Healthcare fundamentals resume as pandemic eases


July 7, 2021

By Harvest Portfolios Group 

Paul MacDonald, CFA

Chief Investment Officer
Harvest Portfolios Group

Even as vaccination rates rise and the global economy returns to normal, the healthcare sector remains in the spotlight.

With the books closed on the first half of 2021, catalysts caused by the pandemic are being replaced by long term energizers for the sector. Pent up demand for elective surgeries, patients returning to their doctors and other basic healthcare needs are reasserting themselves. These include the needs of aging populations in the developed world and those in developing world where incomes are rising.

“The first thing I see looking ahead is normalization,” says Paul MacDonald, Chief Investment Officer at Harvest Portfolios Group Inc. in Oakville. “We’re coming back to fundamentals where earnings valuations and expectations are going to be going to be key drivers.”

Mr. MacDonald said the pandemic had a mixed impact on the sector. Some companies saw windfall gains, including those making vaccines, rapid tests and providing related supplies and equipment. Others, such as medical technology firms, hospitals and clinics were hurt as patients stayed away voluntarily or because of lockdowns. New drug rollouts were delayed as were clinical trials.

Even so, healthcare stocks as a group were up 11% in the first half versus 13% for the S&P 500.

This is a respectable showing, because “when we take a step back, the sector has very positive tailwinds,” Mr. MacDonald said.

Two big developments relate to Alzheimer’s treatments. Biogen Inc. received approval from the U.S. Food and Drug Administration (FDA) for its drug in June. It is the first approval for a drug that reduces cognitive decline in patients who have Alzheimers. Rival Eli Lilly has gained ‘breakthrough’ status from the FDA for a related experimental drug. The designation will speed up its consideration for approval. The Lilly drug is the third to receive the designation based on its ability to attack amyloid, an abnormal protein believed to be involved in the damage Alzheimer’s causes in the brain. Eli Lilly is a top holding in the Harvest Healthcare Leaders Income ETF (HHL:TSX).

We’re quite excited by the Alzheimer’s area.” Mr. MacDonald said. “It is really the last frontier and hasn’t seen a lot of success over the past 20 years.”

The Harvest Healthcare Leaders Income ETF holds 20 of the largest global healthcare companies with 46% of its holdings in pharmaceuticals including the vaccine makers Pfizer Corp., Astra Zeneca plc and  Johnson & Johnson Inc. as at June 30, 2021. Biotech is about 15% of holdings with about 19% in healthcare equipment, supplies and testing. This includes Medtronic Inc., Abbott Laboratories Co. and Thermo Fisher Inc. These firms will benefit from the resumption of elective surgeries and continuing Covid testing. About 15% are healthcare providers benefitting from telehealth trends.

The ETF uses Harvest’s covered call strategy which generates extra monthly income. The portfolio is actively managed and rebalanced quarterly and has a 0.85% management fee.

Mr. MacDonald noted that with the latest earnings season over, the ‘Covid pass’ given to all companies for over or under performing is over. Investors will have a clearer view of the forces driving earnings.

He noted that Abbott Labs turned in strong results in its latest quarter in part due to its covid tests, but the stock dropped as the company said demand for its tests is weakening. Mr. MacDonald says Abbott’s other businesses are doing well and demand for covid tests isn’t going away.

“It will be ongoing, likely slower but we’ll still need it.”

Pfizer, a leader in Covid vaccine development has enjoyed a boost and will continue to benefit from that.

“What’s an unknown is how much demand we’re going to need into the future.”

Other areas of recovery are medtech as elective procedures resume and managed care with insurers like Anthem Inc. and United Health Group showing strong gains.

“The major catalysts for 2021 are behind us, so now we can start to focus more on individual stock performance. The sector has visibility, attractive valuations and attractive growth profile so that ought to really continue to gain,” Mr. MacDonald said.

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