COVID-19 and the health care sector

The coronavirus may change the investment winners and losers in the sector.

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Key takeaways

  • The health care sector lagged in 2019, principally because of the uncertainty surrounding the 2020 presidential cycle.
  • In the second and third quarters of 2020, demand for elective medical procedures should drop but may return more quickly than other consumer sectors.
  • COVID-19 may change some of the sector leaders. Companies associated with creating point of care diagnostics and patient monitoring innovations may see a boost in demand.
  • In the long term, the health care industry is moving toward a pay-for-value system and away from a fee-for-service model.

Looking at the stock market in the short term, right now it feels horrible. But you have to remember that even though the market is down a lot, it is a discounting mechanism. And health care has figured out a way to handle health-related crises before, including finding an antibody for the Ebola virus, treatments for HIV, and curing Hepatitis C. These are things that the health care sector has been able to figure out over time. So I would never count out the creativity and the power of private sector innovation to accomplish great things.

Health care is in high demand

Health care lagged in 2019, principally because of the uncertainty surrounding the 2020 presidential cycle. There were worries about nationalizing the health care system—but some of that uncertainty seems to be out of the way now that Joe Biden is the nominee for the Democratic party.

When I think about health care, specifically as we go through and eventually emerge from this crisis, I think it's important to remember that health care demand is less sensitive to economic cycles than other sectors. Demand for drugs, for example, will hang in there.

In Q1, last quarter, we saw that people actually went to the pharmacy to fill prescriptions so they wouldn't have to worry about medication shortages when they were locked down at home. So we actually saw a pull for demand of pharmaceutical drugs. That just tells you how important health care demand actually is.

The outlook for 2020 in the health care sector

We are going to see a very dramatic drop in elective procedures in Q2 and Q3. I would consider to be deferred demand for most of these procedures. As hospitals go back to operating on a more regular basis, this demand should return fairly quickly. I'm pretty confident in saying that health care demand is being delayed right now. The elective procedures, principally, will come back at a faster rate than some other consumer sectors that are out there.

Longer term outlook: Changes are coming

The health care sector in the United States is 18% to 19% of our GDP. It's a massive part of our economy. And the health care economy is going to go through a generational change.

Today, the health care economy uses a fee-for-service model. That means if I, as a doctor, do a knee replacement, I get paid for doing that knee replacement. I do an office visit, I get paid for doing that office visit.

The world that we're going toward is a pay-for-value system. And in a pay-for-value system, you're doing what's right by the patient for their health in the long run. Essentially, taking care of patients when their symptoms first show up, and keeping them from going down the road into chronic problems.

So it's really the first time in a generation, or in many generations, where the economic incentives and social responsibility are starting to align between the 3 most important players in a health care ecosystem. And that's the patient, the payer, and the provider.

That's going to be a very different experience for the patient consumer and how payers and providers interact with that patient.

Read Viewpoints on 2020 outlook: Health care

I think the changes that are being made as we're going through the crisis right now are going to accelerate that pace of change. The hospital infrastructure in the United States is a lot stronger than it is in some other countries like Canada, the UK, and Italy. But it could be better. So I'm hopeful that phase 3 of the stimulus, the CARES Act could help. There is a lot of money in the CARES Act for hospitals to help them get through the COVID-19 crisis right now. (Phases 1 and 2 of the stimulus were the Coronavirus Preparedness and Response Supplemental Appropriations Act in early March and the Families First Coronavirus Response Act signed into law in mid-March.)

Investment opportunities in 2020

As we go into phase 4 stimulus, and I'm pretty certain that there's going to be phase 4 of stimulus coming down the road, I'm hopeful that the health care infrastructure is going to be a big player. Areas that could be improved include modernizing and making sure that our supply chains come back to the United States or are not so dependent upon other countries to manufacture personal protective equipment (PPE), for example.

I think we are going to see a lot of winners and losers through this crisis. I've been running this fund about 12 years now, the Select Health Care Fund (FSPHX). The team has managed through the global financial crisis. We managed through the passage of the Affordable Care Act. We've managed through a lot of different volatile periods in the market.

If you look at companies who are going to be able to develop point of care diagnostics for coronavirus, they're obviously going to see a big boom in demand. If you think about all the incremental hospital bed capacity that we're creating, and the importance of patient monitoring, for instance, measures like oxygen saturation or SpO2 (peripheral capillary oxygen saturation), the manufacturers of those products are going to see a big boost in demand.

In the long run, the investment process that we in the health care team at Fidelity have been implementing for over 10 years is not changing at all.

I will tell you some of the inputs that are going into that investment process. We think about free cash flow per share on an intermediate term basis. Our forecasts of free cash flow per share a couple years out is changing very dynamically, and in some cases very dramatically. And that is creating new answers to who we think the winners are going to be. And that ultimately is impacting portfolio decisions that we're making. It's a very dynamic process.

I'm actually really excited about what I'm seeing out there. And the opportunities to find who the winners are going to be, not only from the current public health crisis we're going through, but who are going to be the long-term winners? As we mobilize and get past this crisis, we really need to think about what we want from our health care system. How do we want our health care system to function—particularly now that we've gone through such a dramatic event.

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