibly ultimately an emergency use.
Avisol Capital Partners: I am watching remdesivir data from Gilead, Inovio’s (INO) INO-4700 which had good response against MERS-COV, Novavax (NVAX) MERS vaccine, BioCryst’s (BCRX) galidesivir, an advanced nucleoside RNA polymerase inhibitor, Moderna vaccine phase 1 trial that has already begun in healthy volunteers. These are some of the strongest candidates.
BioSci Capital Partners: At least September sounds like a good time line.
How do you think hospitals are holding up amidst the pandemic, and what does that portend for their future?
Bret Jensen: Hopefully we learn the lesson this time around that we should have learned after the Swine Flu panic of 2009/2010 like South Korea did with SARS several years later. We need to store medical equipment in various regions in the country like ventilators. That should make it easier to forward deploy this needed equipment for other potential pandemics in the future. We also need to build up testing capacity so we know the true extent of impacts much earlier in the cycle next time so we can avoid nationwide lockdowns and the extreme economic impacts next time around. Being better able to move needed resources (doctors, nurses, hospital ships, etc.) quickly from relatively non impacted regions to more impacted areas also is an area in need of improvement.
Bhavneesh Sharma: Hospitals in hard-hit areas like New York City are like war zones from the experiences shared by ex-colleagues. Mostly, large hospital EDs and ICUs are well equipped to handle emergencies like a large trauma. Hospitals are however expected to increase their supply of protective equipment like masks and gowns as well as ventilators to prepare for a resurge of the virus in the Fall. Companies like 3M (MMM), Alpha Pro Tech (APT) (protective equipment) and Ford (F) and GM (who were picked by the Federal government to produce ventilators) are likely to benefit.
Chris Lau: The US medical system cannot handle the pandemic if it gets out of control. No system in the world can. Germany’s hospitals did, helped by low virus spreads.
Terry Chrisomalis: Hospitals are doing the best they can, with the equipment on hand. There definitely will be a shortage in several hospitals for personal protective equipment and ventilators. It is highly likely that the healthcare system will be slammed for many months and it may mean lighter foot traffic for other illnesses. In cases of emergency, patients will still have to be separated and it is likely that Hospitals will need to boost hiring to handle additional work that will become necessary. That in turn means they will need a lot of cash to restructure their operations for the foreseeable future.
Avisol Capital Partners: The situation here in India is different from what’s happening in the US. Despite the negative media portrayal, you will be surprised by the inexpensive efficiency of India’s welfare healthcare system for the poor. However, my doctor friends are reporting long lines of patients, coughing and showing other symptoms of viral infection, no social distance being maintained mainly because of the immensely crowded nature of the government-run hospitals here. This is not good. In the US, a grim situation is developing in cities like New York. The US does not have a navy medical ship to take in non-coronavirus patients for each of its 30+ large cities. If this spreads, our only hope is immunity, and the fact that, by and large, symptoms in the otherwise healthy patients are mild.
BioSci Capital Partners: COVID-19 puts tremendous strains on hospitals in the US. They’re not equipped to deal with this Coronavirus pandemic. Now hospitals don’t have to be ready. But they’ll get through it by being adaptable and resourceful. In the future, they’ll be more prepared. After all, there is no better teacher than experience itself.
Likewise, what do you make of the impact on the insurance industry, both as a short-term source of costs and what it might say for the longer-term shape of healthcare in the US?
Bret Jensen: I think the insurance industry should weather this pandemic in decent shape. Given extraordinary measures taken at local, state and Federal level, I continue to think final death toll will be between that of the Swine Flu (approximately 12,500) and the horrid 2018 flu season (around 80,000 Americans). Measures in the stimulus package should also provide a ton of funding for hospitals to offset costs. As for the longer term future for insurance/healthcare, that to a large extent depends on the outcome of the elections in November which no one can have a good handle on at this point given the extreme uncertainty in the economy and markets. Not to mention the complete dysfunction of our political system at the moment.
Chris Lau: Cigna (CI) is waving out-of-pocket expenses related to COVID-19 testing and UnitedHealth (UNH) unveiled self-administered tests. This may earn both firms some goodwill and help grow its business.
Terry Chrisomalis: In the short term, I expect that many insurance companies will likely change rules to accommodate the surge of patients they will have to pay for as far emergencies go. It shouldn’t happen, but it’s likely that costs may go up for some insurance plans of individual patients. Long term, I believe that things will settle down. However, this likely may not happen until next year in 2021. There are some generous insurance companies, which may go for a campaign and champion the fight against COVID-19. For instance, Aetna, Cigna (CI), and Humana (NYSE:HUM) are waiving portion of a patient’s fees if treated for this virus. That is, patients won’t have to pay the full cost of their deductible before the insurance company kicks in to cover the costs. This depends upon if the patient qualifies and may end up still have to pay a smaller portion. Hopefully, more is done to help these patients who suffer with COVID-19 in the emergency room.
BioSci Capital Partners: COVID-19 exerts huge pressure on the insurance industry. Costs will skyrocket. And though I’m not exactly sure what they’ll do, insurance companies will adjust their policy to be better prepared for unforeseen catastrophe.
Are there any trends emerging in this period that you think might stick, for better or for worse? (Adoption of telemedicine and impact on elective surgeries come to mind as examples).
Bret Jensen: The migration to a more virtual work environment which has been underway for a long time definitely was accelerated by this crisis. Companies that provide services for virtual work and consumer services such as Teladoc Health (TDOC) or Dropbox (DBX) will see their business models enhanced. The outlook for commercial real estate especially in the office sector has definitely been dimmed.
Bhavneesh Sharma: Teladoc is a telemedicine company which is likely to benefit from increased use of telemedicine for consultation in remote areas.
Chris Lau: Followers who bought Teladoc upon my recommendation did well. Telemedicine channels may grow to alleviate the current congestion in the healthcare system.
Terry Chrisomalis: During this COVID-19 period that is ongoing, it has really put a shift to telemedicine. I believe that this will stick, because of the obvious convenience that has been developed. For instance, telemedicine ends up being cheaper for the patient in terms of costs. On top of that, there is no need to drive several hours to a medical center. Lastly, I think it should be adopted more. That’s because it no longer puts patients at risk that doesn’t have a medical emergency. For non-emergency items, telemedicine could allow a Doctor to review old charts, determine symptoms the patients experiencing and then recommend if they should come in. This avoids going to the Hospital to potentially catch a virus or bacterial infection. I think this will have a long-lasting effect as people shift to this type of virtual environment. Elective surgeries may change in terms of when they should be scheduled. Possibly in another part of the Hospital. However, that may cause an impact on scheduling. Meaning patients may have to wait for longer periods of time just to get an elective surgery completed.
BioSci Capital Partners: Even without Coronavirus, telemedicine plays an increasingly important role in US healthcare. The current situation is like a magnet gravitating us toward telemedicine. That aside, the timeless wisdom of buying and holding stocks at depressed bargain works in the long term. And that’s how I base my core investing strategy.
What has changed about how you look at your portfolio of healthcare and biotech stocks?
Jonathan Faison, author of ROTY: We’ve chosen to re-emphasize our focus on quality over quantity, sticking with just a few names that have significant derisking and downside cushion along with multiple value drivers playing out this year. It’s important to have enough cash/dry powder to sleep well at night and also to be ready to take advantage of opportunities that present themselves. Avoid overtrading or investing in mediocre ideas simply because you want to put cash to work- wait patiently for the right pitches to swing at.
Bret Jensen: In this sort of ‘risk off’ environment with such volatility in the credit markets, one definitely has to be more selective in these sectors. I am primarily investing in names via buy-write option strategies in concerns with the following criteria a) The company must be profitable or on its way to profitability. b) Given the turmoil in the credit markets, I don’t want to add to names that might need to raise additional funding in the foreseeable future. Therefore, I am targeting companies with a lot of cash/or no need for it. c) I want stocks whose options are liquid with low bid/ask spreads, so any buy-write or covered call orders I place is filled quickly.
Chris Lau: Although our biotechnology top idea stocks are lower, the DIY Value investor will buy on the dip and hold them for the long term. Their fundamentals are no different than before. For example, I hold Innoviva (INVA) and am watching Theravance Biopharma (TBPH).
Terry Chrisomalis: I have kept my biotech positions for the long term. That’s because I have invested based on a long-term horizon. By that I’m talking about biotech stocks that have proof of concept data with certain drugs and several shots on goal. In the short term they will be beaten down, but the basis is on the long-term potential. That is, when they reach phase 3 studies and could ultimately be approved by the FDA. Matter of fact, this environment has created a lot of buying opportunities for biotechs that have been beaten down for no reason other than the global markets falling on COVID-19. Eventually, the projected curve for COVID-19 should start to drop off. It may not happen immediately, but that may signal a quick turnaround in the biotech sector. Such a turnaround could happen faster if a potential “cure” or significant treatment for COVID-19 is ultimately released. Bottom-line I haven’t changed any of my long-term biotech holdings.
Avisol Capital Partners: Coronavirus has forced me to completely stop investing in mid-term opportunities. Either I am very long on fundamentally sound biostocks, or I am in a trading mode for stocks showing stable daily trends on a weekly basis. I have no illusion of buying stocks with a 3-6 month term catalyst down the line, and being able to predict with any degree of confidence how things will turn out. Therefore my latest buy suggestions to my subscribers are geared towards long-term stocks. I don’t usually suggest trades.
BioSci Capital Partners: Sir John Templeton said, “Bull markets are born on pessimism, grown on skepticism, mature on optimism and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.”
Due to the extreme pessimism toward biotech stocks, they are trading at dimes for a dollar. As such, they present as highly promising long-term investments. If you average down on these stocks, you can make a lot of money at the next bull market.
What characteristics are you looking for in potential winners going forward?
Jonathan Faison: Stocks with “needle-moving” catalysts in the near term (typically in the form of important data readouts) and those with a steady stream of material events throughout the year that appear unaffected by the COVID-19 pandemic.
Bhavneesh Sharma: I am looking at adding to the biotech companies which are leaders in their fields with little competition and have catalysts like data releases within the next 12 months. Areas like cell therapy in immuno-oncology and gene editing are my top interests.
Chris Lau: Moderna has institutional support and several quarters’ worth of cash on hand. It is a potential winner. Regeneron is cash flow rich and is a winner in the COVID-19 drug development space. Inovio is a potential winner but the stock appears to appeal to traders.
Terry Chrisomalis: In terms of potential winners, I’m looking for biotechs that have already achieved proof of concept in mid-stage studies. That, along with promising technologies that could shift the landscape in several sectors like oncology or metabolic disorders. Especially now, with this global pandemic occurring, there are many beaten down biotechs that have promising pipelines with multiple shots on goal.
Avisol Capital Partners: Fundamentally, lots of cash and a good revenue stream coupled with lower-than-usual prices. Medically, stocks that are using the virus as an opportunity, or stocks that are focused on serious orphan drugs, or, in general, stocks with a non-divisive competitive space. My risk-averseness has increased considerably. I wouldn’t invest in stocks with a high risk potential, whatever the allure.
BioSci Capital Partners: A potential winner needs to satisfy my 3 M: Management, Market, and Money.
Any specific stocks you like in this climate, and what’s the story?
Jonathan Faison: Trillium Therapeutics (TRIL) continues to be a high conviction idea for us. Our thesis is as follows: Trillium Therapeutics – Full Size Position (Achieved maximum weighting on March 12th and again on the 20th). I continue to believe that this CD47 player is significantly undervalued (consider that Forty Seven was acquired by Gilead for $4.9 billion). New CEO Jan Skvarka hails from Bain Capital and has moved quickly to streamline activity in the clinic and reduce cash burn. TTI-621 is the only anti-CD47 agent to show meaningful single agent activity including complete responses, and revised trial protocol has allowed for use of increased doses with no DLTs (dose limiting toxicities) observed so far. TTI-622 also looks intriguing, as it’s intended for use in combination studies and just like the first asset doesn’t have anemia issues that magrolimab is known for. Interestingly enough, it now appears that TTI-622 has activity as a monotherapy as well! Data updates for both assets midyear (likely ASCO or EHA) are key catalysts for us to look forward to, followed by initiation of combination studies. Lastly, Forty Seven’s magrolimab produced impressive responses in AML and MDS patients at ASH (doubled response rates of standard of care), and updated data (durability, overall survival) in 2020 should prove a potent catalyst (TRIL to benefit as a sympathy play). As member Biotech Phoenix pointed out, anti-CD47 agents could address cancers where checkpoint inhibitors haven’t worked and even more exciting is the idea of engaging both t-cells and macrophages to get better responses. Optimism is justified, but keep in mind the field is still in early stages and updated data sets are necessary before conclusions can be drawn. Time Frame For Upside = 6 to 12 months as we await midyear updates for both lead programs (Catalyst & Revaluation Idea).
Bret Jensen: Based on the criteria laid out above names like Alexion Pharmaceuticals (ALXN), BioDelivery Sciences (BDSI), Exelixis (EXEL), Amicus Therapeutics (FOLD) and Gilead Sciences all make great sense for covered call candidates. With volatility spiking, buy-write strategies using just out of the money long dated call strikes provide much more downside protection and significant greater potential returns than when the VIX is trading in a more normal range. We try to outline one covered call strategy in depth at the Biotech Forum every week and also talk about others every day on Live Chat.
Bhavneesh Sharma: Fate Therapeutics (FATE) based in La Jolla, California is focused on developing off-the-shelf cellular immunotherapies (both NK cells and T cells) for cancers and immune disorders. It is a leader in iPSC derived off-the-shelf cell therapies which are expected to have advantages like lower cost and faster manufacturing compared to the currently approved CAR-T therapies. The company has several data releases from ongoing clinical programs over the next 12 months. The stock is up >30% since bottoming two weeks back and trades at a significant discount to recent cancer therapy acquisitions like KITE (acquired for $12 billion) and JUNO (acquired for $9 billion), despite the potential for broader application, better safety and better efficacy due to repeated dosing.
Chris Lau: I especially like Regeneron for its revenue growth from its current product line-up. I was bearish on Pfizer (NYSE:PFE) but am hopeful it develops a treatment for COVID-19. I am disappointed that AbbVie (ABBV) is out of the race with its small lopinavir/ritonavir study.
Terry Chrisomalis: I like Advaxis, Inc. (ADXS) in this climate, because of its long-term potential. It has been beaten down due to the global pandemic of COVID-19, but I believe it has several prospects that could quickly turn things around if one can weather though these global markets. Specifically, I’m intrigued by the ADXS-PSA drug which is combined with Keytruda. That’s because this combination regimen has already delivered solid proof of concept in treating patients with metastatic castration-resistant prostate cancer. It delivered a median overall survival of 33.7 months in this patient population. The median overall survival in patients with visceral metastasis was 16.4 months for those taking ADXS-PSA, which is very good since SOC only provides mOS of only 11 months. This product is already partnered with Merck (NYSE:MRK) and Advaxis is expected to announce its plans for next steps of this program in the 1st half of 2020. Advaxis also delivered good preliminary data in 2 patients with ADXS-503 HOT + Keytruda treating patients with non-small cell lung cancer.
There is another HOT product in development known as ADXS-504, which is also in development for patients with prostate cancer. This drug is expected to reach the clinic in the 2nd half of 2020. The bottom-line is that several of these studies have shown that Advaxis’ Lm technology platform products, like ADXS-PSA and ADXS-503 restore sensitivity to checkpoint inhibitors. In essence, these products boost the potential that Keytruda already provides on its own as a monotherapy. My case for investment in Advaxis is in the potential of its drugs boosting the effects of Keytruda in two large multi-billion dollar markets. Both of these markets being prostate cancer and lung cancer. Especially for the non-small cell lung cancer market, where Merck pretty much dominates in with Keytruda.
Avisol Capital Partners: I would buy Amarin (AMRN) at $5 any day. They just lost a generic lawsuit they shouldn’t have, and tanked from $17 to $5. Everything indicates that they will a) prevail on appeal over a procedural error, and/or b) block generic competition in other market-related ways. The other group of stocks I like are the coronavirus stocks – NVAX, INO, MRNA, BCRX, GILD even. But these are not long-term likings – not all of them.
BioSci Capital Partners: I like Fonar Corporation (FONR). The company operates a highly successful diagnostic management business. This Coronavirus bear market pushed valuation to a depressed level, which makes it a highly enticing bet for value and growth investors.
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Thanks to our panel for their insight on where the biotech and healthcare sector is going. Check out their work at the links above.
We are continuing this series tomorrow with a look at the tech sector, and have planned roundtables coming on the macro climate, the market outlook, shortselling, fixed income, global stocks, and dividend investing. Any other requested topics? Let us know.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Jonathan Faison is long TRIL:
Bret Jensen is long ALXN, BDSI, EXEL, FOLD, and GILD.
Bhavneesh Sharma is long FATE.
Chris Lau is long INVA.
Terry Chrisomalis is long ADXS.
Avisol Capital Partners is long AMRN.
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