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There Is No Vaccine Against These Investing Mistakes

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A tray contained ampoules of a Covid-19 vaccine in Russia in August.

A tray contained ampoules of a Covid-19 vaccine in Russia in August.

Photo: Andrey Rudakov/Bloomberg News

What’s the value of the most important medicine since the invention of penicillin? For shareholders, it all depends.

If you had bought into the stock of
Pfizer,
which was the first of the big pharmaceutical companies to announce its Covid-19 vaccine’s effectiveness, the answer is not a lot. Pfizer shares were down this year even before being hit on Monday by the effectiveness of the rival vaccine from
Moderna.

It gets worse. The pharmaceutical sector has lagged behind the rest of the market in the U.S. this year, not an obvious outcome at a time of pandemic-inspired drug discovery. Even the biotechnology sector, where Moderna sits, has underperformed the S&P 500, at least as measured by MSCI.

Warren Buffett is giving it a try, anyway. Berkshire Hathaway invested several billion dollars spread across Big Pharma and biotech names last quarter.

The broad explanation is that a vaccine is better for the rest of the world than it is for the maker of the vaccine. This showed up in the biggest winners from Pfizer or Moderna’s positive results on Monday and the week before: the cruise lines, airlines and oil companies, whose beaten-up shares jumped as much or more than Pfizer and Moderna on the prospect of a faster return to normal.

The pharmaceutical stocks face three financial headwinds, plus the fear of a political storm. First, they are treated as defensive due to their reliable sales, so they fell by less than the rest of the market during the March selloff, but after rebounding in April went essentially nowhere as the S&P 500 continued higher.

Second, Covid-19 vaccine sales might not end up as recurring revenue. There is no data yet to confirm how long immunization lasts, and investors disagree as to how much is priced in, but at the very least the Covid-19 vaccine candidates aren’t being treated like the moneymakers of annual influenza shots. The cash from billions of injections world-wide will be welcome but doesn’t add much to the pharma companies’ valuation multiples as a result.

Third, the vaccines are competitive with each other—and the leading candidates all work by targeting the same part of the coronavirus, so there is a decent chance that since two (plus the controversial Russian one) have good results, many others will, too.

“There’s a sort of winner-takes-all dynamic,” says Andrew Baum, head of health-care research at Citigroup. That helps explain why the immediate reaction to the good results from Moderna’s trial on Monday was to sell Pfizer, which became the third-biggest decliner in the S&P 500, giving back half of last week’s 6% gain. The trial results of the two vaccines showed similar effectiveness, but Moderna’s is easier to store and distribute as it doesn’t need to be kept so cold.

The political storm hasn’t appeared yet, but could. Drug companies are the most politically exposed part of the broken U.S. health-care system, because it is their expensive products that the sick end up contributing to through copays. Democrats have long been critical.

This isn’t to say there are no winners. The novel use of messenger RNA (mRNA) has been validated, which suggests the approach being commercialized by Moderna,
CureVac
and Pfizer’s German partner
BioNTech
could lead to other breakthroughs, too, especially against cancer. The shares of all three have already soared, along with some other small Covid-19-related biotech companies, although BioNTech fell hard on Monday because of the Moderna competition.

The biotech market is highly speculative and prone to mini-bubbles, which has made 2020 very strange. Before Monday’s fall, BioNTech was only 1% above its summer high, even though last week its approach was shown to work, while in the summer the evidence for mRNA vaccines was thin.

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Shares of Germany’s CureVac quintupled after its August initial public offering on Nasdaq, but despite a recent run-up are still well below the high. And Moderna—ticker MRNA—passed its July peak only on Monday. Again, it is weird that with the mRNA approach confirmed, the stock is worth pretty much the same as it was before anyone had shown it could work.

“It was really wishful thinking,” says Kosta Kleyman, therapeutics analyst at Columbia Threadneedle. “It’s hard to imagine anyone could have with this much confidence predicted that the vaccines would work, with just [preclinical] data.”

Biotech’s oddness extends to its main exchange-traded funds. Mainstream biotech indexes are weighted by market value and dominated by two big players,
AbbVie,
up by less than the S&P 500 this year, and
Amgen,
whose shares are down. The biggest U.S. biotech ETF,
iShares Nasdaq Biotechnology
(ticker IBB), includes only Nasdaq-listed stocks and so excludes AbbVie. The second-biggest,
SPDR S&P Biotech
(XBI), treats each stock almost equally, minimizing AbbVie and Amgen’s effect. Because some of the upstarts have done phenomenally well this year, it is up 32%, much better than IBB’s 17% or the S&P’s 12%.

What all this shows is that how an investment idea is implemented is just as important as the idea itself. An inspired bet that the Pfizer/BioNTech vaccine would work out would have been deeply unimpressive if carried out by buying Pfizer shares. Buying BioNTech could have worked out incredibly well, but not if executed when everyone else had the same idea in the summer.

Equally, a bet on the new interest in vaccines boosting biotech or helping Big Pharma overall didn’t work out well if you used the standard value-weighted indexes; biotech delivered good, if volatile, returns on an equal-weighted basis. The real win was to predict the exact timing of the positive vaccine-trial results and then choose to buy cruise line Carnival—not only difficult but something that would have appeared completely mad if explained in advance.

As government and private money pour into the global race for a Covid-19 vaccine, drug makers are under great pressure to keep the shot affordable while also keeping investors happy. WSJ explains what this means for the final price tag of the jabs. Illustration: Crystal Tai

Write to James Mackintosh at James.Mackintosh@wsj.com

A Global Asset Management Seoul Korea Magazine

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