Gilead Shows the Dangers of Covid-19 Drug Mania -- Heard on the Street
By Charley Grant
Researchers are racing to develop a Covid-19 vaccine, and
investors are in a mad dash to profit from it. The financial side
of this exercise is likely to run into trouble.
Promising news in the hunt for a vaccine continues to pour in.
Several companies have revealed encouraging, albeit preliminary,
data in clinical trials, and the U.S. government has its wallet
wide open to defray research and manufacturing expenses.
GlaxoSmithKline and Sanofi said Friday that the U.S. government
will pay up to $2.1 billion to develop and manufacture a Covid-19
vaccine. Other companies such as Moderna and AstraZeneca have
received similar contracts. These deals include the upfront
purchase of hundreds of millions of doses if trials prove
successful. Heavyweights Merck & Co. and Johnson & Johnson
also have candidates in development.
While it won't be clear if any candidate is successful until at
least the fall, investors aren't waiting around. A broad index of
biotechnology stocks has surged 65% since March. Within that group,
the Covid-19 vaccine makers have led the way, both large and small.
The gain in market value for these companies since the spring
matches the total value of some major drugmakers that generate
roughly $20 billion in annual sales.
There are ample reasons for caution, despite the clearly
positive news. For starters, most drug candidates in development
don't reach the market. Huge research investments won't change that
And, even if successful, pricing power may not be as strong as
investors are hoping. The first round of doses are already paid for
and priced into stocks. Pfizer and its partner BioNTech, which
didn't take any government research funding, have a contract to
deliver 100 million doses for a total of $1.95 billion. That comes
out to about $39 per two-dose treatment.
Companies that hope to charge more than that over the long term
will need to meet a very high safety and efficacy bar to make their
case -- especially those that took public funds upfront. While drug
pricing hasn't attracted much scrutiny this election cycle, it has
been a recurring theme in American politics with major consequences
for shareholders. That dynamic likely makes visions of windfall
profits more dream than reality.
Granted, some risk-taking is always necessary to make money in
biotech. And story stocks have a way of maintaining their upward
momentum while hopes for the future are still intact --
particularly in today's euphoric investing environment.
But investors shouldn't forget that hot drug stocks can suddenly
plunge even if things go according to plan. Gilead Sciences shares
surged nearly 25% from March to April as anticipation built for its
antiviral Covid-19 treatment remdesivir, but the stock has since
lost nearly all of that ground. Those losses came despite a string
of successes: The drug has been authorized for emergency use, and
Gilead began selling it this summer after donating its initial
supply. Last week, the company increased the midpoint of its 2020
adjusted profit guidance to $6.95 a share from $6.25.
Don't dismiss the possibility that Gilead's descent will repeat
itself on a much larger, uglier scale.
Write to Charley Grant at email@example.com
(END) Dow Jones Newswires
August 03, 2020 07:14 ET (11:14 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.