Healthcare hedge fund Rhenman sees sector dispersion as Coronavirus grips markets

Medical research

Rhenman & Partners Asset Management, the Stockholm-based hedge fund firm which invests in global healthcare stocks, says the industry has not been shielded from the impact of Covid-19 - though different sub-sectors have been impacted in markedly different ways.

The Rhenman Healthcare Equity Long/Short Fund – which trades a range of small, medium and large pharmaceuticals, biotechnology, medical technology and service company stocks – fell more than 3 per cent during February, as the market reversal on the back of the Coronavirus outbreak began to bite. The USD700 million strategy, which launched in 2009, returned an eye-catching 40 per cent last year, but was down 7 per cent in the first two months of 2020.

Henrik Rhenman, founding partner and chief investment officer, said that while market crashes occur on a regular basis, the current downturn “feels unique.”

“It’s a virus that triggered this, and we haven’t had this kind of financial crisis due to virus before, not to this extent,” he said, adding the global stock market is highly correlated, and every sector has “massively” corrected.

In light of the virus spread, and the subsequent move towards social distancing and remote working, the firm has begun a series of online webcasts for clients this week.

Rhenman and Susanna Urdmark, portfolio manager of the Rhenman Healthcare Equity Long/Short strategy, suggested different sub-sectors of the healthcare sector have been impacted in different ways – but ultimately the sector as a whole has not been shielded from the wider economic impact.

Urdmark suggested large pharmaceutical companies are among the least impacted by the fallout from the pandemic.

“They will continue to sell their drugs that treat different chronic diseases, and people will need those medicines whether or not there is a virus out there,” Urdmark explained. “When we had the swine flu ten years ago, we didn’t rally see a large impact on sales of these drugs. We don’t really expect that to happen this time either.”

On the flipside, there are other sub-sectors in healthcare that face more challenging conditions, such as smaller cap firms that rely on external capital, and the businesses in the med-tech sector, where patients scheduled to have elective procedures such as hip replacements face postponements as beds are required to tackle the Covid-19 spread.

“Most large caps and large pharmaceutical companies have safety inventories of between 6 and 12 months,” Urdmak observed. “So the temporary shutdown that we saw in China will not have large impact on inventory levels, assuming that they are now starting to operate again.”

One concern, however, are potential delays in clinical trials.

Rhenman said larger companies, which are the main drivers of profitability in the broader healthcare industry, are unlikely to see major impacts on profits. But certain smaller specialist and niche med-tech companies could be impacted more.

He added the warmer weather in the next few months could help ease the pandemic, offering relief in the summer period, but questions remain over what happens later in the year.

“It could be W-shaped,” he said of the disease’s progress.

While a vaccine may be 12-18 months away, he noted that before a vaccine, there may pharmaceuticals such as antivirals, synthetic antibodies or plasma-based products available within six months following trials, and certain existing treatments and therapies may be used to combat the spread.

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