Worried about missing out on vaccine profits? Don’t.
What will happen to the perception of the “evil” profit-hungry drug companies when the dust settles from the pandemic? A year ago, headlines like this one from the Kaiser Health Network were common: “Despite Intense Public, Congressional Scrutiny, Pharma Still Hikes Prices For Hundreds Of Drugs In 2020” (January 3, 2020). These days, by contrast, we’re counting on those same ne’er-do-wells to literally save our butts. And it appears they’re up to the task. But here at Wealth Protection Research, we’re about profits, not perception. For some ideas along those lines, read on…
— Bob Bogda, Editor
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In the 1960s comedy sketch “The 2000 Year Old Man,” Carl Reiner, playing an interviewer, asks Mel Brooks, the 2000-year-old man, his secret to living a long life.
His reply: “I never run for a bus. There’ll always be another one.”
As investors, one of our biggest fears is FOMO: fear of missing out. Currently, there is a lot of FOMO surrounding the COVID-19 vaccine-pharma trade.
Feel like you’ve missed the bus? Relax. There will be another one.
Pharma giant Pfizer (PFE) may have been the first to announce significant efficacy but rolling out its vaccine faces huge hurdles. In its present form, the doses must be stored at -94 degrees Fahrenheit. The ability to package, ship and store the vaccine faces significant logistical challenges. Because the company expects to ship 50 million doses in the remainder of 2020 and a mind boggling 1.3 billion doses in 2021, Pfizer is putting its own supply chain in place which will be costly at best.
The second big announcement came on Monday from cutting-edge biopharma firm Moderna (MRNA). Moderna announced Phase 3 trial results of 94.5% efficacy for its COVID-19 vaccine. Moderna’s advantage is that its vaccine can be stored in regular refrigerators.
A number of other well-known names are also working on vaccines. These include some of the biggest pharma companies in the world, whose shares are extremely cheap relative to the rest of the market and the competition.
Drug giants Glaxo Smith Kline PLC (GSK) and Sanofi (SNY) have partnered to develop a two-dose, recombinant protein-based vaccine for COVID-19. This means that the vaccine does not use the live virus but rather uses recombinant DNA to produce an immune response. Importantly, this type of vaccine helps eliminate post vaccination reactions in the recipient such as mild symptoms of the disease the vaccine is meant to prevent.
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More important, if successfully distributed, Glaxo and Sanofi’s vaccine can be stored at a temperature of around 40 degrees Fahrenheit. This means that it can be easily stored in a regular refrigerator in a doctor’s office or pharmacy.
That’s a good thing because Glaxo and Sanofi are scaling up to produce more than a billion doses if Phase 3 trials prove successful by year end. The partners anticipate shipping 200 million doses initially priced at around $10.50 per dose. Compared with Pfizer’s initial order of 100 million doses at $20 a dose and Moderna’s initial shipment of just 20 million doses at $20.50 to $30 each, the Glaxo-Sanofi collaboration has much more scale and pricing power. Longer term, it’s potentially a much better bet.
GSK and SNY have combined annual revenues of over $67 billion and more $3 billion in free cash flow. Moderna? Annual revenue of $247 million and negative cash flow.
As things stand right now, I prefer GSK and SNY.
Outside of their work on a COVID-19 vaccine, these are world-class pharma companies with solid franchises, pipelines and balance sheets. GSK trades at around $37.26 with a forward PE of 12.47 and a generous 5.36% dividend yield. SNY is priced at about $51 a share with a forward PE of 15.26 and a 3.32% dividend yield.
No fewer than ten other high-quality pharma giants are frantically developing vaccines and treatments as the need for such is, indeed, dire. However, like market timing, buying a pharma stock in anticipation of a drug announcement can amount to a fool’s errand. If the stock gets a nice pop based on some positive vaccine news, great. But better to own a company with a solid operating history and strong fundamentals in case you end up holding it longer than you anticipate.
Don’t get caught up in the news cycle.
Purchased together, GSK and SNY stocks trade at a combined forward PE of 13.37 with a blended dividend yield of 4.37%. As the mobilization for the fight against COVID-19 is massive, if successful, these companies should benefit. Patient investors could enjoy total returns of 25%+ over the next 12 to 18 months.
Action to Take: Covid-19 vaccine efficacy announcements from other big pharma companies will dominate the headlines through the end of the year. The Glaxo/Sanofi effort will be among them. The shares tend to creep up in sympathy with rival announcements. It’s okay to buy in this range. The valuations are extremely attractive and the underlying fundamentals are ironclad regardless of vaccine news. But, getting out ahead of the news is never a bad thing while the stocks are reasonably priced.
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Dec 14th, 2020