Health Stocks May Offer Shelter for Investors in Virus Meltdown

(Bloomberg) -- Health-care analysts see several places for investors to hide from the fallout of the spreading coronavirus.

Shares of U.S. drugmakers and diagnostic companies have outperformed amid hope for a means to combat the virus and the need for tests to diagnose it. Analysts also see some opportunities among medical device stocks, and managed-care specialists expect only a modest impact on the sector barring a “full-blown pandemic.”

Medical Device Firms

What’s happened: The sell-off in U.S. medical technology firms has largely mirrored the drop across U.S. markets. The iShares U.S. Medical Devices exchange-traded fund has fallen more than 15% since the middle of February, compared to the S&P 500’s 17% drop.

Street says: Analysts fear that should an outbreak spread domestically, some patients may cancel or delay elective procedures. Jefferies advised investors look for long-term companies that have little to no exposure in China, arguing that the potential impact to supply chains show companies are “not out of the woods.” In a note last week Wells Fargo analysts pointed to Baxter International Inc., Becton Dickinson and Co., Cooper Cos., Johnson & Johnson, Novocure Ltd, and Penumbra Inc. among the firms likely to “better weather the spread of coronavirus.”

Diagnostics and Services

What’s happened: Diagnostic companies have been under pressure, although to a lesser degree than the broader market. Firms that have touted coronavirus tests like Quest Diagnostics Inc. and Laboratory Corp. of America Holdings have withstood downward market pressure while smaller peers like Co-Diagnostics Inc. and Opko Health Inc. have seen investors rush in driven by hopes that they would benefit from potential mass testing.

Street says: Evercore ISI said companies like Quest and LabCorp may benefit from testing demand but that could be offset by fewer visits for unrelated routine and elective care. Jared Holz, a health-care trading specialist at Jefferies, expressed caution on toolmakers and pointed to impacts related to slowing demand in China.

Managed Care

What’s happened: The sector has been among the few bright spots for health care amid optimism that Joe Biden’s rise in the Democratic presidential primary could stifle Bernie Sanders’s Medicare for All plan.

Street says: Jefferies analysts wrote Friday that “outside of a full-blown pandemic, the net impact of Covid should be fairly modest as demand for most services is likely to shift out to later months.” Analysts are divided on whether a potential increase in doctor visits will offset the slowdown in elective surgeries. Hospitals also are considered unlikely to see a boost in emergency room visits, although shortages of supplies could drive a bottleneck in procedures in the near term, Jefferies said.

Home Health & Health IT

What’s happened: Shares of Teladoc Health Inc. have outperformed on expectations that telehealth visits will spike with increased social distancing to prevent the spread of coronavirus.

Street says: Firms positioned to benefit from the potential spread of Covid-19 include Amedisys Inc. and other providers of home health, Benchmark analyst Bill Sutherland said in an earlier upgrade. Addus HomeCare Corp., Encompass Health Corp. and LHC Group Inc. are among other names Wall Street pointed to as potential beneficiaries.

Pharmaceutical Companies

What’s happened: Drugmakers have fallen less than the broader market as investors took shelter in their strong balance sheets and notably high dividends.

Street says: Analysts have been on the lookout for potential drug shortages amid export restrictions in China and India. Many companies have broadly shrugged off these concerns, and JPMorgan analysts wrote on Monday that demand for prescription medications is “fairly inelastic.”

Biotechnology

What’s happened: Biotechnology has been among the most volatile groups as companies pursuing vaccines or drugs to combat the virus have surged while markets tumbled, including Inovio Pharmaceuticals Inc, Novavax Inc., Regeneron Pharmaceuticals Inc. and Gilead Sciences Inc. Small-cap companies like Trillium Therapeutics Inc. have also gotten a lift from Gilead’s deal to buy Forty Seven Inc. last week.

Street says: Results from Gilead’s coronavirus drug candidate are expected in April, which should provide a catalyst for other companies hunting treatments. Jefferies’s Holz advised investors to look at small-caps studying drugs instead of Gilead, which has “been overly rewarded.” “Supply concerns, though quieter for now, certainly remain,” Baird analysts wrote on Friday. Amgen Inc., Biogen Inc. and Regeneron all have drugs that could get pressured from impacts to the supply chain. Drug sales could also be hurt if patients forgo medicine refills to save money or avoid pharmacy trips.

To contact the reporter on this story: Bailey Lipschultz in New York at blipschultz@bloomberg.net

To contact the editors responsible for this story: Catherine Larkin at clarkin4@bloomberg.net, Cristin Flanagan

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