Hello and welcome to our discussion on the future of the health care sector in a Covid world.  My name is Chris Sunderland and I'm the Institutional Portfolio Manager on the Global Equity and International Equity Strategies at MFS. 

I am joined today by my colleague Nicholas Demko who covers the medical services and medical equipment industries in the equity research team at MFS. 

With so much news recently regarding the effectiveness of the vaccines, coupled with the rising case counts in the US and other regions around the world, could you start with providing a bit of background and just set the landscape of where we are at right now? 

Sure. Well, first of all, thank you very much for having me. I certainly appreciate the opportunity to discuss COVID-19 and this is a great starter question. I would probably think about it in two parts, the virus itself and then the broader financial market implications.

And so, with regards to the virus itself, over the past few weeks we've really gotten quite a bit of new information. And some of it good, some of it bad. Starting with the good news is that we've received the first phase three, meaning large-scale, inhuman clinical trial data for the first COVID-19 vaccines. And while there's still plenty of unknowns and caveats, this data was really pretty much as good as we could have possibly hoped for. The effectiveness of around 95% is a lot closer to vaccines for diseases like polio and measles, which we largely have under control, than it is for a disease like the flu where the vaccine effectiveness of around 50% just isn't enough to prevent meaningful seasonal outbreaks.

And so for most people, I think this means there's light at the end of a very long COVID-19 tunnel. The bad news side of things is unfortunately that global COVID-19 case counts are just seeing a pretty meteoric rise. And that trajectory is concerning certainly from a societal standpoint, but also from a financial markets point of view as well.

I guess, where does this leave financial markets? Well, I think it leaves us in a period of extreme uncertainty and in volatility. The rising case counts do increase the odds of recessionary type events and ones that seem to get a lot of attention are maybe a consumer spending stoppage or politically driven civil unrest. But the reality is there's just a whole host of, call them unknown unknowns that really tend to get uncovered in times like these. And these recessionary tail risks are always present in financial markets. But I would say the likelihood of them certainly feels elevated today. However, on the flip side I guess I would say, if we are able to find a way to navigate through all these tail risks over the next year or two until the vaccine is widely distributed, what I think we're left with is potentially a pretty good setup for equities. Interest rates are low, consumer balance sheets are in good shape, particularly if we get more stimulus. Central banks are pretty accommodative right now and I think like other crises before there's the potential that this one sort of uncovers incremental productivity in efficiency gains that we discover through the pandemic.

3) Given all these developments, when do we return to a relatively normal lifestyle and what does normal even look like?

Yeah, so great question Chris. It's going to be hard to give you an exact date. But I think what you're really asking about is when do we hit this so-called herd immunity threshold? That required herd-immunity threshold is something that's very hard to measure in subjects who, a lot of assumptions, that makes giving a precise number hard. But most experts think that the herd immunity threshold is somewhere between 50 and 80 percent.

And so what does that mean? Well, roughly 10 to 15 percent of the current population has protection from the virus because they've already had it. And that kind of current trends of infection I suspect that will exit the winter closer to 20 to 25 percent of the population having these so-called natural antibodies. And so, even if you only get 60 or 70 percent of the population gets vaccinated, which is in line with a lot of these consumer-willingness-to-take-vaccines survey are at, at least in the U.S., that means that with a 95% effective vaccine we can hit herd immunity in relatively short order. I guess somewhat, the down side of things, while I expect the FDA to authorize the first vaccines for emergency use in the next few days or weeks, there is limited manufacturing capacity. And the supply chain is quite complicated. And so what that means is I don't think we're going to be getting mass distribution at levels required to hit herd immunity until mid 2021 at the earliest in the U.S. And other developed markets will be on a similar time line and emerging markets are probably shortly behind that

4) So, looking forward, who are the winners and losers within the healthcare sector as we emerge from the Covid-19 crisis?  In particular, the pharma companies producing the vaccines versus the companies engaged in testing?

Yeah, so, there's still a lot of unknowns and a lot of winners and losers who are still to be determined, really over the next few years. But I do think we're starting to see some opportunities in companies where management can really capitalize on this brief period of rather rapid change by investing in the future and setting up their companies to be fundamentally better off over the next decade-plus. An example where we think this is possible is one you mentioned, Chris, the life science tools and diagnostics equipment manufacturers.

These are companies that manufacture the highly complex instrumentation and equipment that is enabling the cutting edge science that we're using to combat this virus. And that includes COVID-19 diagnostic test manufacturers where a lot of these companies are reinvesting COVID-19-related profits in talent and technology that we think are going to enable new scientific discoveries within the diagnostics and pharmaceutical fields.

And so where we have confidence in the capital allocation abilities of management, we see a lot of opportunity for these companies to take share in a growing pie of global life science research and development spend. And we find this attractive, particularly compared to the vaccine manufactures themselves, where higher levels of competition, I think, are likely to make longer term profitability just a little bit more challenging.

Another example where we see more permanent changes and behavior is in the digital health and telemedicine side of things. I think in a lot of ways, this pandemic has exposed some inefficiencies in the way healthcare is delivered globally. And in the use of technology, whether that be on-demand video with a physician, or the remote monitoring of patients via an internet-connected medical device, I think it's pretty clear that there is better quality care that can be delivered in a more convenient, lower-cost manner in certain circumstances. And I think that there's a few companies that are really enabling this digital transformation of healthcare that we find attractive today.

5) Thanks Nick, now bringing it up a level, and considering all the human and financial capital that has accompanied the virus, what do you feel is the impact on the broader economy?

 Yeah. So I guess as a healthcare analyst, perhaps one of the most exciting and potentially positive impacts this pandemic could have over the long term is really the rapid acceleration in scientific advancement. There's really probably never been a time in human history where we've invested this much capital, be it financial capital or sort of raw, human, intellectual capital into science more broadly. And while it's still early, I think that this investment in science has the potential to have pretty meaningful impacts on things like longevity, quality of life, and quality of care, that I think could very well increase global productivity over the very long term. And I would imagine, even though that's a healthcare specific comment, that across all sorts of other sectors and industries, this kind of odd period of rather rapid change, that's defining 2020, is going to teach us new things.

 Companies are using technology differently. They're connecting with their customers and suppliers differently. And really, every facet of operations are being impacted in some way by this pandemic. And now, some] of these things are going to be less efficient and worse than the prior ways that we were doing things, but other things are likely to be better. And we're going to kind of keep the good stuff and discard the bad. And so, I think like many other crises before this, I think there's a chance that we eventually emerged from this pandemic a more productive, efficient, and, hopefully, healthier society.

6) Lastly Nick, how is our research team able to identify opportunities and risks in this environment or what is it about our investment process that allows us to navigate through this crisis?

Yeah, I think our long-term focus really helps us find those companies, who are positioning themselves best for the next decade and not just the next quarter or the next news cycle. And I think, during the pandemic with just so much news flow out there, we have seen markets be a lot more volatile and more short-term oriented. And I think that does create the opportunity for us to find long-term value in these markets. And as I mentioned before, I think finding the companies, who are positioning themselves to be better off over the next decade at attractive valuations, is really the hardest part. And I think in order to be able to do that effectively, it really requires global cross-asset class collaboration. And so, what I mean by that at MFS, is that I'm able to leverage my teammates globally for perspective on things like what management teams are saying,  what valuations are implying about companies in similar industries across the globe.

 And it really helps, I think, identify emerging trends early on that that might just have broader global applicability. And I think that that collaboration really extends beyond just equities too. I spend a lot of my time talking with our fixed income and quantitative teammates to gain an even broader perspective on trends across broader financial markets. And I think a good example of this was during the March lows this year, when we weren't even sure which companies would make it through the pandemic. And so, I was on the phone with our fixed income analysts almost daily to analyze things like liquidity and debt covenants and maturity schedules, all things that I think really help us make more informed long-term decisions. And so, I really think that this long-term focus and culture of global cross- asset class collaboration, that we have at MFS, are important differentiators, particularly at times of heightened uncertainty and volatility that we're living in right now.

Closing:

Well Nick, I think with that, we will close today's discussion.  Thank you so much for sharing your insights during what is a critical and important time in our history and we look forward to continuing the conversation at a later date.

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The views expressed are those of the speaker and are subject to change at any time. These views are for informational purposes only and should not be relied upon as a recommendation to purchase any security or as a solicitation or investment advice from the Advisor.

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