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Healthcare Investing Update

July 28, 2020

Written by Dr. Daniel R. Omstead, Portfolio Manager, Tekla Capital Management

The world, in general, and healthcare investing continues to be a wild and crazy place. Of course, a good bit of this tumult derives from the Covid pandemic. The upcoming Presidential election has not contributed to settling things down either. There continue to be myriad opinions about the right path forward. We won’t articulate any particular view, but the fact is that we have to invest effectively for our shareholders in healthcare assets amidst a panoply of opinions and actions that have had a noticeable impact on sentiment and on the value of certain of the stocks which the Tekla Funds own.

We have been investing in the healthcare sector for quite a while and have witnessed the emergence of more than one apparently impenetrable medical/health challenge. Covid is the most recent example. What we have observed over many years is that the healthcare sector, often in partnership between the public sector and the academic community, has consistently been able to successfully invent, develop and/or commercialize solutions to what had previously seemed to be the most vexing problems.

It appears to us that we may be in the early stages of repeating this process for the Covid epidemic. We have much yet to figure out, but relative to four or five months ago, we know a great deal more about coronavirus biology. For example, in addition to attacking a patient’s lungs, we are now more aware that Covid infection often induces a cytokine storm and can lead to serious clotting. So, if, in addition to traditional standards of care for such infections, one treats a Covid patient with something (like steroids) to slow down an initial immune reaction and with anti-coagulants to reduce the likelihood of clotting, there is a decent chance that morbidity and potentially mortality associated with Covid can be (and in some situations has been) materially reduced. There are a few studies that have sought to evaluate mortality associated with Covid infection. Our reading is that something like 6 in 1000 Covid patients will not survive infection. This is about 5 or 6 times more than the common flu but is not as bad as once feared. From the success observed in previously hard-hit states, it is now clear that use of masks and social distancing can reduce infection rates. With broad use of these and other behaviors, we think mortality can be pushed lower. And that is without introducing meaningful use of new Covid-targeted drugs. As we previously reported, at least one therapeutic drug, Remdesivir, has become available and there are more coming.

What drugs/treatments are coming and when? We understand that more than a hundred are in development. They cluster in two main groups: vaccines, which might prevent a person from being infected (or at least reduce the severity of infection) and therapeutic drugs which present the possibility of “curing” or reducing the impact on a patient once infected.

In the last couple of weeks, we have seen early clinical status reports for at least three potential vaccines from Pfizer/Biontech, Astrazeneca/Oxford and Moderna, respectively. There are also vaccines being developed in China and elsewhere. The good news is that much of the data are encouraging. We have seen reports indicating that more than one of these potential vaccines can produce the antibodies thought/expected to confer some level of immunity to Covid and can apparently do so without inducing overwhelming side effects. This is great news as it suggests that we might be able to achieve so called herd immunity which would increase the chances that we can get the Covid epidemic under relatively tight control. However, it is not yet clear how many doses over what timeframe will be required, what percentage of treated individuals will develop the necessary antibodies, how long these neutralizing antibodies will last in the patient, whether some rare but limiting side effect will emerge, how soon the vaccine could be generally available and, most importantly, whether the vaccine will actually prevent infection/death.

On the therapeutic side, there are also numerous drug candidates. With respect to many others, there are two main therapeutic classes being developed. These are direct acting antivirals and ex vivo manufactured antibodies. Direct acting antivirals might prevent replication of virus in the body, helping a patient’s other innate physiologic/immunologic capabilities to overcome the infection. Ex vivo manufactured antibodies (in contrast to those produced by the patient’s own cells in response to infection) are those administered to the patient and intended, for example, to bind either to the virus or to receptor binding proteins in patients cells for the purpose of preventing virus particles from infecting a patients cells. There are many types and forms of such antibodies under development, including some that may have a prophylactic effect like that of a vaccine.

What does all this mean for the future of the pandemic? The positives for mankind are obvious. Despite local outbreaks of infection, we have made impressive progress in a relatively short period of time. In just a few months we have learned a great deal about how the Covid virus infects people and have developed and, in many cases, implemented procedures which, when used effectively, can slow the propagation of a powerful pathogen. And in that same timeframe, the pharma/biotech sector has demonstrated that candidate vaccines can invoke neutralizing antibody formation in patients that might confer immunity at least for a period of time. Simultaneously we have begun to push forward with the development of therapeutic drugs that might favorably impact mortality rates for patients who do get infected. There is much yet to be done but this is all encouraging.

We get asked a lot what we think will happen over time. Making predictions is difficult given how much is unknown. However, acknowledging that we are not experts in virology or epidemiology, we expect to see the following to unfold over time. We do not expect the emergence of a silver bullet. We do not see the administration of a pill or injection that will by itself confer lifetime immunity or cure the disease in infected people in one fell swoop. In fact, we do not think it likely we will eradicate Covid in the short term and possibly not ever. However, we do expect that we will get the Covid pandemic under control. But it will take a multiprong approach. We hope that in the next six months to two years (depending how much of the best-case scenario occurs) that we will have access to a vaccine that will confer immunity to Covid for at least 6 months and hopefully longer. We would expect regular vaccination to be required. We anticipate seeing in the next 2+ years, the availability of the therapeutic drugs that will reduce morbidity associated with Covid and decrease mortality of infected cases. We also expect that for the foreseeable future, the public will need to adopt behavioral changes (reduced physical contact and increased control of respiratory fluid exchange). We think the net of these things will lead us back to a way of life that is a lot closer to the one we were leading pre-Covid than to the one many of us have been leading in recent months.

How does this all affect the prospects for healthcare investing? We won’t go so far as to predict the future of the markets, but we do note that sentiment has been and remains strong. As we indicated in our prior note, we see healthcare as a good place to be. It remains a defensive sector. We think a significant portion of the developments that return us to where we want to be will be driven by healthcare companies. Capital raising has been strong, and the market is up significantly in 2020. We will surely have some dark days ahead. But over any reasonable timeframe, we are optimistic about the prospects of healthcare investing.

Destra Capital Investments is providing this update with permission from Tekla Capital Management. No offer or solicitation to buy or sell securities is being made by Destra Capital Investments.