Several companies have announced various degrees of progress on a COVID-19 vaccine in recent weeks, cheering many of the financial commentators we follow. But their enthusiasm apparently stretches beyond broad equity markets. We have seen a steady trickle of articles encouraging investors to chase quick riches in the vaccine arena, purportedly with tricks to identify the frontrunners as well as the overlooked dark horses who could win a surprise victory. We aren’t here to offer securities recommendations or pass judgment for or against any one company, and we think investors do benefit from owning some large, Pharmaceuticals firms for diversification, as we will discuss further. However, we don’t think trying to reap big returns from a COVID-19 vaccine is a wise approach for long-term investors.
Our research shows markets are efficient and forward-looking—they quickly factor in widely known information and then move on, anticipating corporate earnings over the next 3 to 30 months or so. Given the amount of attention throughout the global media on vaccine candidates and clinical trials, we think basing investment decisions on vaccine news is the very definition of buying on widely known information. In our view, presuming vaccine progress offers any sort of an edge is to presume markets aren’t efficient at all, with a blind spot toward one of the most discussed news items on Earth. That strikes us as heat chasing—investing based on past performance—which we think is a recipe for error.
Even if you don’t accept the conceptual argument above, we see practical problems with the vaccine-winner investment thesis. By US News & World Report’s count, there are over 100 vaccines in the works, with about one-fifth already in human trials.[i] With such a broad pool, how do you identify the winner? A 1-in-20 chance, presuming one of the drugs that has already advanced to human trials crosses the finish line first, amounts to a 5% probability of choosing correctly. If you try to overcome this by owning several of the contending companies in hopes that one of them will be the winner, simple logic suggests you run the risk of the totality of your investment disappointing. Hypothetically speaking, if you buy now, investors’ vaccine hopes are likely baked into every contender’s price. Therefore, it stands to reason that even if the winner generates some excess returns, there is a high likelihood that investors’ disappointment over the rest is more than enough to cancel it out.
The whole notion of trying to reap big rewards from vaccine winners rests on a flawed premise, in our view: that the vaccine itself will ultimately be profitable. That strikes us as a bit presumptive, to say the least. Few, if any, industry observers we follow think any one company is likely to have a monopoly on an eventual vaccine. That means the volume of doses produced and sold will likely be spread across many firms. Two of the companies currently working on a vaccine with US government assistance have announced they will offer their vaccine “on a not-for-profit basis” if it is successfully approved. Another accepted $1.6 billion in US government funding as pre-payment for 100 million doses.[ii] The UK government has signed similar deals with several vaccine contenders as well.[iii] In addition to being widely known and therefore already incorporated into analysts’ earnings expectations, news coverage stresses that all of these up-front deals are at pandemic emergency prices. Based on our research, the main contenders mostly view themselves as performing a public service. In our view, any Pharmaceuticals firm that isn’t party to these deals and develops a successful vaccine would likely come under extreme political pressure to match that attitude and pricing structure.
When choosing Pharmaceutical companies to include in a diversified equity portfolio, we think investors benefit more from taking a wider, longer-term view of a company’s entire pipeline. Despite the focus on COVID, a large body of industry research and companies’ financial statements have demonstrated that vaccines just aren’t all that profitable. They are a one-time purchase—demand spikes, then disappears. We strongly suspect this is why the few companies that developed vaccines in the pre-COVID world relied heavily on government subsidies.
Our research shows Pharmaceutical companies generally make the vast majority of their profits on disease treatments, where their margins are largest and patients buy more than a single dose. A COVID vaccine will get a company heaps of attention, but it won’t fill that company’s pipeline with new treatments for cancer, hepatitis, dementia, Alzheimer’s and scores of other infectious and degenerative diseases and chronic conditions. Unlike a vaccine, these treatments can generate revenue and profits for years or even decades, depending on the disease or condition. In our view, the companies with the highest potential on this front, regardless of their position in the COVID-19 sweepstakes, are likely better candidates to fill out the Pharmaceuticals portion of a long-term portfolio. If they happen to develop vaccines that quash COVID, so much the better, but we don’t think that should be your investment thesis for owning them.
[i] “7 Pharmaceutical Stocks Working on a Vaccine,” Mark Reeth, US News & World Report, 7/8/2020.
[ii] “How Much Will a Coronavirus Vaccine Cost?” Sabri Ben-Achour, Marketplace, 17/7/2020.
[iii] “UK Strikes Two Covid-19 Vaccine Deals for 90 Million Doses,” Lina Saigol, MarketWatch, 14/8/2020.
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