Fund manager & scientist: the global healthcare crisis explained, March 2020

Donning first his fund manager hat, and then his scientist hat, Dr Dan Mahoney, co-head of the Polar Capital Global Healthcare team, talks to us about the global healthcare crisis.

Dan Mahoney joined Polar Capital to set up the Healthcare team in 2007. Prior to joining Polar Capital, he was head of the European healthcare research team at Morgan Stanley and worked in New York for ING Barings Furman Selz following the US biotechnology sector. Before working in the investment industry, Dan worked as a research scientist for seven years, with the majority of his time at Schering Plough Corporation in California. He has a BA (1st Class Hons) in Biochemistry from the University of Oxford and a PhD in Developmental Biology from the University of Cambridge.

Dan Mahoney, the fund manager

What is your view on the healthcare sector right now?

“Having experienced the 2008/2009 global financial crisis, I didn’t think I would see stock market moves like this again in my career. But I was as guilty as everyone else of underestimating the impact of the Coronavirus back in January: we now have a global healthcare crisis.

“Stocks have had a ‘waterfall’ crash. So, as a team, we’ve been thinking about how we position our funds going forward.

“Big pharmaceutical companies tend to be defensive in nature. For example, the sellers of insulin and cancer drugs hold up because people simply cannot go without them.

“Other healthcare companies are more cyclical – for instance, demand for Botox may fall for a while. And others supply products or services for elective, rather than critical, requirements – like hip and knee replacements. Although ultimately still required, these operations could be put off for a time, and beds used for patients with the Coronavirus or other urgent needs instead.

“So, if exposed to these less crucial areas, businesses could be hit. But the larger companies have diversified portfolios, so even if one part of the business struggles, there will be others that do ok.

“There will also be opportunities. China has managed to slow the infection rate and is ‘reopening’. Companies with decent exposure to China could therefore have a good second quarter – companies like AstraZeneca, possibly, which has 20% of its sales from the country.

“The other thing to remember about healthcare today – the big blue chips at least - is that there is also very little debt on balance sheets. This means they are less likely to go bankrupt in a downturn (unless there is a product recall) and they can still pay a good dividend.”

Dan Mahoney, the scientist

Will the sector be able to come up with a vaccine or a cure?

“There have been some stunning advances and the pace of innovation is huge – what takes three weeks today, took three years a couple of decades ago. However, getting a vaccine quickly seems unlikely.

Very simply, think of the Coronavirus as a plastic bag, with lollypops sticking out - each one a different shape. Vaccines work by taking some protein from a lollypop and putting it in the immune system. Our body recognises the protein and fights it. But the body finds it hard to recognise so many different shapes of lollypop protein.

With the Coronavirus there seems to be two stages: the first is like flu, which is all most people get. The second, for some, is viral pneumonia – it’s like our immune system gets super-activated trying to fight all those lollypops.

“Getting a new vaccine to work is just the first step. You then have to prove it works, then manufacture it. And if it is going to be used on millions and millions of people, it needs to be safe.

“So, it may be that, in the short term at least, we turn to drugs that are already used for other illnesses. For example, Roche makes a drug called Actemra, which is used for rheumatoid arthritis – it dampens the immune system.

“Another company in Southampton has been making beta interferons for multiple sclerosis for years and has more recently been developing it as an oral treatment for asthma. Again, it dampens the immune system. These are now being tested on COVID-19 patients.

“If we can dampen down the super-activated immune system, it could limit the fatalities and also get people out of intensive care sooner.”

Dan Mahoney, the fund manager

What do you think the long-term impact will be?

“Events such as this change behaviour. And I think we’ll see some big structural changes in the future. 

“Teledoc Health, for example, is a video-conferencing facility that can be used by doctors to ‘see’ patients without them going to a doctor’s surgery. It has seen a spike in use in recent days. Where there may have been some barriers to this type of doctor/patient relationship before, I think both doctors and patients will see how useful and convenient it is, and more will use it in future.

“On a wider scale, I think companies will rethink their whole supply chains. For example, most drugs are chemicals, which are made into an active pharmaceutical ingredient. This may then be sent to a factory in one country to mix with other ingredients and make a pill, and then to a factory in another country to be put into blister packs.

“Companies may now question whether having supply chains so far away makes sense – especially when labour costs are now not so different and fewer people may be needed if automation could be used. The same questions will be asked in other industries.

“The China/US trade wars got companies thinking about all this – now they are more likely to be developing a plan. I think the Coronavirus will precipitate change that may not have occurred before.”