Polar Capital's Douglas 'optimistic' on defensive healthcare
Eye on large-cap pharma and biotech
Defensive areas within healthcare provide nuggets of optimism, with large-cap pharmaceuticals and large-cap biotechnology particularly favoured, Polar Capital has said.
James Douglas, fund manager within the global healthcare team, said large-cap pharma and biotech have collective strong balance sheets, good cashflow conversation and secure dividend yields, where applicable.
He said areas where "sentiment collapsed" during March included medical devices and healthcare facilities due to the delays in non-urgent procedures at hospitals. Small and mid-caps were also hit hard due to perceived higher risk.
Douglas said: "On a one and three-year view, areas hit hardest with the worst sentiment offer compelling returns.
"Assuming some kind of resumption to normality over those timeframes, medical devices, healthcare facilities and small/mid-cap stocks in areas such as biotech, screen as highly compelling."
Pharmaceuticals and biotechnology
Douglas explained that with no significant supply-chain issues at this point in time, pharmaceutical and large-cap biotech companies should be able to display "defensive, operational characteristics through the Covid-19 crisis".
He said: "Patients that require lifesaving medications will likely find a way of getting what they need. Indeed, in the very short term, there could be an increase in volumes as physicians write prescriptions for longer periods, saving patients travel time and minimising the time they have to be away from home.
"If true, this trend could reveal itself during the Q1 2020 earnings season for the drug manufacturers and distributors who have been stockpiling."
However, he added a couple of notes of caution: "First, new drug launches may be temporarily disrupted with sales reps sitting at home instead of interacting with prescribing physicians, and second, clinical trials will be disrupted if trial sites become inaccessible and/or patient recruitment becomes challenging."
Medical devices
Douglas said: "The near-term implications are material in that elective or non-urgent procedures are being postponed or cancelled, freeing up much-needed capacity for Covid-19 patients.
"Further, healthcare facilities' attitudes towards capital expenditure may be altered in the near term given they are also coming under Covid-19-related pressure."
He added: "The big question is one of the depth and length of the trough given H1 2020, and indeed FY20, will clearly be challenged. It is worth noting that several medical device companies have pulled Q1 2020 and FY20 financial guidance.
"There is absolutely no doubt that the demand for services will resume, it is the shape of the recovery curve that is uncertain."
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