All eyes have been on Big Pharma during the past year as they worked with unprecedented speed to develop vaccines to counter the spread of COVID-19.
But there is no consensus on whether investors should seize the opportunity these vaccines have presented.
The efforts of pharmaceutical companies have garnered praise from all quarters as they harnessed scientific and financial resources for global good. The halo effect is such that when Merck & Co. Inc. (NYSE:MRK) recently agreed to manufacture a vaccine developed by Johnson & Johnson Inc. (NYSE:JNJ) U.S. President Joe Biden praised the competitors for their “historic, nearly unprecedented collaboration.”
However, vaccines represent a small part of the overall operations of the big companies and offer thin profit margins. Johnson & Johnson and Pfizer Inc. (NYSE:PFE) have committed to public service pricing. Moderna Inc. (NDQ:MRNA), a much smaller company, is trying to recapture its investment while AstraZeneca PLC (NDQ: AZN) is somewhere in between.
It’s also unknown how much demand there will be in years to come. Once the pandemic is under control, will people need boosters? If so, how often? And will everyone need them, or just higher-risk populations?
“That’s the question. Is a COVID-19 vaccine a one-and-done thing or a sustainable business that keeps growing?” says Peter Choi, senior research analyst in New York with Vontobel Asset Management Inc., an asset management group based in Zurich.
Pfizer has hit a home run year with its vaccine, which was developed in partnership with Germany-based BioNTech SE (NDQ:BNTX).
In Pfizer’s first quarter, reported on May 5, COVID-19 vaccine revenue was 60 per cent higher than estimates. Looking ahead, the company has almost doubled its vaccine sales projections for the year to roughly US$26-billion from US$15-billion.
Pfizer is just one vaccine player, and the US$26-billion it expects in sales is already more than five times the annual global demand for flu vaccines, Mr. Choi says.
Paul MacDonald, chief investment officer at Harvest Portfolios Group in Oakville, Ont., also says that future vaccine demand is a question mark. He suspects the windfalls will tail off by 2023, and investors should look at the role of vaccines within the larger context of a company’s operations. For example, delayed surgeries are being rescheduled. That creates demand for hospital services, medical devices, supplies and drugs.
“Pfizer’s quarter was a big deal from the vaccine side, but the other good news is that when you peel it back and look at their base business, they’re performing really well too,” says Mr. MacDonald, who manages Harvest Healthcare Leaders Income ETF (TSX:HHL), which counts Pfizer, Johnson & Johnson and AstraZeneca among its holdings.
The prospect of more vaccine competition is another issue. Mr. MacDonald doesn’t think it will be material, even as rhetoric about lifting patent protection is grabbing headlines. He believes it’s little more than a distraction. That’s because by the time the issue is resolved at the World Trade Organization, the window for demand will have closed and, even then, there are high barriers to entry.
“Producing these vaccines is a hugely complex thing that only a few companies can do. You need technological expertise, manufacturing capability, logistics, distribution, and marketing,” he says. “By the time you get all of those things figured out, you’re into a time frame where you’re not going to need nearly as many doses.”
Both Mr. Choi and Mr. MacDonald say that while the vaccines are not hugely profitable, they add another product in a normally low-profile area. In addition, the lessons learned with the quick turnaround can be applied elsewhere.
One promising area is the messenger RNA (mRNA) molecule, which has been described as a surprising star of the pandemic response. It’s a key ingredient in the Pfizer and Moderna vaccines. While most traditional vaccines use a weakened version of the virus to generate an immune response, mRNA vaccines teach cells how to make a protein to trigger an immune response specific to each of us.
Mr. Choi says that mRNA vaccines had not been widely tested commercially before the pandemic.
“Now, hundreds of millions of people have received them and they’ve proven to be extremely effective with minimal side effects. That’s gone as well as you could have hoped,” he says.
Mr. MacDonald adds that during Pfizer’s earnings call, the company said it’s planning to test mRNA for flu and other vaccines.
Although pharmaceutical companies’ efforts to defeat the pandemic have changed perceptions positively among investors, Mr. Choi isn’t sure the halo effect will last. Many underlying tensions remain, he says, pointing to the patent protection debate and the ever simmering drug pricing issue.
Meanwhile, Mr. MacDonald believes that as long as the pandemic remains a public health threat, the goodwill will remain.
“For the next 12 to 18 months, anyway, we’re going to be talking about vaccine development and boosters. One can’t help but think that having the U.S. president praising the companies for delivering a solution that helps society changes perceptions about them,” he says.