A Blog by Jonathan Low


Sep 4, 2020

Biotech Stocks Soar As Investors Try To Catch Covid Vaccine Payday

Despite the fact that most biotech companies will not reap huge rewards from Covid vaccines and related medical innovations, investors are pouring money into the sector in hopes of cashing in.

While this is good news in the short term for those companies, the history of biotech is one of early promise followed by disappointment, causing a boom and bust reputation which has made it difficult to sustain growth. JL

Allison Gatlin reports in Investors Business Daily:

Fervor over the race for the first coronavirus vaccine has led to skyrocketing valuations for previously unknown biotech stocks.The market for biotech initial public offerings is among the strongest the industry has seen in years. Follow-on offerings from biotech stocks have already outpaced 2019 numbers.Institutional and individual investors are crowding into biotech stocks, hoping the next innovation in the pandemic will pay off big. (But) most biotech companies aren't going to reap huge financial rewards from their coronavirus vaccines.
The coronavirus pandemic will have a yearslong impact on biotech stocks, experts say, as investors cast aside common concerns about biotech companies and focus on the industry battle to develop winning Covid-19 treatments or vaccines.
Fervor over the race for the first coronavirus vaccine has led to skyrocketing valuations for previously unknown biotech stocks. Leaders so far in the process include Moderna (MRNA), BioNTech (BNTX) and Inovio Pharmaceuticals (INO).
In fact, excitement for the next big drug innovation to tackle Covid-19 has dampened the usual election-year depression for biotech stocks, says Brad Loncar, chief executive of Loncar Investments. Usually, election years are filled with worries that legislators will come down hard on drug prices.
But drug prices thus far are not on the election agenda for 2020. Loncar believes that will likely continue to be the case for years to come. Covid-19 treatment and vaccine news has floated most biotech boats, he says. The market for biotech initial public offerings is among the strongest the industry has seen in years. In addition, follow-on offerings from biotech stocks have already outpaced 2019 numbers.
"I think biotech is going to be a focus of the entire world for years," he said in an interview. "I think this opened people's eyes to that."
Institutional and individual investors are crowding into targeted biotech stocks — hoping the next innovation in the coronavirus pandemic will pay off big. It's an "amazing time in medicine," Loncar said.

Biotech Stocks Catch Fire

Biotechnology typically differs from the broader tech sector. Unlike Apple (AAPL), Tesla (TSLA) or Facebook (FB), most consumers don't need — or want — biotech products.
"You see a Tesla driving down the street, or you use Twitter," Loncar said. "It's easy for the general public to get excited by, and to invest in, the tech sector because they see the products and, in many cases, use them every single day."
With biotech, that's not the case, he says. "Our products are interesting in that you hope you don't need them."
Biotech stocks are reviving a powerful rally started late last year. In the fourth quarter of 2019, biotechs surged, sending the more than 500 stocks in IBD's Medical-Biomed/Biotech industry group to a collective gain of 32% for the quarter. Meanwhile, the Nasdaq rose 12%. A strong earnings season and a major run of mergers throughout 2019 bolstered biotech investing.

Biotech Companies Outpace The Nasdaq

This year, biotech stocks plunged alongside the broader market as the coronavirus pandemic slammed Wall Street. But after closing at their lowest point this year March 18, the industry group has soared 56%, as of Friday That closely shadowed the Nasdaq's 61% rebound, and clobbered the S&P 500's 48% bounce.
The group ranked No. 28 out of the 197 industry groups tracked by IBD. The group on Friday showed a year-to-date gain of 5.5%.
In general, this year's biggest gainers are biotech stocks working on coronavirus vaccines. Vaccine leaders like Moderna, Inovio and BioNTech have tacked on triple-digit gains since March. Novavax (NVAX) and Vaxart (VXRT), which started the year as dollar stocks, have rocketed by quadruple digits.
Some names outside the Covid-19 development blitz have also tapped investors' newfound appetite for risk. Vertex Pharmaceuticals (VRTX) flinched only briefly during the bear market dive and is easily outrunning the Nasdaq with a 25% year-to-date gain. Regeneron Pharmaceuticals (REGN) took a quick dip to test support in January, then jumped into a six-month advance that left it up 66% year-to-date.

'The Most Defensive Sector'

Stocks like Vertex and Regeneron virtually skipped the bear market triggered by the coronavirus pandemic. Wedbush analyst Laura Chico calls biotech "the most defensive sector" heading into the second-quarter earnings season.
Chico contends there is a positive correlation between increases in daily confirmed Covid-19 cases and the Nasdaq Biotechnology Index.
The iShares Nasdaq Biotechnology ETF (IBB), which tracks the index's 207 biotech stocks, on Friday showed a 10.8% gain for the year and a 44.5% rebound from its March low.
The NBI's biggest securities are Amgen, Vertex and Gilead Sciences (GILD). As of June 30, the three stocks represented 23.7% of the index's total weighting.
"With a number of NBI components actively involved in the development of novel Covid-19 treatments and vaccines, it may make sense that there is increasing attention on these companies as the pandemic becomes more prevalent," she said in a recent note to clients.

Biotech Companies Focus On Covid-19

According to researcher Bio World, 495 experimental coronavirus treatments were in development as of July 23. Moreover, 158 potential vaccines were also underway.
Those high numbers are due partly to Operation Warp Speed, a Department of Health and Human Services initiative to deliver 300 million doses of a coronavirus vaccine by January 2021.
So far, the agency has identified 14 candidates from upward of 100 coronavirus vaccine makers. It plans to narrow that list down to seven companies with the most promising candidates. Those drugmakers will receive additional funding to develop their vaccines.
Some of the biggest hopes for tackling Covid-19 come from biotech stocks like Moderna and Gilead. Gilead currently has the only authorized coronavirus treatment in the U.S. Cambridge, Mass.-based Moderna was a small biotech company back in January. Now it's worth $31.5 billion and a leader in the vaccine race.
Moderna announced Monday it had injected doses of a vaccine candidate into its first late-stage trial patients. It also reported it received another $472 million in funding from the Biomedical Advanced Research and Development Authority, part of the Warp Speed federal partnership.

Biotech Stocks Control The Market

Today, news from biotech stocks tackling the coronavirus pandemic can catapult — or capsize — the entire stock market. Some of the biggest swings on Wall Street this year have revolved around coronavirus news from biotech companies.
On May 18, Moderna announced the first positive data for its coronavirus vaccine. The biotech stock spiked 20%. The broader industry group popped 2.2% higher.
Prospects for a vaccine suggest some sort of return to normalcy for workers and companies. For investors, that stirs broader optimism for economic recovery. As a result, Moderna's vaccine May 18 news helped spur the Nasdaq to a 2.4% gain. The S&P 500 rallied 3.2%.
Still, biotech stocks like Moderna remain volatile on the downside as well. Moderna shares tumbled more than 10% the day after the biotech company announced a public offering. The ripple effect helped drag the S&P 500 down 1%, with the broader biotech industry group dropping 2%. That volatility underscores Loncar's point.
"I think it's pretty clear at this point that society is not going to get back to total normalcy until there's a vaccine," he said. "If the virus quiets down a little bit, maybe life will somewhat return to normal. Maybe people will start to go back to work or shopping, but you're not going to pack a football stadium with 80,000 people."

Are Valuations Too High?

The run-up has driven biotech stocks to a level where valuations might actually be too high, Loncar says.
Take a look at coronavirus vaccine names. Moderna's market cap has nearly quadrupled this year as of July 23. BioNTech, which is partnered with Pfizer (PFE) on a trial-stage coronavirus vaccine, has seen its market cap increase by $12 billion this year, as of July 23.
Other biotech stocks like Translate Bio (TBIO), Inovio, Vaxart and Novavax also had valuations sprint north in 2020.
It's important to note that none of these biotech companies has even a single commercially approved product. In 2019, the combined revenue of Moderna, BioNTech, Inovio, Vaxart and Novavax — made up mostly of collaboration funding, royalties and grants — was $215.1 million.
By comparison, the biggest biotech stock, Amgen, reported $6.16 billion in sales in Q1 this year.

'Throwing Money' At Biotech Stocks

Yet investors are "throwing money" at biotech stocks, says Loncar, who sees "a lot of froth" in some vaccine-focused biotechs. Most biotech companies aren't going to reap huge financial rewards from their coronavirus vaccines, he says.
People think a successful vaccine means these companies are "going to be printing money," he said. "That's not the case at all. The big companies like AstraZeneca (AZN), Johnson & Johnson (JNJ) and the leading companies that are in the top of Operation Warp Speed, they've already publicly said they don't plan to profit off of this."
Health Care Venture CapitalThat hasn't made biotech stocks any less inviting. Investors are flocking into biotech, according to SVB Leerink analyst Jon Norris. Notable big investing firms moving into the sector include New Enterprise Associates, Lightspeed Venture Partners, General Catalyst, Founders Fund, Town Hall Ventures, U.S. Venture Partners, Mayfield and Felicis, Norris said in a recent report.
But investors should note some caveats when considering biotech companies — especially those working to undermine the coronavirus pandemic.
First, vaccine development is tricky. The obvious example is the HIV vaccine. In 1984, then-U.S. Health and Human Services Secretary Margaret Heckler predicted there would be a vaccine to ward off AIDS within two years. To date, there's no approved HIV vaccine.
Second, biology can surprise even the smartest researchers. Failure is always a possibility.
"One thing we have not seen yet during this Covid time is we've not seen any major failure or blowups or disappointments," Loncar said. "That will happen. That's a natural thing we live with. As a biotech investor, one of your No. 1 skills has to be risk management."

Looking Beyond Biotech News Headlines

Wedbush analyst Chico says to look beyond the coronavirus headlines. She advises seeking biotech stocks with strong management teams, compelling pipeline opportunities and a flow of catalysts. She lists Biohaven Pharmaceutical (BHVN) and Ultragenyx (RARE) as biotech stocks to watch in 2020.
Biohaven is in the middle of launching a migraine drug. Meanwhile, Ultragenyx gained two key Food and Drug Administration approvals in June alone.
Biotech stocks are prone to big swings, she noted in an interview. Positive headlines can lift all biotech stocks, and negative headlines tend to sink all ships.
Around 2016-18, biotech stocks felt some pressure due to concerns over drug prices and potential regulation. But this year, the coronavirus pandemic has so far kept the positive spin on biotech stocks.
"Anecdotally, it doesn't feel like the (investors) are ready to exit at the moment," she said.

Money Floods Into The Sector

Loncar agrees. Money is flooding into biotech stocks right now. Governments around the world are pushing hundreds of billions of dollars into developing coronavirus treatments and vaccines, he says. Meanwhile, Chico points out that the IPO market and follow-on offerings are strong.
Post IPO, many biotech stocks in 2020 have outperformed expectations, SVB Leerink's Norris said in his report.
"Biopharma IPOs in 2020 had strong post-IPO performance, with stocks surging an average of 79% in the public market (median of 82%)," he said.
Even today, some of the more impressive feats of biotech companies are hidden from most investors. In late 2017, Roche's (RHHBY) Spark Therapeutics won the first FDA approval for a gene therapy. That drug, called Luxturna, can treat a disease that causes blindness.
"It literally helps blind people see," Loncar said. "That's the type of thing that if you grabbed someone off the sidewalk and told them that we have the tools to do stuff like that today, a lot of people would think it's science fiction. And it's not. That's the exciting thing about our industry."


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