Investing in biotech amid the race for a vaccine

A perspective from E*TRADE Securities 07/24/20

It’s no secret that the sprint to develop a COVID-19 vaccine has been a major story during the market’s record-setting rebound. Promising clinical trial results of potential vaccines and drug therapies have been quickly followed by some of the US market’s biggest daily gains over the past few months, and the moves in some of the individual stocks that have entered the race have been downright explosive—at least temporarily.

The coverage has fueled a larger interest in biotech stocks, many of which have seen heightened interest just by association with the vaccine story—the Nasdaq Biotechnology Index is up more than 50% since mid-March.1

The global mandate to get an effective vaccine to the public suggests the biotech story is unlikely to simmer soon. Investors considering exposure to this corner of the market should make sure they understand not just the broad strokes of the vaccine race, but the unique characteristics of the biotech arena as well.

Vaccine players

First, the vaccine playing field is a big one. Although a few companies have captured most of the publicity, according to the World Health Organization, there are currently 140 vaccine candidates in the preclinical evaluation phase and 24 in the clinical trial stage.2

A few lesser-known biotech and pharma stocks have joined the ranks of household names since the coronavirus upended the economy and compelled the US to fast-track the development and distribution of a vaccine (“Operation Warp Speed”). Since then, some of these stocks have spiked dramatically as hopeful news emerged from their labs. 

For example, shares of Moderna, which was among the first to release preliminary data for its experimental vaccine, have skyrocketed more than 300% year to date, recently gaining steam after the company published positive results from its phase-one human clinical study.3 

Another biotech name that has gotten a great deal of attention during the pandemic is Novavax, which rallied 30% on July 7 after the company was awarded a $1.6 billion government contract to develop and manufacture a potential vaccine,4 and is up more than 3,000% since January.

Biotech giants Gilead and Regeneron, which both have treatments in the works, have also outperformed the broader market since the March bottom (although not as much as Moderna or Novavax), as many investors flocked to companies with skin in the game.

And these are only a few of the firms bidding to be the first to the finish line. Some mainstream pharma players, such as Johnson & Johnson and Pfizer, have partnered with smaller outfits to accelerate the development process. 

The development process

Traditionally, the drug development process is a long one—it can take more than a decade for a potential treatment to go through the stages of research, preclinical tests, and human trials necessary to bring it to market. Although the race for a COVID-19 immunization has been moving at a breakneck pace, vaccine candidates ultimately need to undergo three phases of progressively larger human clinical trials before receiving approval from health authorities.

Here's where some of the notable players currently stand in the runnings:

Source: World Health Organization, July 21, 2020


Will a "vaccine boost" be temporary?

The first rule of biotech is that the industry has never been a stranger to volatility—it’s part of its DNA, so to speak. The promise of treatment breakthroughs and blockbusters (and profits) on the one hand has always been coupled with setbacks and failures on the other. 

So, could the vaccine boost serve more as a temporary high than a longer-term price floor? Even with a number of candidates in the clinical trial phase, there are still several unknowns about how the drugs will perform during the mid- and (especially) critical late-stage studies, and whether they will ultimately yield the desired outcome.

Also, not every company can win the vax trophy, which means some of the early players that have rallied could fade into the background if someone else gets into the market first. Finally, those companies that are successful in developing a vaccine or treatment may be pressured to keep costs affordable, potentially limiting opportunities for profit.5

Investing considerations

While the recent momentum in the sector may be hard to ignore, investors would be wise to step back and consider how the vaccine race fits into the larger biotech picture. Here are a few things to keep in mind:

  • Funds can provide broad exposure: The odds of correctly predicting which company will cross the vax finish line first are low. Investors may want to consider diversifying among several candidates or investing in funds that offer exposure to an array of biotech companies.
  • A good target has merits beyond the cure: Investors should also look under the hood a bit and consider whether a given stock has the potential to perform well even without success in the vaccine arena. What is the company’s longer-term track record? What else is in their treatment pipeline? Are they profitable? In other words, analyze the stock in the absence of the vaccine story.
  • Patience is a virtue: There’s a long road ahead, and it’s likely to have many twists and turns. Stocks that surge one day on breaking headlines may pull back dramatically the next. Don’t chase the market.

Bottom line: It’s not a sprint, it’s a marathon. Make sure investing decisions are focused on the long term and reflect individual timelines and goals.

  1. Reflects closing prices from 3/16/20–7/22/20.
  2. World Health Organization, Draft landscape of COVID-19 candidate vaccines, July 21, 2020, https://www.who.int/publications/m/item/draft-landscape-of-covid-19-candidate-vaccines
  3. MarketWatch, “Moderna’s stock extends rally as experts await details of the coming Phase 3 study of the coronavirus vaccine candidate,” July 16, 2020, https://www.marketwatch.com/story/modernas-stock-extends-rally-as-experts-look-to-the-coming-phase-3-study-of-the-coronavirus-vaccine-candidate-2020-07-15?mod=biotech-industry
  4. The Wall Street Journal, “Vaccine Stock Soars, Rewarding Investor’s Big Bet,” July 9, 2020, https://www.wsj.com/articles/vaccine-stock-soars-rewarding-investors-big-bet-11594294901
  5. The Wall Street Journal, “Gilead Is Wise to Leave Remdesivir Money on the Table,” June 29, 2020, https://www.wsj.com/articles/gilead-is-wise-to-leave-remdesivir-money-on-the-table-11593439722

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