We were clueless about how to best cope with the pandemic. Should we all isolate for ever (China), or first die like flies for the survivors to gain immune protection (Boris Johnson), or inject bleach (recommended by Donald Trump and Austria’s ultra-right, recent election-winner Herbert Kickl)? And then, in an incredibly short timespan, powerful vaccines were developed which made sure that even in case of an infection the disease was not lethal anymore.
The vaccines, a pharmaceutical feat of excellence, were not universally welcomed by all, as we know. For some, bleach was still the preferred method of treatment, for others, death a god-prescribed necessity for the old and the weak. For many, particularly in developing countries, the new vaccines were out of reach. Industrialised countries hoarded them beyond their needs, ignoring death elsewhere and risking the possible emergence of more deadly mutations.
For the pharma companies working overtime to develop an effective inoculation it was boom time when some of them did find a workable solution. Helped by governments which granted them high-speed certification and cash by buying unproven shots in large quantities in advance, the winners were printing money. Small, cutting-edge companies, developing gen-tech solutions like Moderna and BioNTech, were suddenly the darlings of the stock market, eclipsing in value staid pharma behemoths. Pfizer, which decided to cooperate with BioNTech, raked in $US100 billion in two years. The company suddenly looked like a hot startup.
For the Covid winners, the good times did not last. Moderna is now a loss-making company, with a market capitalisation of one-fifth ($20.8bn) of its former glory (September 2021: $430bn). BioNTech (€24.5bn) is worth a quarter, when compared to November 2021.
Covid vaccines are not bestsellers anymore, and most gen-tech companies working on more effective cancer treatments have so far little to show. BioNTech’s recent clinical trial of a combined flu-Covid jab fared poorly. And Pfizer, which had spent all its gains plus newly raised debt on dividends, share-buybacks and expensive acquisitions (it bought for $44bn Seagen, a loss-making cancer biotech firm, among other blind-shot investments) is back down to earth.
Pfizer’s shares are worth half of their former prime, with a current market cap of $165.6bn. It made headlines recently when Starboard Value, an activist investor, bought one billion worth of shares, demanding a “turnaround”. I am invested in Pfizer and hence more than interested in better fortunes for the company. Alas, like Robert Armstrong of the FT has pointed out in a recent opinion piece, it is not quite clear how this can possibly be achieved.
The Covid windfall profits are all spent, hastily, if not wisely. This fact cannot be undone. In order to turn fortunes around, the company has sold various non-core businesses and implemented a cost-cutting programme to reduce debt. This is more or less what any activist investor would have demanded.
No “new leadership” of the company, brought in by the activist, would act now in a different manner. To cut research, or to demand divestment of Seagen, for instance, is not a wise proposition. Nobody can tell with certainty how research projects will fare in future. Some bets will flounder, others may succeed. No one could possibly have predicted the explosive success of weight-loss drugs like Wegovy, Ozempic or Zepbound.
Many active ingredients look promising in the lab to later fail in clinical trials- Andreas Weitzer
Eli Lilly or Novonordisk, the companies bringing these new drugs to the market were successful if pedestrian companies before. They may have not even planned for this jackpot. These substances were meant to treat diabetes. All of a sudden, based on expected future revenue growth, which is currently hard to over-estimate, they are the new darlings of the stock market, leaving their Covid peers far behind. For a retail investor to smell a new pharma blockbuster is impossible.
Bestselling drugs are only bestsellers as long as their patent protection lasts. Then cheap generics will take over. Big pharmaceutical companies therefore spend lots of money and effort to develop new drugs. It is a process with an unknown outcome.
Many active ingredients look promising in the lab to later fail in clinical trials. Neither an activist investor nor we retail investors will have a clue. We can only evaluate existing sales, and future growth based on known successes. A meagre product pipeline or pending patent losses will rightly lower earnings expectations. These known successes and failures will mould the share price. But only momentarily.
What truly turns fortunes around are blockbusters like the mentioned weight-loss jabs. But it is also impossible to foresee how long those good fortunes will last. I could not have predicted that COVID will turn into something less harmful than a flu. New, more dangerous Covid strains may have necessitated permanent inoculation. It may also turn out that the impressive results of weight-loss drugs will diminish over time, or turn harmful. Or that competitors will come up with similarly successful treatments.
Eli Lilly then might become again not much more than a solid, if not exceptional pharma company, with a too high share price (P/E 75!). For us retail investors this means that any staid pharma company is like the other. It does not make much sense to chase a success story that is already too expensive for much upside.
It also might be unwise to sell the losers of the weight-loss game, the producers of unhealthy snacks, fast food and sugary drinks in anticipation of a radical, global diet change for the better. As long as Warren Buffett drinks coke, we may stick with it.
A good example for a less hype, more neutral investment is AstraZeneca, the producer of a more traditional Covid jab based on neutered animal viruses. Astra’s vaccine did a good job, saving many lives in the UK and elsewhere. But they had priced their treatment at cost, instead of raking in exorbitant profits. There was no Covid boost to their stock price. In November 2021, when their competitors’ shares went through the roof, Astra cost £88.0. Today, at the time of writing, they are worth £119.36 per piece, having gained 17% in the last year. With a forward P/E of 18 they are more expensive than Pfizer (0.95% gain over the last year, despite the recent activist drum beat, with a forward P/E of 11), and pay a smaller dividend (1.96%).
Is Astra the better investment? Who am I to know? I’ll stick with my Pfizer shares. Yes, they have halved since their peak. But this was only three years ago.
Andreas Weitzer is an independent journalist based in Malta.