Omicron: The facts that matter
Antipodes Partners Limited
14 December 2021
Just as the global economy started hitting its reopening stride, Omicron has seen uncertainty return.
First identified in Botswana, Omicron spread to South Africa where the alarm was raised on the 24th November. Since then, the variant has been confirmed in almost 40 other countries.
With around 60% of the global population fully vaccinated - the question is, how big a threat is this?
There are many unknowns when it comes to this new variant. These, along with the key facts we do know, plus the important signposts investor should track are discussed with Antipodes' healthcare portfolio manager, Dr Nick Cameron, in the latest episode of the Good Value podcast.
Here are some of the key takeaways.
Transmissibility and severity
The Omicron variant has around 30 mutations in the spike protein - many more mutations or changes in the virus than we have seen in previous variants (of which many are new/novel). The spike protein is the key protein responsible for - and necessary for - the virus to enter or infect cells and cause symptoms.
Omicron has quickly become the dominant strain in the Gauteng province in South Africa. The infection growth rate profile appears higher than prior waves but importantly hospital admissions data looks more consistent.
Given borders between South Africa and many other countries were open to travellers for some time prior to the knowledge of the variant, it's no surprise Omicron has spread around the world.
Omicron appears highly transmissible but even if it's more transmissible, this doesn't necessarily mean its virulence (capacity to cause more severe disease) is also increased. Early signs suggest disease severity may not be any worse than Delta. For example, most hospitalised patients in South Africa had mild symptoms and few required high-level care.
While there are a number of mutations in the critical areas of the spike protein, there are many parts of the Omicron spike that remain unchanged. The immune system, including both T cells and neutralising antibodies in vaccinated people and in those that have recovered from prior infection (and have "natural immunity") should "remember" the unchanged parts of the virus, and provide some protection against severe disease and death.
Based on this, countries with high vaccination rates and high rates of community infection in prior waves will likely be the best protected.
Given Omicron has so many mutations it is no surprise to see a marked reduction in the efficacy of current vaccines.
The most recent lab data shows the current two-dose regime of existing vaccines aren't as efficacious against the Omicron variant, but it's still too early to say how this lab data translates into real world protection against severe illness and deaths.
Boosting with current vaccines appears to lift protection, but this is likely to be short-lived. It increasingly appears an Omicron specific booster will be required, particularly for the more vulnerable populations like the elderly and those with higher-risk profiles for severe disease.
mRNA vaccine makers Pfizer and Moderna have already started developing new boosters which are specific to the Omicron variant - Pfizer's candidate could be available in March 2022.
More will be known on vaccine effectiveness in the coming weeks as more lab data results become available.
The key metric for investors
For investors, monitoring hospitalisations over the coming weeks will be key in assessing the extent of the risk posed by Omicron and the risk of further lockdowns.
So far, early indications suggest hospitalisation rates for Omicron appear low and vaccinations rates also appear to be lifting following the Omicron news. If vaccinated people, and particularly those that have also recovered from prior infection, are shown to only develop mild flu or cold like symptoms, this would be a positive sign in the fight against COVID-19. And positive in terms of the reopening continuing.
But it will take some time to collect enough data to confidently determine whether the Omicron variant is a threat to overloading health systems.
Two attractively priced healthcare opportunities amid the Omicron threat
Sanofi (EPA: SAN)
Sanofi is more than just a drug developer. A material portion of its earnings (~35%) comes from its vaccines and consumer health businesses both of which are more defensive, long-duration businesses compared to traditional drug development.
Sanofi is a leading manufacturer of vaccines, globally - it's one of only three scale flu vaccine manufacturers, and has a broad portfolio including polio and meningitis as examples, and a full pipeline of vaccines under development including two COVID-19 candidates.
Vaccines are attractive businesses. They require large scale manufacturing, are highly regulated and have high barriers to entry.
Sanofi's consumer health business is also one of the largest globally. Sanofi has a collection of well-known, over-the-counter medications and supplements and these businesses are very stable, generate high free cash flow and operate in markets which have more room to consolidate. When separately listed they can demand multiples of around 25x.
Finally, its drug business is one of the least exposed to patent cliffs over the next decade, has limited US drug pricing relative to peers, and a solid balance sheet with ample firepower to transform its pipeline.
The company's earnings are growing faster than peers, around the mid-teens level, and Sanofi is valued at just 11x earnings.
Walgreens (NASDAQ: WBA)
Walgreens has around 9,000 pharmacies in the US. In fact, ~80% of the American population lives within 5 miles of a Walgreens so the scale of their physical presence is a key competitive advantage.
But what really excites us is that Walgreens is leveraging its extensive retail footprint to provide healthcare services. Walgreens is transforming its physical locations into health hubs which will provide a range of healthcare services such as primary care, chronic disease management, vaccinations and specialty pharmacy services. All while the traditional prescription and retail offering continues.
Not only is Walgreens becoming a one-stop shop for healthcare needs, the margin profile of health services is much higher than the pharmacy business alone. Over time this could become a material driver of earnings growth and margin upside if the company is able to execute on its plans.
Once the healthcare services offerings are fully ramped up, the company's long-term earnings growth profile could reach 12-13% p.a. including buybacks, and it's valued at just 10x earnings.
The market is not pricing any value for the potential in health services and we see this a great pragmatic value opportunity.
Alison Savas, Client Portfolio Manager
Funds operated by this manager:
Antipodes Asia Fund, Antipodes Global Fund, Antipodes Global Fund - Long Only (Class I)