Equity Outlook  |  Q2 2020

Treating COVID-19

Equity Team

Treating COVID-19

Kimberly Smith, Analyst, health care and biotechnology

The vaccine is a long-term solution

A key resource for our in-house research has been the published guidance of Scott Gottlieb, M.D., former U.S. Food and Drug Administration commissioner. We are in agreement with his view that a safe and effective vaccine will not be ready for mass manufacturing in 2020, and perhaps not for two years. As a result, the best near-term solutions are effective therapeutic drugs.

Antivirals: The first wave

On a much faster track than the vaccine are antivirals — drugs that are used to treat people once they've become sick. I expect the initial therapies to provide modest benefits in COVID-19 patients, such as accelerated recovery times and shortened hospitalizations.

According to news releases, the first study in China for one of these antiviral treatments in severe COVID-19 patients did not show a benefit. While more recent data indicate that it may improve time to recovery by approximately 30%, other data sets have been more mixed. It appears this treatment is unlikely to bend the curve enough to allow us to meaningfully reduce social distancing measures. The first large randomized study for another treatment reported mixed results and may only be modestly effective in critically ill COVID-19 patients. There are several studies yet to report through May, and while some may have the potential to help mild to moderate COVID-19 patients, there may be insufficient supply to treat such a large patient population.

Help from recovered patients

Experimental antibody treatments are being used for some of the most severe cases of COVID-19. With this process, blood and serum are taken from patients who have recovered from COVID-19. It is then purified, and the antibodies — which prevent the virus from replicating — are extracted and infused in COVID-19 patients.

We believe neutralizing antibodies have the potential to significantly reduce mortality rates. In my view, one company is in the lead for developing an effective treatment by manufacturing select neutralizing antibodies from recovered COVID-19 patients. The company plans to begin clinical trials in June, and we expect to see initial data over the summer.

William C. Rives, CFA, Portfolio Manager, Analyst

Testing: The big challenge is logistics

The science of creating tests for COVID-19 is not nearly as complex or difficult as developing a vaccine. The technology and capacity to develop tests is in place, but the bigger hurdle today is getting a system in place to conduct mass testing. We do not yet have a central organization directing these efforts, but several effective tests are approved and should become available for everyone who needs them.

"Point-of-care tests now can produce results in under an hour and potentially in just 15 minutes."

Who has the virus and who has recovered?

There are two methods of testing for COVID-19. The PCR test is a molecular test designed to identify viral loads and determine if a person currently has the virus. This is the test we've heard about most in the news, and it has largely been limited to people who are coming into hospitals with symptoms. Many PCR tests are already approved for use, and there is significant manufacturing capacity.

The second type of test, the serological test, looks for antibodies in the blood to detect an immune response and determine if a person has already had the virus. Progress in this area is slightly behind that of PCR testing, as work continues to determine the accuracy of these tests.

"If we manage COVID-19 more effectively, a second wave might be considered a non-event by equity markets."

Speed of PCR results and production are improving

The speed of results and scale of availability continue to improve. Today, there are point-of-care tests available that can produce results in under an hour and potentially in just 15 minutes. Hospital-based PCR tests are being introduced with turnaround times of two to four hours. One company received FDA authorization to send an at-home PCR test and will begin shipping to consumers in the coming weeks. At the same time, the quantity of available tests is growing, and many companies are ramping up capacity.

Within a few months, testing should be much more widespread. Quicker tests will be targeted for healthcare workers and at-risk populations, while the higher throughput tests will be used for the general population. By late April in the United States, an average of 225,000 tests per day were conducted, and this will continue to increase. By June, we may see as many as 500,000 conducted each day.

Testing is key to easing restrictions

Testing results should help authorities determine how aggressively to ease quarantine restrictions and reopen businesses and communities while vaccine development continues. As infections decline and stay-at- home orders are lifted, we are likely to see widespread testing to detect immediately when new clusters of infections emerge. In these areas, measures such as social distancing can be quickly reintroduced to slow the spread. As a result of improved testing, hospitals will be less overwhelmed and patient outcomes should improve considerably.

Testing will play a slightly different, but just as important, role over the longer term. I believe that testing and monitoring of the population will become a permanent part of our new normal. The goal will be to put comprehensive testing procedures in place to prepare for — and ideally prevent — future outbreaks of COVID-19 as well as other viruses.

Michael J. Maguire, CFA, Portfolio Manager, Analyst

The challenges ahead

Among the most frustrating aspects of this crisis is the fact that an "all clear" for COVID-19 depends on a comprehensive vaccination program that is effective and safe. Since this solution is at least one year away, if not two or more, we need to assume for the time being that it does not exist as we try to plan for reopening economies.

On the positive side, if we achieve sufficient hospital capacity, fulfill equipment needs, and create a better mechanism for catching patients earlier in the viral load, we will manage COVID-19 more effectively. If we encounter another wave of infections in the fall, I would be surprised if the mortality rates are anywhere near the levels we have seen with this first wave. In this scenario, a second wave might be considered a non-event by equity markets.

Investment considerations

While the human toll is devastating, businesses are responding. Many recent top-performing stocks represent companies that are creating tests as well as the suppliers to those companies. They should continue to benefit as the number of diagnostic tests conducted globally will be sustainably higher than in the past. We should also see increased spending on medical research, particularly in the area of infectious diseases. This will be beneficial for life sciences companies.

Companies that we believe will be negatively affected are those with leverage and those with elective procedure risk, which refers to the cancellations of procedures that are not considered critical. Since we have entered a recessionary environment, this risk could be with us for some time. In our opinion, the most vulnerable are hospitals, which operate with financial leverage and will be under significant pricing pressure.

Next: A bullish case for emerging markets


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We explore what might lie ahead for the economy and markets, and provide an outlook for COVID-19 treatments.