Can Healthcare Stocks Keep Climbing?

VIDEO: After healthcare stocks soared in the Covid-19 crisis, Morningstar analyst Jay Lee says investors should focus on the less popular names in the sector

Holly Black 17/07/2020 16:34:00

 

 

Holly Black: Welcome to Morningstar. I'm Holly Black. With me is Jay Lee. He's an equity analyst at Morningstar in Hong Kong. Hello.

Jay Lee: Hi there, Holly.

Black: So, Jay, you've been looking at the healthcare sector and this really has been front and centre this year in the coronavirus pandemic, what's been happening to this sector?

Lee: Sure. Well, since the beginning of the year most of the sector has rallied tremendously, especially some of the more innovative biotech aims. I think there are two main factors that are driving this trend. One is that there's been a general rotation out of older industries and into more of high tech industries, of which biotech and healthcare in general is included. And then the second thing that has also happened is that the COVID-19 pandemic has just reminded most of the people out there, how vital healthcare is for us for our well being, for us as human beings, and as a result, people know that this is going to be a huge focus for Chinese policymakers, as well as the Chinese people in the future. And I think that's driven a lot of bullish sentiment we've seen.

Black: So obviously some of these stocks have been absolutely soaring and that might make people think they want to get involved. But should investors actually be concerned that some of the valuations of these companies are now looking quite toppy?

Lee: Yes, I think that's a very good point. So overall, not that much news with regards to drug development, or clinical pipeline progress or newly launched products has been announced from a lot of these drug makers. Certainly not to the extent that would justify, say the 100% rally that we've seen with some of these stocks. But that being said, we think that overall, we're relatively bullish on, on healthcare as a whole. In terms of which names to pick we recommend the ones that probably have, we recommend focusing on the names that have underperformed relative to some of their star peers in the market.

Black: And what would the discovery of a coronavirus vaccine do to this sector and its prospects from an investment perspective.

Lee: Just like any industry, it would allow people to go back to work. And so how that applies to drug makers, as a whole drug makers sales have not been really that affected by Covid-19. Maybe for one or two months during the lockdown in the beginning of the year. There should be some effect from that, as well as some mild effects from people not wanting to go to hospitals often or not wanting to leave their homes to go to the pharmacy as frequently. But overall, for drug sales, that part is relatively unaffected. The part that might be a little bit more effective is clinical trials. So some of the progress with those clinical trials might be slowed as a result of the pandemic, but beyond that, once we get a vaccine or a long term treatment plan in play to combat the Covid-19 disease that hopefully should get everyone back to work and clinical trials to get back in progress as before.

Black: So you said there about looking for the undervalued stocks that maybe haven't rallied quite as much. Have you got one or two names that you are more keen on at the moment?

Lee: Sure. One biotech name that we cover is Genscript, which is a little bit of a complicated company because traditionally they were a commercial research organisation, focused on gene synthesis, where they're one of the top five players in the world. But they also have a wholly owned subsidiary that listed on the Nasdaq this year called Legend Biotech. Now Legend is a leader in CAR-T therapies which is on the cutting edge of modern immune-oncology treatments they have -- their lead product is called JNJ-4528, which is a BCMA targeting multiple myeloma treatment. And so far the data that they've released indicates that they might be the best in class. It's still early stage at this point in time. But we're relatively bullish on the prospects of this product and the company as a whole. And we don't think it's rallied nearly as much as some of its peers have, and we see value in the company at these levels.

Black: Jay, thank you so much for your time. For Morningstar, I'm Holly Black.

About Author

Holly Black

Holly Black  is Senior Editor, Morningstar.co.uk

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