By Gregory Zuckerman
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (May 15, 2020).
As drug companies race to discover treatments for the new
coronavirus, big investment firms are placing cautious bets on
likely winners.
Hedge funds and venture-capital firms, which are in the business
of predicting the future for companies and economies, are growing
more confident researchers will develop effective drugs to fight
the pandemic.
Yet, successful efforts that could help millions -- or even
billions -- of people, might not result in big profits for
shareholders, the investors argue. Some are even placing bearish
wagers on pharmaceutical companies they believe are attracting
excessive excitement over their progress on Covid-19
treatments.
"Most of the stock prices don't bear semblance to reality," says
Joseph Edelman, who runs Perceptive Advisors, a $4.2 billion New
York hedge health-care fund, which is focused on what it sees as
the disconnect between the price of stocks like drug company Gilead
Sciences Inc. and their potential profits from any treatment or
vaccine.
Gilead is up 18.9% this year, thanks to remdesivir, an antiviral
drug administered intravenously that shortens the recovery time of
hospitalized Covid-19 patients, according to recent data.
It is always hard anticipating successful drugs, but those
wagering on coronavirus treatments face unique challenges. Some of
the most innovative and promising approaches are wholly unproven.
Companies are competing with foreign nations and not-for-profit
organizations determined to achieve their own breakthroughs.
Successful drugs or vaccines may run into pricing, manufacturing
and distribution difficulties.
Among the issues investors are struggling with: Can Covid-19
treatments help those sick while also protecting individuals
against the virus, or will that require different drugs? Will
vaccines render treatments less necessary? Will governments allow
companies to charge high enough prices to generate sizable
profits?
Larry Robbins, who runs health-care hedge fund Glenview Capital
Management, is avoiding bets on possible coronavirus treatments,
partly because he expects researchers to find a vaccine, limiting
the need for even the most effective treatments.
"We are all cheering for a treatment on a humanitarian level,
but as an investor, you have to believe a treatment works, and that
sales last long enough for it to have a material impact on a
company," he says.
Gilead is among the stocks that has investors thinking twice.
The company expects to manufacture more than one million treatment
courses of remdesivir by the end of this year, and the drug could
have billions of dollars in new annual sales, investors say. If
Gilead can develop an inhaled version of the drug or other
alternatives to receiving it intravenously, its popularity could
increase, bullish investors argue.
But Gilead has promised to donate 1.5 million doses of Covid-19
treatments to hospitals free of charge, and the price it would
charge thereafter is unclear, raising questions about eventual
profits. In the past, Gilead has been criticized for placing high
prices on its HIV and hepatitis treatments. It may feel pressure to
keep a lid on remdesivir's cost -- especially given President
Donald Trump's past public criticism of drug prices.
If Gilead charges about $4,000 per course, as some investors
predict, that would result in $4 billion of revenue for a million
patients. That figure would be well below Gilead's $14.6 billion of
added market value this year -- without taking into consideration
the drug's development costs, estimated to be about $1 billion, a
figure that would reduce any profits.
Some bearish investors aren't yet convinced of remdesivir's
efficacy.
"Even if the drug has only a modest effect, people will still
prescribe it, but Gilead won't make a lot of money," says Dr.
Joseph Lawler, who runs hedge fund JFL Capital Management, which is
shorting, or betting against, Gilead.
Gilead's company spokesman said the drug company hasn't yet set
a price for remdesivir.
"At this time, we are focused on ensuring access to remdesivir
through our donation," he said. "Post-donation, we are committed to
making remdesivir both accessible and affordable to governments and
patients around the world."
Dr. Luciana Borio, who was director for medical and biodefense
preparedness at the National Security Council, argues that smaller,
private companies may emerge with the most effective treatments,
not publicly traded companies, another challenge for investors.
"For technology that's truly innovative and disruptive there's
opportunity for funding and interest in partnerships," she
says.
Some investors are focusing on treatments that may help those
who are sick but also can prevent people from getting the virus, a
larger potential market. These investors are betting on therapies
that use antibody proteins generated by the body's immune system.
These antibodies may be able to block the action of the
coronavirus's "spike" protein, preventing the virus from infecting
healthy cells.
Mr. Edelman, of Perceptive, owns shares of Regeneron
Pharmaceuticals Inc., a leader in antibody therapies. The company
is using a "monoclonal" antibody approach, where scientists select
the most powerful antibodies from recovered coronavirus patients --
or, in the case of Regeneron, from mice that have been given human
immune systems -- clone them, and turn them into drugs.
Regeneron plans clinical trials in early summer and is preparing
to manufacture hundreds of thousands of doses each month beginning
in late summer.
Robert Nelsen, who helps run venture-capital firm Arch Venture
Partners, which made early and successful bets on cancer
immunotherapy, is backing VIR Biotechnology Inc., which plans
trials for its own monoclonal antibody therapy this summer.
"I'm pushing them every day," Mr. Nelsen says. "We don't know if
the virus will be weaker or stronger or the same in the fall, but
in 1918 it came back stronger, so we have to be prepared."
Regeneron shares are up 52% this year, adding $23 billion in
market value, while VIR is 148% higher and has added $2.3 billion
in value.
Some investors say if a vaccine is discovered it could limit
these shares' potential. Mr. Nelsen counters that it could take
longer than expected for researchers to find vaccines, creating a
huge market for antibody treatments.
"Vaccines are never 100% effective," he argues, "so antibody
therapeutics may be key to preventing a re-emergence."
One high-risk, high-reward strategy: Buying shares of tiny
companies with potential upside. Messrs. Edelman and Nelsen hold
big chunks of ownership in VBI Vaccines Inc., an unproven biotech
company claiming an experimental vaccine approach. The stock closed
at $2.07 on Thursday.
Forecasting a winning vaccine is perhaps even harder than
predicting coronavirus treatments. By some measures, Chinese
companies and a group at Oxford University are in the lead. Some
companies say they will distribute a vaccine they develop at cost,
potentially reducing profits for others. Still, the potential
market is huge -- some investors believe a combination of vaccines
may be necessary to meet global demand, perhaps a low-cost option
for younger, healthier individuals and a more potent one for those
who are immune-compromised.
Moderna Inc. has attracted the most excitement among vaccine
makers, sending its stock soaring 230% this year, as it moves
through human trials. Moderna's strategy is to produce a vaccine
using the virus's genetic sequence, rather than its actual genetic
material. It uses programmed material, called messenger RNA, or
mRNA, with the goal of directing a patient's immune system to
produce antibodies to the coronavirus.
The approach, which may be able to produce a vaccine quickly,
was described as "impressive" by Dr. Anthony Fauci, director of
National Institute of Allergy and Infectious Disease. Pfizer and
Germany's BioNTech are working on their own mRNA vaccine.
But analysts note that mRNA technology is expensive and has
never produced an approved medicine or vaccine. Moderna is already
worth $24 billion, up from $6.5 billion at the beginning of 2020.
As for Pfizer, the company already is worth $211 billion, so it
isn't clear how much a vaccine would increase the company's
value.
Some investors are skeptical of some of the highest-flying
coronavirus stocks. Mr. Lawler of JFL Capital is shorting Inovio
Pharmaceuticals Inc., a small Pennsylvania company that's up 314%
this year despite limited past success.
A spokesman for Inovio says it is in phase one trials for a
Covid-19 vaccine and expects results in June, while working on
other medicines.
"The general public is throwing money at headlines," says
health-care investor Brad Loncar at Loncar Investments.
Write to Gregory Zuckerman at gregory.zuckerman@wsj.com
Corrections & Amplifications Moderna Inc. is currently
moving through human trials for its Covid-19 vaccine. An earlier
version of the article incorrectly said the vaccine is moving
closer to human trials. (Corrected May 14)
(END) Dow Jones Newswires
May 15, 2020 02:47 ET (06:47 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
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