In the first quarter of 2020, the U.S. GDP declined by 4.8% year over year. For the first time since 2008, the global economy is heading toward a recession (defined by two consecutive quarters of GDP decline) due to the COVID-19 pandemic.
The numbers are startling. Since January, over 4 million people around the world have been diagnosed with the virus, and there have been at least 290,000 deaths. Meanwhile, all major U.S. stock indices have experienced dramatic sell-offs. With murmurs that the recent bear market rally may come to an end, let’s look at two stocks with the potential to hedge against a coronavirus-induced recession.
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A fast-growing telemedicine company
Teladoc Health (NYSE:TDOC) is a telemedicine pioneer that has seen its revenue skyrocket due to high demand for medical services from people staying at home amid the pandemic. The service features physician-patient consultations by phone or video. The service costs around $49 per online visit, with roughly $20 of the payment going to doctors. Based on the amount of patient volume, doctors can make a competitive income via Teladoc.
In the most recent quarter, 6 million new members across the nation signed up for Teladoc’s services. New registrations also saw a 125% increase over last year. Moreover, the number of total visits in the quarter grew by 92% year over year to 2 million. On average, this represents more than 20,000 visits per day during the quarter. These metrics were achieved despite 90% of the company’s staff working from home.
Teladoc raised its guidance for fiscal year 2020, predicting between $800 million and $825 million in annual revenue, an increase of over $100 million from the prior range. Although the company isn’t profitable, it does have $510.8 million in cash to offset $447.2 million in debt. In terms of margins, the company is on its way to breakeven, losing about $0.16 for every $1 it earns in revenue.
Since this is a growth company, it’s operating at a loss to invest cash into customer acquisition. Hence, a more telling metric is how much the company is spending on sales and marketing versus its revenue. In the past quarter, the Teladoc spent a combined total of $50.45 million on sales and marketing efforts, while it brought in $180.8 million in revenue. In other words, every $1 the company spends on advertising generates about $3.58 in revenue.
A high return on advertising spending is certainly good for the company’s momentum. The 43 million paid users utilizing Teladoc’s platform is an increase of 61% compared to the same quarter last year. Overall, there’s a premium to be paid for growth stocks, and the 16.3 times forward price-to-sales ratio isn’t unreasonable given its growth and its unique position to excel in the coronavirus crisis.
A biotech with a promising COVID-19 drug
As of May 9, Gilead Sciences (NASDAQ:GILD) is the only company that has both received Emergency Use Authorization for a COVID-19 treatment and demonstrated the drug’s efficacy in phase 3 clinical trials. The drug in the spotlight is remdesivir (a once experimental antiviral for Ebola) and it can reduce the time to recover from COVID-19 by 31%.
In addition, patients being treated with remdesvir had a mortality rate (percentage of patients dying in a clinical cohort) of 8%, while patients on placebo had a mortality rate of 11.6%. For illustration purposes, out of 1,000 patients, 80 deaths would be attributed to the remdesivir cohort and 116 deaths would be attributed to the placebo cohort. This means there were 31% fewer fatalities in patients who took the experimental drug compared to patients who didn’t.
Hence, the drug is likely to save lives, but the study’s results were released early so the drug could be distributed for humanitarian reasons (after it achieved efficacy in accelerating recovery), and didn’t provide enough time for the survival benefit to reach statistical significance. Luckily, the trial is continuing and Gilead has additional phase 3 placebo-controlled studies involving remdesivir ongoing with results to be released at the end of May, which should verify whether the drug can save lives.
Meanwhile, experts have argued $4,460 may be a fair price per treatment course. Even so, analysts are saying remdesivir could theoretically add $1 billion in revenue this year for Gilead even at a fraction of this cost. While the company is donating 1.5 million doses after initial authorization, this supply may run out before fulfilling the global demand, necessitating the manufacturing and sale of more doses.
Unlike past pandemics, COVID-19 is characterized by a large number of asymptomatic carriers. In fact, between 25% and 50% of those infected with COVID-19 show no symptoms, while each individual infected with the virus has the potential to spread it to up to four other persons. To make matters worse, a recent study showed 10% of infected individuals do not have any symptoms of the virus even after the 14-day quarantine period governments around the world have imposed.
At a minimum, there could be major second or third wave infections, followed by consistent, sporadic outbreaks around the world. Hundreds of millions of people across the globe may eventually become infected until the virus subsides. In these scenarios, a life-saving drug to combat COVID-19 would be critical, and would significantly improve Gilead’s bottom line. Until then, healthcare investors should also take note of exciting developments in other areas of Gilead’s pipeline.