Interactive Investor

Stockwatch: where next for vaccine heroes’ share prices?

Companies behind the leading Covid-19 vaccine saw limited rises yesterday.

10th November 2020 12:09

Edmond Jackson from interactive investor

The companies behind the leading Covid-19 vaccine saw limited rises yesterday, raising questions for interested investors.

Yesterday it emerged that a 90% effective vaccine against Covid-19 was nearly ready for launch, which was on the front page of every national newspaper today.

But the companies responsible – Pfizer (NYSE:PFE) and Germany’s BioNTech SE (NASDAQ:BNTX) – saw limited stock market gains.

Rolls-Royce (LSE:RR.) was up 90% at one stage yesterday, a slew of transport and pub stocks rose by about 30% and cinemas/gyms by 40%.

Yet Pfizer rose less than 8%, and BioNTech by just under 14%.

This development begs a series of tactical questions

Do these drug stocks merit buying, or is it better to play any sea-change in sentiment via stock in industries hurt most by the pandemic? 

Also, is it better to sell richly-valued internet and ‘work-from-home’ stocks especially the US FANGS, which lagged yesterday? 

Here, Covid/lockdown favourites such as Novacyt (LSE:NCYT) and Ocado (LSE:OCDO) plunged 30% and 12% respectively. 

What of other pharmaceutical stocks, specifically AstraZeneca (LSE:AZN) whose vaccine developed in partnership with Oxford University began production yesterday in Australia despite not yet passing the last stage of approval?

News on the Oxford-AstraZeneca phase three trial is said to be due in the next fortnight.

Double whammy of vaccine breakthrough plus confetti cash 

Pfizer’s news is huge, but is essentially the first major news from 52 Covid vaccines being trialled, of which 11 are now in phase three. 

It is starting to look as if medics’ optimism and exceptional effort on a global scale stands a decent chance of success.

Sentiment towards equities may continue to rise given a situation of containing the virus combined with massive economic and monetary stimulus.

Since the 2008 financial crisis and markets’ rebound only last March, traders’ reflexes are attuned to buying this macroeconomic cocktail of debt-driven government spending.

Biden's victory reinforces this, as does central banks' bond-buying for cash.

Pfizer’s scale limits upside but it could still lead the Covid vaccine race

At $39.20 (£29.57) Pfizer is capitalised around $218 billion a historic price-to-earnings ratio of 25x.

This reflects demand for global pharmaceutical stocks as a cornerstone for many investment portfolios. 

A prospective yield of around 4% is material, since monetary stimulus measures have destroyed yields from bonds and should be relatively safe versus a swathe of industries having to bypass dividends currently.  

Yet Pfizer’s size, and also diversity of medical treatments, makes it harder for any blockbuster to re-rate market value. 

Perhaps investors also wonder what might be around the corner from other Covid-19 vaccine trials and whether governments may be committed to some extent to domestic companies (some partnered with universities). 

Classic hope for a ‘blockbuster’ drug may simply not apply. 

Moreover, a four-year snapshot of Pfizer’s income statements (see table) is unconvincing as to revenue growth, a key criterion for growth stock status. 

In 2017 the company enjoyed a whopping tax credit that boosted net profit and its earnings per share, otherwise its numbers are still quite volatile.  

Yet investors’ sense for global pharmaceutical stocks offering a decent compromise of defensive value plus dividends means Pfizer's chart affirms the theory of ‘buy the dips’.

Its share price is now back to highs seen last in January, April and July. 

My sense is Pfizer rating as a ‘buy’ if competition fails to manifest in coming weeks, hence potential to be seen as market leader in the race for a Covid-19 vaccine. 

Otherwise, ‘hold’ applies. Amid a paucity of dependable dividends you could say this means a modest position in Pfizer is merited: the stock's downside should not be material and you might get lucky.

Pfizer Inc - financial summary              
year-end 31 Dec              
  2016   2017   2018   2019
Revenue 52,824   52,546   53,647   51,750
Gross profit 40,495   41,306   42,399   41,531
Research & development -7,872   -7,657   -8,006   -8,650
Sales & administrative costs -14,837   -14,784   -14,455   -14,350
Operating profit 13,730   14,107   15,045   13,921
Pre-tax profit 8,351   12,305   11,885   17,682
Net profit 7,215   21,308   11,153   16,273
Diluted EPS 1.17   3.52   1.87   2.87

Source: Company REFS

BioNTech is more a wild goose chase for intrinsic value  

Its table of summary income statements is the kind of profile liable to deter me, given I prioritise proof of investment value. 

Yet this difficulty is a plus for sentiment-driven traders as no-one can easily check rising hopes with a definitive sense of what the business is worth. 

Past experience of stock manias, for example, show all manner of discounted cash flow valuations emerging that can involve a wide range of target prices - with bullish brokers promoting the highest. 

So yes, if this particular vaccine becomes a global market leader then BioNTech will get punted. ‘Buy’ if you have risk appetite for such speculation. 

Somewhat similarly to Pfizer, the chart for BioNTech has three modest spikes this year and the current one regains previous highs. Technical analysts might therefore regard a movement higher in weeks ahead, according to industry news flow, as rating ‘buy the break-out’. 

BioNTech is also a relatively smaller company, capitalised around $25 billion, hence potential for one particularly successful drug to boost value. 

BioNTech SE - financial summary          
year-end 31 Dec          
  2017   2018   2019
Revenue 61,598   127,575   108,075
Gross profit 52,280   113,885   91,228
Research & development -85,496   -143,040   -226,466
Sales & administrative costs -29,472   -27,090   -43,410
Operating profit -61,277   -53,853   -181,518
Pre-tax profit -85,905   -47,662   -179,440
Net profit -85,653   -48,019   -179,056
Diluted EPS -0.38   -0.21   -0.85

Source: Company REFS

US Food and Drug Administration (FDA) approval looks assured

Required safety data gathering will last until the third week of November, then be submitted to regulators for approval.

However, the FDA has previously said any vaccine proving over 50% effective could be licensed (given risks also of hesitancy while a pandemic accelerates). 

Furthermore it seems improbable other countries would delay getting a place in the order queue unless committed to results of their own research.  

The 90% efficacy trumpeted by Pfizer is a very high number. Remarkably, Sir John Bell, a Canadian immunologist on the UK vaccine task force, repreatedly affirmed how life could be back to normal next springtime. 

Personally I find that over the top and a sign that experts can be too close to their subject to judge context. 

We have yet to see proof of longevity. We also have not seen if the vaccine can cope with variant mutations of the virus, as is happening in Denmark with the offshoot of Covid-19 found in mink.

Now do we know if the logistics of global distribution can cope. But yes, it is undoubtedly positive news. 

This Pfizer-BioNTech trial began in July, involving 43,538 volunteers split between taking the vaccine and a placebo. 

It appears those from black and ethnic minority backgrounds are seemingly as well protected as others. 

The latest update was released once 94 participants had developed Covid-19 with at least one symptom. It was found to be effective 28 days after a second dose.  

Pfizer is likely first to prioritise US distribution

In advance of yesterday’s news, Pfizer’s UK managing director had said 40 million doses of the vaccine were sitting in a Belgian warehouse, the UK having pre-ordered enough to treat 20 million people with two doses.

However yesterday, Pfizer’s vice-president of global supply indicated distribution as more likely to happen in the first half of next year. Around 50 million further doses are indicated by the end of this year, 1.3 billion potentially by the end of 2021. 

The US is likely to be prioritised initially, with 100 million doses rising to 500 million. So I reckon it will be sometime later next year before need for masks and social distancing can abate. 

Investors in businesses most exposed to Covid-19 will need to see through to better times, but with monetary stimulus remaining high a fear of missing out may well support such stocks. 

Minus 80 degrees centigrade challenge for distribution

The vaccine needs to be kept cold. Pfizer says its shipment boxes incorporate dry ice so can sustain this temperature for up to 10 days. Once thawed the vaccine can last up to five days at between -8 degrees and 2 degrees.

That still implies a huge logistical challenge of planes, trucks and cold storage warehouses to vaccinate billions of people globally. 

The temperature challenge is nothing unusual though: some 25% of vaccines are generally degraded by transportation, thereby compromising protection.

So yes, there are significant hurdles ahead. But with the world desperate to sense a solution, confidence is likely to rise. 

This should help Pfizer and BioNTech for the medium term but watch for news next on the Oxford-AstraZeneca vaccine.   

Edmond Jackson is a freelance contributor and not a direct employee of interactive investor.

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