Large Pharma is Here to Save People… Make a Profit

THE BRIEF

And they’re off to the races… Global pharmaceutical and biotechnology companies, governments, and academic institutions are on a high stakes race to develop a vaccine.

• 10 organizations have entered human clinical trials with US-based Moderna and Pfizer amongst the top.
• Estimates show that a COVID-19 vaccine could be ready within 12-18 months, an impressive feat for a process that can take on average 15 years.

THE EXPLANATION

US Drug development goes through a long process that includes three phases of human testing. The Food and Drug Administration (FDA) must approve or reject each stage which can lead to massive swings in stock prices that make pharmaceutical companies a high-risk investment.

Pharmaceutical companies that normally profit from developing a drug, holding a patent (exclusive rights for a period of time), and charging outrageously high prices, face a political hurdle in profiting off the vaccine.

• The Doha Declaration will allow governments to overrule intellectual property rights and patents during a public health crisis, opening up the market to multiple versions of the vaccine. These patents, which may not be enforceable contribute up to ~80% of a pharmaceutical company’s revenue.

Once a vaccine is developed, the world faces a large-scale manufacturing challenge. At a minimum of two doses of the vaccine per person, the world will need 16 billion doses. The world cannot rely on a single vaccine made by one company to meet the needs of 8 billion people. Multiple pharmaceutical companies will benefit and profits will ultimately be divided amongst the whole industry.

THE ACTION

Avoid the trap of buying into a COVID-19 vaccine with the hopes for a quick profit. A vaccine will boost the industry as a whole but betting on individual pharmaceutical stocks can be highly complex and risky. Investors are at the whim of trial results that could easily send stocks down or up over 50%.

Investors can diversify into a group of pharmaceutical stocks with these ETFs:

• Invesco Dynamic Pharmaceuticals (Ticker: PJP), SPDR S&P Pharmaceuticals (XPH), iShares US Pharmaceuticals (IHE).

Big pharma seeking profits and governments racing for global prominence aside, the only winners in this race should be the patients of COVID-19.