Defensive Healthcare Firms Should Hold Up, Relatively
Our base case calls for a strong economic rebound in 2021 following a recession in 2020.
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The concerns around a global recession due to coronavirus disruptions are weighing on global markets, but the defensive nature of healthcare should hold up on a relative basis, and we don’t expect any significant changes to our healthcare moat ratings. While we may make downward adjustments to our valuations in healthcare to account for near-term challenges, we expect more modest changes relative to recent stock price movements. Our base case calls for a strong economic rebound in 2021 following a recession in 2020, which should only have modest impacts to healthcare valuations, given the defensive nature of those companies. However, if the coronavirus pandemic exerts a sustained impact on the economy, with significantly higher numbers of patients unemployed and uninsured or underinsured, this could reduce healthcare demand to a greater extent. We expect government efforts to reduce the near-term hit can keep most of the harder-hit industries in business while effective treatments emerge.
On the near-term effects of coronavirus, we expect critically ill coronavirus patients needing essential medical services and therapies will crowd out more elective procedures, new products, and non-critical-care products. Fewer elective procedures will weigh on the device makers and service providers. Also, higher-than-expected medical costs focused on the COVID-specific cases could reduce profitability for health insurers. With branded drug firms already focused on specialty drugs, we expect less impact to this industry, but drugs administered in the hospital could still feel some crowding out by coronavirus patients. Also, clinical development timelines will probably face some delays due to coronavirus disruptions, which will likely slow some new product launches. Additionally, the coronavirus impact on the credit markets could weigh on more heavily indebted companies, such as some hospital firms and companies that have recently completed major acquisitions.
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