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Why Vaccines Might Not Spell Downturn For Covid Testing Firms

Investors should hold off permanently rebranding diagnostics stocks as coronavirus stocks with a short shelf life, experts say. Their future could be much brighter than that.




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Last year, companies that make diagnostic tests for health — like Abbott Laboratories (ABT), Hologic (HOLX) and Thermo Fisher Scientific (TMO) — enjoyed some of their best sales growth in years. This came as governments pushed for deeper testing to understand, and stop, the spread of Covid-19.

Now, that Covid testing runway is looking a bit short, but that might be OK, experts say. Jeremie Capron, head of research for Robo Global, is looking for what’s next for coronavirus stocks as the world reopens and the need for testing slows down.

“This is a renaissance moment for testing and health care in general,” he said in an email to Investor’s Business Daily. “From a top-down perspective, the whole world just woke up to the potential of health care technology’s impact.”

Coronavirus Stocks Shine In March Quarter

The March quarter has proved huge for those coronavirus stocks focused on testing.

For Hologic, worldwide revenue from its molecular diagnostics business skyrocketed nearly 391% to $935.3 million. The company credited demand for two tests that search out SARS-CoV-2, the virus that causes Covid-19, for the massive growth.

Thermo Fisher delivered roughly 150% growth in its diagnostics business.

And Abbott posted 212% and 295% sales growth in its molecular and core diagnostics businesses, respectively. Those segments record different sales of Abbott’s Covid tests. Global Covid-19 testing sales were $2.2 billion, generating close to 21% of total sales.

Companies Cautious On Future Covid Demand

But taking a look under the hood put some pressure on all three coronavirus stocks. Abbott’s Covid testing revenue lagged its own expectations for $2.5 billion. Meanwhile, the chief executives for Hologic and Thermo Fisher had conservative views on the potential future for Covid testing.

Hologic CEO Stephen MacMillan used the “toilet paper” analogy. Customers stockpiled Covid tests from a variety of suppliers at the beginning of the pandemic. Data from the industry advocate Advanced Medical Technology Association show Covid tests are being performed ahead of tests shipped. This indicates the inventory is still being worked down.

For the current quarter, coronavirus stock Hologic expects $200 million to $250 million in Covid testing sales.

“While it looks like a big step down from where we have been, I would remind everybody on this call that is larger than our entire molecular diagnostics business ever was pre-pandemic,” MacMillan said on the company’s earnings conference call. “So, we are still looking at a big business, and that is why we are continuing to expand our production.”

Testing Continues As World Reopens

Thermo Fisher CEO Marc Casper expects Covid testing demand to dip as vaccinations climb. But he also sees a place for testing as the world continues reopening.

“And to be honest, I’m looking forward to the world, when we’ll have so much testing, because it means that, we’re going to sporting events, and we’re traveling around the world and all the good things that come with it,” he said on the company’s earnings conference call. “And what happens when that happens is our base business really picks up as well.”

Abbott CEO Robert Ford expects the Covid testing market to move away from older polymerase chain reaction tests to more rapid tests. That would benefit Abbott, which makes about 150 million rapid Covid tests per month, he said on the company’s earnings conference call.

And, even as vaccines roll out, there will be a need to keep tabs on how Covid circulates.

Robo Global’s Capron called variants “the biggest wild card here.” So far, the main mutations of concern first cropped up in the United Kingdom, South Africa and Brazil. Vaccine makers are working on booster shots to target those variants to the original virus. The variant first found in South Africa appears to undo some of the protection of current vaccines.

“If novel Covid-19 (variants) pop up that are resistant to our current natural and vaccine-induced antibodies, testing and preventive measures will be sustained for up to two years,” he said. “Now, this isn’t a 2020 repeat, this is a more sustainable and contained slow burn.”

What’s Next For Coronavirus Stocks?

Capron is excited about what comes next for these coronavirus stocks.

The world has never been more tuned into the health care industry, he said.

He expects growing interest in “not just population epidemiology/tracking but also genetic sequencing. If you asked the general population or government officials a little over a year ago what an antibody was, you might have gotten mostly puzzled looks.”

Now, that word is a part of everyday vernacular.

Diagnostic Companies Ramp Up Machine Production

Diagnostic companies have ramped up production of machines capable of running a massive number of Covid tests at one time. Others have rapid tests that can deliver results in minutes.

To that point, Hologic said it shipped 717 of its Panther Fusion instruments over the last year. These instruments can run Covid tests. Usually, Hologic averages about 225 shipments a year. That put the installed base of Panther systems at roughly 2,600. And it poises Hologic to grow its non-Covid business on those same machines.

Meanwhile, testing has become a normalized experience for everyday people.

If another coronavirus takes hold of society, coronavirus stocks be ready, Capron says.

“We now have technologies that can sequence novel diseases at low cost — and so detection of a new ‘coronavirus’ or similar will happen much faster than before with faster vaccine creation,” he said.

Follow Allison Gatlin on Twitter at @IBD_AGatlin.

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