Investors could be forgiven for piling money into companies on the verge of a coronavirus vaccine breakthrough, but those in it for a quick win should think again
As the race to develop a coronavirus vaccine heats up, the pharmaceutical company first to market will be hailed heroes and should see stock value soar. However, this doesn’t necessarily guarantee a good investment for traders.
Take a traditional vaccine. Before it can be brought to market, it has to go through lab-based research, clinical trials, regulatory reviews and then be manufactured. It’s a process that can take up to a decade.
This model of developing a vaccine isn’t fast enough for COVID-19. For this reason, as of June 9, there are 126 candidate vaccines in pre-clinical evaluation and ten in clinical evaluation, according to the latest data from the World Health Organization.
Leading the race to develop a vaccine are pharmaceutical giants AstraZeneca, Gilead Sciences, GlaxoSmithKline, Merck and Pfizer, but there’s also biotech startup Moderna in the running. So what does this mean for investors and traders looking to take advantage of the race to develop a vaccine?
Pharma vulnerable to stock volatility
“Pharmaceutical stocks remain popular with investors, and rightly so, thanks to their long-term revenues and excellent dividend yields,” says Chris Beauchamp, chief market analyst at trading company IG. “In a world where yield is even harder to come by, such stocks will maintain their place at the top of watch lists.”
Yet the trial-and-error nature of vaccine development exposes pharmaceutical companies to volatility in the stock market. Moderna’s share price dropped nearly 11 per cent in a day mid-May following reports people were experiencing adverse reactions to its vaccine candidate.
Gilead Sciences’ stock, meanwhile, fell after an announcement that a large trial of its drug Remdesivir had shown only a limited benefit to patients it had been tested on.
“Investing in pharmaceuticals can be risky and it’s difficult to predict which company will eventually produce the best outcome,” says Sheena Berry, healthcare analyst at Quilter Cheviot Investment Management. “Share prices can rise or fall extremely quickly at even the smallest of rumours; Gilead’s stock has oscillated throughout the past few months.”
IG’s senior analyst Josh Mahony says caution is required. He argues that given the volatility around Gilead and Moderna, traders shouldn’t be jumping to invest in a pharmaceutical company. “Experts seem to indicate that a vaccine is going to take some time to develop, yet markets can treat each trial announcement as if we are on the cusp of a huge breakthrough,” he adds.
Vaccine returns not a quick win
Playing the long game seems to be the answer. Even once a vaccine has been approved, which will be considered a medical achievement, the company behind it is unlikely to deliver returns in the near term.
While a vaccine can offer a reliable revenue stream, profit from it is likely to be limited while the pandemic is ongoing. One of the main challenges is that recouping the cost of developing and manufacturing the vaccine will take some time. On top of this, there’s also the manufacturing capacity to factor in, given there will be an unprecedented volume of doses needed.
Pharmaceutical companies could see more attractive returns if people are eventually required to have top-ups or yearly inoculations, Berry points out. “At the moment, it’s unclear if a single vaccination is going to be enough. If it isn’t, then this will add to the global capacity challenge,” she warns.
Looking beyond the vaccine
For investors and traders unsure of which pharmaceutical company to invest in, both Berry and Beauchamp believe they need to be looking at the long-term horizon. They should be focusing on stocks with a strong product portfolio and whose share price has remained relatively resilient since the market sell-off.
“The first companies to develop available coronavirus vaccines may not necessarily be the long-term winners,” says Berry.
Beauchamp adds: “For the UK pharmaceutical industry, it’s hard to beat AstraZeneca. Having shaken off weakness from March, the shares look well placed for further gains.”
Outside developing a vaccine, AstraZeneca currently earns the bulk of its revenue through the sale of cancer drugs and treatments. Its latest quarterly earnings report, for the three months to March 31, show total revenue was $6.40 billion (£5.10 billion), while oncology sales were up 34 per cent year on year to $2.5 billion (£1.99 billion).
COVID accelerating ESG investment
Ensuring access to drugs and medicines is critical. Most of the world’s pharmaceutical companies have the resources and capital dedicated to addressing the healthcare challenge and the pandemic will have only reinforced their position.
If traders and investors are looking for stocks with a conscience, then those in the race to develop a COVID-19 vaccine could be the right play.
The pandemic is accelerating the trend towards ESG stocks, so called because they meet certain environmental, social and governance criteria. And although there are risks involved, for example the possibility of product recalls or lack of access to vaccines in developing countries with a poor healthcare system, the candidates in the race to develop a vaccine are likely to benefit from ESG investing.
“Investment strategies that integrate ESG have gained traction in recent years. Investors have become much more aware of how vulnerable our ecosystem is,” says Berry. “And the coronavirus has emphasised just how vulnerable we all are.”