The Best Way to Play the Vaccine Races? Don’t.

Several companies have announced various degrees of progress on a COVID-19 vaccine in recent weeks, cheering investors. But the enthusiasm stretches beyond broad 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. 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, growth-oriented Pharmaceuticals firms for diversification. However, we don’t think trying to reap big returns from a COVID-19 vaccine is a wise approach.

Markets are efficient and forward-looking, quickly digesting widely known information and then moving on. Given the amount of attention on vaccine candidates and clinical trials, basing investment decisions on vaccine news is the very definition of buying on widely known information. Presuming it 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 and a recipe for error.

Even if you don’t buy 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 a bunch of companies in hopes that one of them will be the winner, you run the risk of the totality of your investment disappointing. If you buy now, investors’ vaccine hopes are likely baked into every contender’s price. Therefore, it stands to reason that even if there are some excess gains left in the winner, disappointment over the rest is probably 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, observers think any one company is likely to have a monopoly on an eventual vaccine. That means the volume will be spread across many firms. Two of the companies currently working on a vaccine with Federal 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 Federal funding as pre-payment for 100 million doses.^[ii] The UK has signed similar deals with several vaccine contenders as well. In addition to being widely known and baked into earnings expectations, 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 investments, we think investors benefit more from taking a wider, longer-term view of a company’s entire pipeline. Despite the focus on COVID, vaccines just aren’t all that profitable. They are a one-time purchase—demand spikes, then disappears. This is why the few companies that pursued vaccines in the pre-COVID world relied heavily on subsidies. 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. 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.