The big pharmaceutical companies have always tended to generate a somewhat mixed response when discussed in the wider context of stock picking.
The sector has had a fairly unremarkable few years, dominated largely by the likes of the big guns of Pfizer, Roche, Novartis, Merck, Johnson & Johnson, GlaxoSmithKline and AstraZeneca, which accounted for about a third of total revenue in the sector in 2019. The publicity that pharma has had hasn’t been particularly positive, with scandals over price-gouging hitting headlines.
In terms of success, it’s not always about the share price performance, and that’s certainly true of big pharma this year, especially considering the impact of Covid-19 and the potential for further advances in the messenger RNA technology used in some vaccines.
Covid-19 puts pharma centre stage
The arrival of the coronavirus pandemic at the beginning of the year thrust the biotech giants into the spotlight once again, and while governments around the world threw billions of dollars at attempting to create a vaccine, the share price performance of some has been a little disappointing, particularly among the bigger players.
Big pharma share price performance in 2020
Source: CMC Markets
This underperformance has largely been down to the fact that the companies have pledged not to profit from the vaccine. However the technology that it uses, particularly in respect of messenger RNA, could have other practical uses for other as yet undiagnosed diseases, as well as existing ones.
The US government’s ‘ Operation Warp Speed’ has funded a good proportion of some of this research into the vaccine, though it has also been notable that not all companies availed themselves of it, while the UK, as well as the EU, also pledged vast amounts of money, along with orders for some of the most promising candidates.
Mixed fortunes for vaccine candidates’ share prices
The front runners in Europe and the US have been the Pfizer/BioNTech collaboration, which targets the virus using messenger RNA to prompt the immune systems to recognise the virus, by way of its spike proteins. This has never been done before; most vaccines are created by using weakened or inactive versions of the existing virus. The vaccine requires two doses about a month apart, however its distribution does present challenges due to it being required to be stored at -70c. It also has a reported 94% efficacy rate.
We also have the AstraZeneca/Oxford University vaccine, which has been developed again by way of a joint venture, and also requires two doses, 28 days apart. However, it does have a lower efficacy rate, which could change as further testing and assessment is completed. On a more positive note, the Oxford candidate is much easier to store, in that it can be kept at the temperature of a normal freezer of about -20c. It’s also different to the Pfizer vaccine as it’s made from a weakened version of the common cold virus, which has then been genetically altered to target and recognise the protein spikes of the virus and destroy them.
Another candidate is Moderna’s offering, which, like the Pfizer/BioNTech vaccine, is also a messenger RNA vaccine, and according to trials, has a high efficacy rate of 94.5%, according to the latest trial results. Like the Oxford vaccine, it can be stored at the higher temperature of -20c.
Moderna and BioNTech share prices hit new highs
While share price performance has been unremarkable among the big names, the same can’t be said from the likes of Moderna and BioNTech, who have had a stunning change of fortune.
At the beginning of this year, Moderna Biotechnology was a small company in Cambridge, Massachusetts, specialising in unproved messenger RNA technology, with a market cap of $6.6bn, and which only listed in June 2018. Since it became apparent that this new technology was going to be a game changer, Modern’s share price has surged, from levels of around $60 in the middle of the summer to peaks just shy of $180 at the end of last month.
Moderna share price chart (2020 YTD)Source: CMC Markets
BioNtech is another success story. The German company, founded by a husband and wife team are based in Mainz, and previously specialised in cancer therapy treatments using messenger RNA gene therapy.
In January, Dr Sahin read an article in the medical journal the Lancet about a new respiratory virus coming out of China, and realised it had the potential due to potential pathogenic qualities to turn into a global pandemic.
Within weeks, on 17 March, he had secured a deal with Pfizer to help the company with clinical trials, the announcement of which sent the BioNTech share price soaring. The first stage of trials began in April, while most of Europe was still in lockdown.
BioNTech share price chart (2020 YTD)Source: Bloomberg
Phase three trials began in late July, and were expanded all over the world beyond just the US and Germany, to South America, as well as Turkey. The rest as they say is history.
Other candidates include a couple from China, namely Sinovac Biotech and Beijing Institute of technology, and one from Russia, Sputnik V, all of which are based on variously different common cold viruses.
M&A activity subdued in 2020
Pharma tends to be a sector that gets a lot of merger and acquisition attention, given that innovation tends to happen by way of a big multinational swallowing up a more specialist company in order to diversify its drugs model.
In 2019, there was a significant amount of M&A activity in the sector, from the $74bn Bristol Myers-Celgene deal, to the $63bn AbbVie-Allergan deal, as well as the $58.6bn Takeda-Shire deal. Even Pfizer got in on the act, acquiring Array Biopharma for $11.4bn.
However, M&A activity has been much more subdued this year, and we don’t have to look too far to understand why, though that didn’ t stop AstraZeneca from trying to acquire Gilead Sciences during the summer, though it appears to have more success with Alexion Pharmaceuticals, which it has made a $39bn bid for.
Small companies take the lead in innovation
The past few months have offered the pharmaceutical sector a shot at redemption after some pretty wretched PR in recent years, however it has been notable that for all the success this year of a vaccine candidate, it has been the smaller specialised biotech companies that have delivered a solution, which big pharma, for all of the size of its R&D budgets, has been unable to.
It’s been the little guy that has delivered the goods, though the scale of the big pharma companies has helped in terms of the trials and testing. As for Moderna and BioNTech, the success story has probably only just begun.