over 3 years ago • 3 mins
There was great rejoicing last week when pharmaceutical giant Pfizer and biotech BioNTech announced that the coronavirus vaccine they were developing appeared to be more than 90% effective. But good news for humanity in general might not in fact be all that great for pharma investors in particular…
It’s first worth noting that Pfizer’s early success won’t stop rivals AstraZeneca and Moderna continuing to work on their own vaccines, with the latter announcing its own positive update on Monday. Having numerous avenues of inoculation will be invaluable: each could end up attacking the virus in different ways, and with varying levels of efficacy. And even if they don’t, it’s probably best that the world doesn’t rely on just one company to manufacture such momentous medicine…
Nevertheless, investors in these pharma firms may find their thoughts dominated by a few potential short-term downsides:
1️⃣ Coronavirus vaccines represent a limited investment opportunity in themselves. While Pfizer’s is famously “for profit”, AstraZeneca has said its own vaccine won’t be – meaning there wouldn’t be much reason for its share price to rise on the back of any success it might (eventually) encounter.
2️⃣ Even in Pfizer and BioNTech’s case, that profit might not be as high as hoped. Vaccines are already one of the least profitable pharmaceutical business lines, and last week BioNTech confirmed it’d price its product below prevailing market rates – likely limiting how much other companies will be able to charge for their own.
3️⃣ The focus on coronavirus vaccines may have come at the expense of developing new, non-Covid drugs that could help grow pharma firms’ earnings. This “opportunity cost” could result in weaker-than-expected earnings growth in the years ahead.
It doesn’t pay to simply follow the news; it pays to really understand its implications for your investments – and it’s been all too easy to get caught up in the vaccine hype. So to refocus:
🦠 Pharmaceutical companies spend years and billions of dollars developing new drugs. When successful – about 5-10% of the time – they sell those drugs to recoup their research costs and then some, before plowing those profits into future development. Eventually, the patent protection on new drugs expires and their sales fall away as cheaper copycats step in and compete.
Pharma company investors accordingly look at how many drugs currently contribute to sales, when their patents expire, and whether there are promising new treatments (or preventatives) in the pipeline. Given large pharma firms tend to be pretty stable, investors also look for a high and reliable dividend yield.
💉 Biotech companies, on the other hand, are all about the new. They’re typically much smaller operations focused on formulating one major drug: a “blockbuster”. If they nail it, they’ll earn big bucks – if not, then they’ll likely fizzle out.
Without any revenue or profit to look at, biotech investors have to take a leap of faith. They’ll normally only do so if they really understand the science at work, or if a drug’s at a late enough stage of development that it’s deemed worth the risk…
With clearer eyes, you might now see that applying a hit-or-miss, biotech-style investment approach to a sprawling pharma company – and overlooking the products more important to its profit and share price – could easily bring an investor nothing but disappointment, even if the firm ends up producing a long-awaited vaccine. That blockbuster-based approach is best kept to biotech companies – with savvy investors instead evaluating pharma companies on the basis of their longer-term prospects.
Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.