December 31, 2020
Eric P. Leve, CFA: I’ve been with Bailard over three decades and never before have I seen such robust attendance at our Monday internal investment briefings, particularly considering we continue to work from home. This weekly meeting between our research staff and investment counselors usually works its way through the asset classes from domestic and international public equities to fixed income and real estate. Yet 2020 brought an unexpected motivation: our life sciences team garnered rapt attention as they offered perspective not just on the healthcare investment landscape, but they also fielded personal (and crucial) questions from our employees about the spread of the coronavirus, safety in a pandemic, and the science behind the vaccine development.
With that in mind, I’m more than pleased to chat with the two leads of our healthcare team, Selena Chaisson, MD and Matt Johnson. At the time of this conversation, we’re nine months into the COVID-19 pandemic. Here in the U.S., the number of cases and deaths continue to rise, while in other parts of the world the virus has been better controlled. How does the response model we saw from places like East Asia compare with the challenges and public health failures we’ve experienced here?
Matt Johnson: Cultural differences have probably been the biggest factor. In many Asian cultures, people are more willing to buy into a collective notion of public health. There’s a higher degree of trust in government policy around health issues.
Eric: Right, there’s more of a communal sense of duty and shared responsibility for not making other people sick.
Matt: There’s also more of a pandemic response precedent in Asian countries than in the U.S. They implemented mask-wearing and other measures in response to SARS, MERS, and serious influenza outbreaks over the past few decades.
Eric: What else contributed to the U.S. pandemic response becoming such a public health disaster?
Selena Chaisson, MD: As a nation, we hesitated to embrace strict rules on individual behavior that helped other countries control the virus, but we enforced them at an institutional level where more autonomy could have contributed to a more effective response. Americans place such a high premium on personal liberty and autonomy; people are more receptive to recommendations than to orders. But then, when the Centers for Disease Control and Prevention (CDC) failed to develop effective tests, the government restricted the scientific community’s ability to create their own, including at renowned universities, that could have significantly stopped the spread in the early days of the pandemic.
Matt: The CDC’s initial failure to develop an effective COVID-19 test was really striking. Some bad test kits created a stunning crisis of confidence and confusion in one of our primary public health institutions. The removal from government agencies of people knowledgeable on matters of pandemic preparedness was a factor, as well. Now the FDA and CDC face the communication challenge of instilling confidence in the vaccines and motivating people to get vaccinated, which seems to be going pretty well so far despite some public bickering of who should be first in line.
Eric: Speaking of vaccines, what are the market implications for the companies producing them? Will the sheer volume of need for these drugs lead to outsized returns for the likes of Pfizer, Moderna, and others who are leading the way with vaccine development and distribution?
Selena: Not necessarily. We don’t yet know how long each vaccine lasts. Based on current valuations, if the vaccine provides long-term immunity (like a measles vaccine), that would be a negative development for the companies manufacturing it. If the vaccine response is shorter and requires repeated doses, those companies will be able to sell more of it. But over time, competition in the marketplace will increase. Moreover, mRNA vaccines like both Pfizer and Moderna are expensive to manufacture, store, and transport, and governments are typically negotiating these contracts with reimbursement rates as low as $1.50 per dose.
Matt: Current vaccines must be stored at sub-zero temperatures, which is not feasible everywhere in the world—particularly in poorer countries. A truly global vaccination effort will require a drug that offers 30-day stability in terms of storage, and possibly a vaccine that can be taken orally as opposed to injected. There will be robust competition to develop new versions of the COVID-19 vaccine, not only among biotech companies here in the U.S. but also abroad in places like China and Russia.
Eric: As these vaccines become more widely distributed, what can we expect in terms of broader economic recovery?
Matt: In the short term, people are unlikely to suddenly return to pre-pandemic levels of activity. Dr. Steven Goodman, an associate dean at Stanford’s School of Medicine, said at a recent FDA hearing that Americans have a 1-in-1,000 chance of dying of COVID-19 in the next six months, and a 1-in-200 risk of hospitalization. It will take time for the vaccine to be distributed widely enough that people feel safe going “back to normal.” In the meantime, unemployment will likely remain high, especially in service industries.
Eric: That’s true. The current COVID-19 spike could be the final straw for many small businesses. Fortunately, the $900 billion relief bill recently passed by Congress is a reasonable compromise and likely about the right scale to support the economy until broad vaccinations allow economic activity to gain some real traction. But, for example, reopening retail storefronts is going to be a big element of restoring supply chains and broad economic growth, and we likely won’t see that shift happen until later in 2021.
On the monetary side, the Fed will likely continue with very loose monetary policy. The real (two-part) risk here is inflation: in the short term, the economy could act like it did after World War II, when industries reorienting toward peacetime production failed to supply enough goods to meet consumer demand, leading to inflation (which resolved in a few quarters). Investors might also get spooked by the “appearance” of inflation this Spring, as year-over-year comparisons with last March through May (when prices actually declined) are likely to produce big “headline” inflation.
The longer-term inflation risk is harder to gauge, and there’s no magic wand with respect to controlling interest rates. If rates do spike, the recovery could be longer, slower, and more like the aftermath of the 2008 financial crisis, where economic growth remained tepid for several years.
Selena: I don’t want to put the cart too far ahead of the horse, because we’ve been burned by incorrect assumptions about this virus before. If there were no vaccine at all, the pandemic would end once the population reached herd immunity. This has been the case in previous pandemics, after which the economy experienced a “V-shaped recovery.” People and markets want to see this kind of straightforward, steady rebound, but our current circumstances don’t lend themselves to that outcome. We will recover, but how long it will take and what the shape of the recovery will look like are still in question.
Eric: Exactly. What we’re most likely to see is more of a “K-shaped” recovery: some parts of the economy are finding traction, whereas other cohorts are being left behind, and may be left behind for a long time.
While we are nowhere near through this crisis—nor do we know the ultimate outcome—I’d like to turn for a moment to look for any lessons learned thus far. Any silver linings? Will the scientific advances that emerged in response to COVID-19 perhaps be applicable to future pandemics?
Matt: Not all of the scientific developments around COVID-19 will have utility for health crises ahead. A coronavirus is a relatively simple virus, and other kinds of diseases (such as those caused by bacterial infections, especially antibiotic resistant strains) manifest and spread differently. However, significant advances in biotechnology over the past few decades, plus those prompted by this pandemic, will hopefully help us better understand our immune systems going forward.
Eric: What else should we keep in mind as far as lessons learned to inform our response to pandemics yet to come?
Selena: Assumptions made about this virus—such as the implications of antibodies, how it would behave in warm weather, and the effectiveness of certain treatments—often turned out to be incorrect. We need to rely more on science and less on so-called “conventional wisdom.”
Matt: Funding for scientific entities is critical. Since the beginning of the Human Genome Project 20 years ago, the pace at which we can sequence a virus like COVID-19 has allowed for a much more rapid response. Having these newer genomic tools at our disposal allows scientists to develop vaccines more quickly. If the COVID-19 vaccine is as effective as the early data suggest it might be, this technology bodes very well for our ability to manage future pandemics.
Eric: Thanks Matt, and thanks Selena. I can safely say I’m not alone in my appreciation for your time, perspective, and expertise. Reflecting on this at year-end, it comes as no surprise that the Bailard team joined together, supporting each other both professionally and personally.