Since the covid-19 outbreak at the beginning of last year our lives have drastically changed, and so has the economy. Cyclical businesses were the most impacted all around the world because of an unprecedented shock in both supply and demand, whereas e-commerce and new online communication technologies have thrived. As time goes by, it is more and more evident that even if central banks keep stimulating the economy through expansionary monetary policies and low-interest rates, a full recovery will not take place until the virus will be eradicated, and confidence restored. We are in a war where time is extremely precious and our only real effective weapon against the enemy is a vaccine. But every war has its arms dealers and, in this case, we are talking about some of the biggest pharmaceutical companies in the world. However, while there is an enormous global demand for vaccines and many rich countries will not even look at the price, the cost and the consequences of producing a vaccine have serious implications for the companies in the short term that many may not be considering.
On January 9 Pfizer-Biontech announced a 90% effective vaccine; the same day the MSCI’s All-Country World Index rose by 1.3%, while the Dow Jones closed at +3% and has registered a +7.75% since. That is a sign that markets are desperately looking for stability and see the vaccine as the only permanent solution to the problem. On average, the 45 public pharmaceutical companies around the world saw a +262% increase in their share price last year, also because of speculation around some companies that are still in pre-clinical trial with no real guarantees of succeeding, like Vaxil Bio (+1350%), IBio (+517%) or Heat biologics (+206.6%). On one side there are the biotech startups like Novavax (+2078% YTD), Moderna (+867% YTD), or Biontech (+211% YTD) that profited enormously from the vaccine research as it represents their core business, while on the other side there are the biggest traditional pharmaceutical firms which had to convert their production in order to start the mass distribution of their new product. By doing so, companies like Pfizer, Merck, and Johnson & Johnson lost parts of their market shares in their traditional businesses and their stock performance reflects this situation, since last year Pfizer lost -9.54%, Merk -12.36%, and Johnson & Johnson gained “only” +9.27% on its share price. The research and production of vaccines have always been a marginal business for the biggest players, whose focus was mainly on generic drugs, heart medications, psychopharmaceuticals, and specialized tools for doctors. So, the combination of losing a part of their business and high costs for research and development of the vaccine has been a big issue, as reported in all quarterly results.
Some of the main vaccine producers are also having a rough time because of ethical issues, which are almost inevitable when it comes to such an important resource. After a good start in the distribution in Europe at the end of December, Pfizer started to cut estimates about its production capability because of “Excessive demand”, but many believe that the company is just giving priority to countries who pay more for the vaccine, like Israel who pays nearly twice as much as Europe (28US$ vs 14US$). This led to many European countries, among which Italy, threatening to sue Pfizer. In fact, time is the key factor to beat the pandemic, save lives and see a quick economic recovery; rich countries will not tolerate any further delays. European countries are really in a rush, as confirmed by the “Ema Leaks” case, a series of e-mails between the European Medicine Agency and Pfizer, where Pfizer warns about some lots of vaccines being less effective, which shows that the EMA has approved the vaccine without Pfizer still having an adequate Rna production capacity in Europe. Analysts from HSBC and Deutsche Bank see the vaccination process as more complicated than expected and many obstacles that still divide us from normality.
In order to overcome these problems, pharmaceuticals are trying to outsource production to third companies, at least ten in Europe up to now (MF*), some of the most famous being Oxford Biomedics, Recipharm, Rovi, and Siegfried. On average, these public companies have witnessed a +123% growth in their stock price in the last 11 months and a significant increase in revenues. The same is true for diagnostics companies (that averaged a +44% since March), the two best performers being the American Thermo Fisher Scientific (+68.82%) and Italian company Diasorin (+67.14%). The interesting thing about these businesses is that their stock performance is inversely related to that of vaccine manufacturers. If we take November 9 as an example, the day that Pfizer announced its vaccine, diagnostics lost 10% on their market cap in a matter of hours on average. In conclusion, many believe that at the end of the covid-19 experience, both the vaccine and the diagnostics businesses will come out much stronger and more prepared for future challenges in any field of biomedicine.
MF*= Milano Finanza
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