By Nicholas A. Demko
In this piece, MFS dives into the current progress of the development of a potential COVID-19 vaccine and how this can affect bio-technology stocks, financial markets as a whole and the world in general.
Nicholas A. Demko, CFA, Equity Research Analyst, Matthew Scholder, Equity Research Analyst & Robert M. Almeida, Jr, Portfolio Manager and Global Investment Strategist
In brief
Financial markets are betting that one or more successful coronavirus vaccines will help society return to normal.
But with vaccines come multiple challenges, not least of which is people’s willingness to be vaccinated.
In our view, mass testing is needed until vaccines and therapeutics are widely available and accepted. Companies in the life sciences supply chain may increase in investment attractiveness.
Most vaccine markets are monopolies or duopolies, but in the case of COVID-19, the World Health Organization reports that there are 42 vaccines in clinical evaluations and over 149 in preclinical development. This is a multihorse race, hopefully with multiple winners. It goes without saying that we hope this becomes an overcrowded market with immense competition and success for all involved. But let’s look at this through an investment lens.
The entire global vaccine market generates approximately $30 billion USD (and up) annually between 2014 and 20191. As optimism over the creation of successful coronavirus vaccines has grown, investors have priced a lot of it into biopharma stocks, adding nearly $100 billion to their market capitalizations2. If asset prices are a reflection of future cash flow probabilities, the market has discounted optimistic outcomes such as successful drug discovery, price durability and recurring revenue.
However, following regulatory approvals, vaccine makers face mass production and distribution challenges. For example, China and India manufacture the bulk of the world’s vaccines, presenting the potential for bottlenecks. As well, limitations in airfreight capacity or the need for temperature controlled delivery may slow distribution, particularly in warm-weather regions such as Africa, Asia and Central America.
Manufacturing and distribution issues aside, there is the likelihood that efficacy rates will not bring herd immunity any time soon. Exhibit 1 below is a 10-year look-back at the effectiveness of flu vaccines in the United States. Efficacy is low and has been falling for the past several years.
Exhibit 1: Flu shot efficacy diminishing
Source: US Centers for Disease Control and Prevention.
Additionally, under normal circumstances, a portion of society is typically skeptical of new vaccines. And given the politicization of this disease, the percent of the population unwilling to be inoculated may be larger than normal. Hypothetically, a COVID-19 vaccine with 50% efficacy (applying a simple average from the chart above) consumed by 50% of the population would immunize only 25% of the population. While this is a simple assumption, it is material, as a 25% immunization rate would be well short of the 70% to 90% minimums often cited by epidemiologists as necessary to achieving herd immunity.
This is why society needs more COVID-19 testing. While these significant challenges — from drug discovery, to manufacturing and distribution, to garnering societal trust — are addressed, identifying those infected and isolating them early can prevent or limit contagion. Although therapeutics may accelerate recovery times and reduce hospitalizations, society may still need a step-function jump in testing.
Testing capacity has grown a lot in the U.S., according to The COVID Tracking Project, the U.S. saw exponential growth in testing during the spring and early summer. While the rate of growth has decelerated recently, the recent seven-day moving average is just under one million tests a day. That still is not enough.
According to a report by Duke University and The Rockefeller Foundation, asymptomatic people transmit approximately 30% to 60% of cases. The report concludes that given current infection rates, the U.S. needs around 200 million tests a month compared with the current trend of about 25 million. Given a reasonable possibility that the United States may be experiencing meaningful community spread of the virus for some time to come, the best approach to resuming “normal” life would be mass testing.
With focus on vaccines, test manufacturers underappreciated
While biotechnology stocks — and perhaps financial markets overall — have discounted high probabilities of successful vaccine discovery, we think investors may be underappreciating the potential opportunity for COVID-19 test manufacturers and services companies.
A handful of the largest life science companies in the U.S. not only develop, manufacture and distribute the global supply of COVID-19 testing supplies but also develop, manufacture and quality-check vaccines and therapeutics. We don’t think it’s a coincidence that the current management of the virus through testing and the future management of the virus through vaccination are enabled by the same kinds of highly innovative companies that support modern scientific advancement.
We believe companies in the global life sciences supply chain could potentially create sustainable profits than those in the highly-competitive vaccine market. While much of their current testing-related sales will be one-time in nature as society manages through the pandemic toward mass vaccination and natural immunity, the investments, innovation and future growth fueled by short-term virus-related revenues may potentially enable these companies to build on their long histories of investing in innovative, sustainable and high-returning endeavors.
Sources
1 https://www.statista.com/statistics/265102/revenues-in-the-global-vaccine-market/
2 https://www.barrons.com/articles/a-covid-19-vaccine-is-coming-and-investors-are-betting-big-brace-yourself-51598631049
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Nicholas A. Demko, CFA, Equity Research Analyst, Matthew Scholder, Equity Research Analyst & Robert M. Almeida, Jr, Portfolio Manager and Global Investment Strategist