The healthcare stocks racing to develop a cure
Opportunistic investors could consider several companies with infectious disease and vaccine expertise.
Mentioned: Moderna Inc (MRNA), Gilead Sciences Inc (GILD), Johnson & Johnson (JNJ), Pfizer Inc (PFE), Sanofi SA (SNY)
Even as some countries start to ease lockdown restrictions and open parts of their economies, scientists and pharmaceutical companies are racing to develop COVID-19 treatments and a vaccine to rein in the catastrophic consequences of the virus.
Fear of a second wave in the fall that may prove to be just as severe has given governments, charities and drugmakers the impetus to go all out in pursuit of protection against the deadly virus.
Billions are being poured into research and development efforts, regulations have been eased to speed up the process, and human trials are underway, much of it in a big departure from traditional rules.
As a result, the pipeline of potential therapies to treat or prevent coronavirus infection is growing steadily. The U.S. FDA counted 10 investigation drugs in trials, with 15 being considered for trial launches, as of March 31, according to a Morningstar report.
Morningstar analysts believe a vaccine from Moderna or other vaccine developers, such as Johnson & Johnson, Pfizer, and AstraZeneca will be available for high-risk populations later this year based on phase 2 data, with tens of millions of doses from various vaccine manufacturers available by the end of 2020. They assume broader approval in early 2021 based on early data from phase 3 studies and supply for broader vaccination in the first half of 2021.
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The companies with experience with vaccines and those with infectious disease expertise could benefit from the coronavirus outbreak. “There could be some intangible benefits to drug companies, as goodwill would build substantially if they can navigate a path out of this crisis,” says Morningstar sector director, Damien Conover.
Opportunistic investors may want to take a close look at these healthcare companies that are at the forefront of multiple initiatives to fight COVID-19, including potential treatments in trial stages. Their robust portfolios comprise treatments for critical illnesses which provide them cushion against periods of economic uncertainty.
Johnson & Johnson (JNJ)
Johnson & Johnson (JNJ) is the world's largest and most diverse healthcare company that operates three divisions: pharmaceutical (focused on immunology, oncology, neurology, pulmonary, cardiology, and metabolic diseases), medical devices and diagnostics (orthopedics, surgery tools, vision care), and consumer (baby care, beauty, oral care, over-the-counter drugs, and women’s health). The drug and device groups accounts for close to 80% of sales and generate the bulk of cash flow.
The company is working on a potential coronavirus vaccine with human testing due to begin in September. “We expect J&J to lead the charge in developing a coronavirus vaccine with annual production of 600 million-900 million vaccines likely by early 2021,” says a Morningstar equity report, but adds the firm may initially offer the vaccine on a nonprofit basis.
The firm’s research and development efforts are resulting in blockbuster therapies and next-generation products, adds Conover, who recently reduced the stock’s fair value from US$137 from US$133, due to disruptions caused by the coronavirus pandemic.
Sanofi SA ADR (SNY)
French healthcare giant, Sanofi (SNY) develops and markets drugs focused on multiple therapeutics areas including oncology, immunology, cardiovascular disease, diabetes, and vaccines. The company generates nearly 30% of revenue from the U.S., 25% from Europe, while emerging markets making up most of the rest.
The European drugmaker recently announced plans to test their arthritis drug Kevzara as a coronavirus treatment. Sanofi is conducting a second clinical trial, which is among several medicines being investigated by the World Health Organization (WHO) in an effort to find a solution for COVID-19.
The global biopharmaceutical company’s diverse array of drugs and vaccines, and robust pipeline create strong cash flows and a wide economic moat. “Sanofi's existing product line boasts several top-tier drugs, including long-acting insulin Lantus,” says a Morningstar equity report, adding that the growth of existing products and new product launches should help mitigate weakening pricing in the insulin market.
“In particular, immunology drug Dupixent looks well positioned to reach peak sales over EUR 7 billion ($10.6 billion), with an initial focus on the moderate to severe atopic dermatitis market,” says Conover, who recently lowered the stock’s fair value from US$57 to US$55, based on disruptions caused by the coronavirus.
Gilead Sciences Inc (GILD)
Biotech behemoth Gilead Sciences (GILD) owns a portfolio of therapies for life-threatening infectious diseases including HIV and hepatitis B and C. The firm’s recent acquisitions broadened its catalogue of treatments to include pulmonary and cardiovascular diseases, cancer and cell therapy.
Gilead may already have a breakout drug to treat coronavirus in remdesivir. The FDA has issued emergency authorization for the use of remdesivir to treat COVID-19, with near certain probably of full approval later this year, says Karen Anderson, sector strategist at Morningstar. “We've added development and manufacturing costs to our valuation model for remdesivir, but we continue to think the drug could see significant sales potential next year, once the initial donated supply is exhausted,” she says, putting the stock’s fair value at US$83.
MORE ON THIS TOPIC: Is remdesivir-maker Gilead Sciences a 'buy'?
Gilead's infectious disease portfolio has significant staying power and supports a wide moat, underpinned by solid uptake for HIV drugs like Biktarvy and Descovy, and a long-acting HIV treatment pipeline, says a Morningstar equity report.
Pfizer Inc (PFE)
Pharma heavyweight, Pfizer (PFE) sells healthcare products and chemicals globally. Prescription drugs and vaccines account for the bulk of its annual US$50 billion sales. The firm also spends a whopping US$8 billion annually on research and development. International sales represent close to half of its total sales, led by emerging markets.
Pfizer is a leading participant in the global push for a coronavirus vaccine. The U.S. drugmaker has started delivering doses of their experimental coronavirus vaccines for human testing in the United States. Subject to the FDA approval, it plans to make as many as 20 million doses by the end of 2020, according to Reuters.
The drugmaker’s size affords it a substantial advantage in the pharmaceutical industry where drug development requires many attempts to be successful. “Pfizer has the financial resources and the established research power to support the development of more new drugs,” says Conover, who recently reduced the stock’s fair value from US$46 to US$44, prompted by coronavirus disruptions. He concedes, however, that the stock remains undervalued as the “market not likely fully appreciating the firm’s entrenched portfolio and growing pipeline.”
Moderna Inc (MRNA)
(Not covered)
Moderna (MRNA) kicked off the early data around the vaccine race and released the first data from its phase 1 trial of SARS-CoV-2 vaccine mRNA-1273 on May 18, in conjunction with data supporting efficacy of the vaccine in mice. Andersen says this first data is encouraging, as the vaccine is producing the sort of efficacy and tolerability profile in humans that would allow for FDA approval, as long as additional data continues to confirm this profile.
"We think this strongly supports the idea that Moderna's vaccine is capable of protecting individuals against the virus, although we have yet to see data showing whether this efficacy is also seen in older adults, and long-term safety data will continue to be collected (for one to two years in a phase 3 trial)," she says.