How to invest in the healthy future of vaccine stocks

When investors try to identify the next exciting frontier for humankind, they may think of conquering outer space. But there’s a more vital one here on Earth.

The vaccine industry and the vast ecosystem surrounding it had areas of rapid growth before the pandemic, with developments such as the approval of a new shingles vaccine by the US Food and Drug Administration.

But the sector has exploded as companies race to develop Covid-19 vaccinations, treatments, booster shots and more. About 299 vaccine candidates are listed on the World Health Organisation’s (WHO) Covid-19 vaccine tracker, with 114 in some phase of clinical development and the other 185 in earlier stages.

Emerging technologies such as the use of messenger RNA (mRNA) as a delivery system hold the potential to speed up the development of vaccines to combat other infectious diseases, as well as for personalised cancer treatments.

It all represents a lot of opportunity — and uncertainty — ahead of what feels like a coming vaccine revolution.

The landscape

There is no shortage of companies in the area. The list ranges from hot biotech companies such as Moderna and BioNTech to Big Pharma players such as Pfizer and Johnson & Johnson (J&J).

Excitement is high about what the industry could produce in coming years, both from efforts using established vaccine technologies and from more novel approaches such as mRNA.

“The beauty of mRNA technology is the speed, in that once you have the genetic sequence, you can identify exactly what you need to put in the code of your vaccine, and you are giving instructions to the target that the immune system can respond to,” said John Bowler, manager of the Schroder Global Healthcare Fund. “It really changes the whole dynamic on infectious diseases.”

The promise

The mRNA technology used in the Moderna and Pfizer-BioNTech vaccines has the potential to fuel more gains at a wider swathe of companies and advance research beyond Covid-19. Some potential uses: vaccines for Zika, multiple respiratory viruses, melanoma, HIV, Epstein-Barr and malaria. There’s also hope for a more effective flu vaccine, because current ones generally reduce the risk of illness by only 40% to 60%.

“The trick now is that we actually now have a lot of ways to make vaccines, and companies are trying out a whole bunch of different ones,” said Marshall Gordon, a senior research analyst covering health care at ClearBridge Investments.

As well, new Covid-19 vaccines are in the pipeline, along with booster shots for variant strains and therapeutic treatments for Covid-19 sufferers, and perhaps oral and nasal delivery of vaccines. Sanofi, Pfizer-BioNTech and Moderna are among the companies testing mRNA flu vaccines; Moderna is also developing a two-in-one booster shot to protect against flu and Covid-19. Meanwhile, leading companies in the vaccine space, such as highly valued Moderna, have lots of cash coming in to fund potential mergers and acquisitions.

While players with vaccines already authorised for emergency use have a huge lead, as time passes and more vaccine candidates and treatments move through the testing and approval pipeline companies that are not on everyone’s lips now could become larger players.

Sanofi is working on an mRNA Covid-19 vaccine with Translate Bio — read about their $3.2bn tie-up — and on a Covid-19 vaccine using a different technology with GlaxoSmithKline. Merck, with Ridgeback Therapeutics, is working on an antiviral drug therapy for Covid-19 sufferers that would stop the Covid-19 virus from replicating in the body.

The obstacles

SA and India have called on the World Trade Organization members to negotiate a waiver of intellectual property protections for drugmakers to help with shortages in poor countries. That would have a big impact on the profitability of vaccine companies. The US has supported the idea of a waiver. In late July, the WTO said talks were “moving slowly”.

There are also issues about the sustainability of Covid-19-related revenue at vaccine companies. So far, the constraints have been more related to supply, but demand could diminish or change: Countries could cut back on purchases of certain vaccines while increasing purchases of others, and efficacy studies could change the calculus about which vaccine is more attractive.

Clinical trials of certain vaccines may prove disappointing — as evidenced by the loss of almost $9.6bn in market value in a single day in June when a large study of a CureVac vaccine showed lower efficacy than rival vaccines.

Big Pharma players

Investors may already have more exposure to the vaccine industry than they realise, in diluted form. In the US, Moderna was added to the S&P 500 Index in July, and J&J and Pfizer are among the top 25 stocks in the index. That means they’re included in many index funds, ETFs and retirement investments.

Other big diversified pharma names in the mix around the world include AstraZeneca, Sanofi and GlaxoSmithKline.

Companies have various levels of risk related to the Covid-19 market. While Moderna expects its jab to generate $20bn in sales in 2021, J&J announced in April that its Covid-19 vaccine sales in 2021’s first quarter amounted to $100m out of more than $22bn in sales.

Pure plays

No company has grown as fast or as dramatically since the start of the pandemic as Moderna, which was founded in 2010 in Cambridge, Massachusetts, and pioneered research in using mRNA to treat disease. The company went public in 2018 at $28 a share. It’s now trading at more than $450 a share, after an increase of more than 1,450% since the beginning of March 2020.

It’s basically the definition of a company in the right place at the right time. It’s entire business hinges on mRNA technology, with about 94% of its $6.3bn in revenue for the six months ending June 30 coming from sales of Covid-19 doses. 

Similarly high-profile is Germany’s BioNTech, founded in 2008 with a goal of using mRNA technology to develop personalised cancer vaccines to harness a sufferer’s immune system to attack cancer cells. Much of the company’s focus is now on Covid-19; BioNTech joins Moderna in seeing big revenues from its mRNA-based shot, though it shares profits with Pfizer.

Moderna and BioNTech are the names everyone knows, but other focused biotech players include Novavax, Dynavax Technologies, CureVac and Vir Biotechnology, which is developing antibody treatments for coronavirus.

Wider ecosystem

Then there are the companies all along the supply chain, from makers of the ingredients in vaccines to diagnostics and testing companies to makers of rubber stoppers, syringes or speciality glass products, such as West Pharmaceutical Services, Becton Dickinson & Co and Germany’s Gerresheimer.

Less-obvious plays along the vaccine supply chain include US companies such as Catalent, which specialises in delivery technologies for drugs and biologics, and Corning, which is manufacturing vials.

In Germany, there’s Evonik Industries, which supplies lipids needed for the Pfizer/BioNTech vaccine. Spanish pharmaceutical company Rovi bottles Moderna’s Covid-19 vaccine, and Switzerland-based Lonza Group produces some of the ingredients that Rovi bottles for Moderna. 

The ETFs

With so many unknowns, investors may want to look into ETFs with investments in the vaccine industry to spread their bets. 

Bloomberg Intelligence ETF analyst Eric Balchunas thinks the ETFMG treatments testing and advancements ETF — with the ticker GERM — makes sense for those who want more exposure to the vaccine ecosystem. GERM has about 20% in Moderna and BioNTech, and also holds a lot of smaller companies.

“You’re getting almost completely original exposure, and there are some very small companies in here that could be future Modernas with the next big thing,” Balchunas said. “That gives GERM a lot of potential M&A pop.”

The Pacer biothreat strategy ETF (VIRS) takes a different approach. While the top three holdings are Danaher Corporation, Nvidia and Thermo Fisher Scientific, the ETF also includes companies such as Netflix, Lowe’s Companies, Home Depot and Walmart. Danaher and Thermo Fisher are involved in Covid-19 diagnostic tests, and Nvidia’s computer technology helped with Covid-19 research. Another ETF, the iShares Biotechnology ETF (IBB) has Moderna as its top holding, at 11.1% and BioNTech at 4.4%.

Investment strategies

Be patient. The bar for vaccines is very high, said ClearBridge’s Gordon.

“Even with Covid-19, a national emergency, you still had to do trials with 40,000 patients because you need to suss out whether there will be those rare [negative health] events,” he said. 

The challenge from an investing perspective? “I see a lot of generalists and a lot of optimism over how quickly and how great things are, like mRNA, and people assume that a lot of these companies are off to the races and will crank out vaccines,” Gordon said. “Normally, these things take seven years, with all the clinical trials, to get to market.”

Also, invest in companies with significant resources that have already had a vaccine approved from either their own platform or a similar platform elsewhere, Gordon said. “Trials are very large, and even companies with good technology, like BioNTech, had to work with a Pfizer because Pfizer had the organisation to be able to go global and to set up enough manufacturing sites and do everything for a huge trial. Pfizer spent hundreds of millions — if not a billion — to run those trials.”

Balance biotech risk with companies that provide “pickaxes to the miners”. There still is opportunity in companies in the supply chain, said Bowler of Schroders. “At the simplest level, there are companies in packaging, vials, in stoppers, and it doesn’t matter which vaccine is dominant,” he said.

“They all pretty much need to go to a small select group of companies, and the demand from biotech is far greater than from vaccines.” Bowler uses those companies to balance the risk of owning more volatile biotech companies in his portfolio.

Bloomberg News. More stories like this are available on bloomberg.com