The pharmaceuticals sector has caught investors' attention in the scramble to halt the pandemic. But what are the industry's longer-term prospects?
Beyond the coronavirus vaccine
The colder months are descending on the northern hemisphere, a second wave of Covid-19 is sweeping across the industrialised world and governments around the globe are looking to the development of a vaccine that they hope will solve the public health and economic crises.
The resulting urgency has produced a stampede of investor interest in the pharmaceuticals sector and, in particular, the companies chasing the so-far elusive prize. Companies such as US biotechnology firm Moderna and German biotech developer BioNTech have both seen their share prices more than triple since February.
what does the longer term hold for the pharmaceuticals sector?
But beyond the rush to pharma stocks since the World Health Organisation (WHO) declared Covid-19 a pandemic on 11 March, what if there is no vaccine or the vaccine takes much longer to develop than expected? And what does the longer term hold for the pharmaceuticals sector?
Eyes on smaller firms
Much of the investor attention so far has focused on the smaller pharmaceuticals and biotech companies involved in the competition to produce a vaccine, with at least 300 candidates in the race, according to the World Health Organisation (WHO).
And while big names such as UK-based AstraZeneca, US pharma giant Pfizer and US-healthcare firm Johnson & Johnson are deeply involved in the search, their share prices have not seen as much upside as the sector's smaller players.
the fortunes of smaller pharmaceutical and biotech companies tend to hinge on one product
Shares in AstraZeneca and Johnson & Johnson have risen by about one third since March, while Pfizer’s have risen by about 29 per cent. US pharmaceutical stocks, represented by the iShares US Pharmaceuticals exchange-traded fund (ETF), have performed broadly on a par with the wider Russell 1000 Index, with total returns in the 12 months to mid-September of 13.5 per cent.
But Chris Beauchamp, chief market analyst at trading and spread-betting platform IG, points out that the fortunes of smaller pharmaceutical and biotech companies tend to hinge on one product or focused area of research, which increases risk from an investor perspective.
A case in point is Moderna, which has seen its share price retreat twice to about US$73 in early October, once from a high of US$80 on 18 May, and then again in July when it hit an all-time high of US$94.85.
"A lot of the smaller pharma companies attract the so-called 'hot money', which can elevate their share price or cause it to fall from one day to the next," says Beauchamp. "They often live or die based on one product and that makes the future very uncertain."
Certain funds have even been building short positions in some of the industry's best performers, including Novavax, whose shares have risen by about 2,900 per cent since the start of the year, and Moderna.
The world's bigger pharma companies, by contrast, possess an extensive portfolio of drugs already being marketed. More important for the long term, they also have long drug-development pipelines that give investors a clearer view of likely future revenue streams.
total annual sales for the global pharmaceuticals industry exceeds US$1.2tn, equivalent to the gross domestic product of Mexico
Then there is the sheer size of the sector: total annual sales for the global pharmaceuticals industry exceeds US$1.2tn, equivalent to the gross domestic product of Mexico or double that of Taiwan. This creates stability for long-term investors. It also creates a potentially significant income stream given that the leading pharmaceuticals companies pay dividends, something that’s not lost on investors in a period of ultra-low interest rates.
Under pressure
As with almost all sectors in the digital age, disruption poses risks to traditional industry models. And a 2020 report on the future of the pharma industry by KPMG argues that drug producers face at least two big challenges over the long term.
The first is a fierce downward pressure on prices from governments and insurers across the industrialised world as they wrestle with growing demand from ageing populations while having to cope with shrinking public-sector budgets.
The second is what KPMG calls "a seismic shift" in healthcare over the coming decade that will see attention swing increasingly away from treatment to prevention, diagnostics and cure - a change that could see a wave of new entrants and non-traditional competitors in the sector.
drug producers face at least two big challenges over the long term.
One example of this is the development of a cure for hepatitis C, a disease which affects 180 million people worldwide and was previously considered incurable. "This has created a paradigm shift that has taken healthcare professionals, patients and payers by surprise," says the report.
Like almost every industry swept up by the technological changes in the fourth industrial revolution, this makes it difficult - if not impossible - to predict the future. In the medium term, however, the smart money seems to be on size and pipeline over one-hit wonders.
"It's a punters' market at the moment with lots of people betting on a handful of companies," says Joshua Mahoney senior market analyst at IG. "But it makes sense to look at the size of companies and the attractive diversification in products that they offer."