The vaccine breakthrough has triggered widespread hopes of a return to normality by spring and a sharp revival in global markets (Figure 1). For Big Pharma, it is also a moment of justification that could redefine the previously undervalued industry.
Figure 1: Stock Markets Bounce Back. Refinitiv.
As recently as 2009-10, pharmaceutical companies’ stock prices gave the impression of depleted innovation and the rate of producing new drugs had decreased significantly. Investors’ low confidence in pharma has historically also been fuelled by long and uncertain research and development (R&D) processes, stringent regulations and the substantial threat of decreasing patent protection periods. Future growth was considered tentative.
The record-breaking pace of development and efficacy levels achieved by the vaccines has exceeded the expectations of politicians, medics and markets. Only 10 months have passed between the start of the COVID-19 outbreak and the regulatory approval of vaccines this November, a significant success when compared to the customary 10-year R&D process for these types of treatments. COVID-19 has provided the industry with an opportunity to revalidate its importance and subdue the voices of its critics; governments, and increasingly shareholders, are recognising that investment in research and development of drugs and vaccines can be game-changing for the unmet needs of patients and brings breakthrough solutions for the most imperative health challenges which beset society.
Equity investors took the vaccine breakthrough from BioNTech-Pfizer, Moderna and Oxford university-AstraZeneca as an indication that a return to normal economic activity is imminent. The possibility of three viable vaccines has propelled major equity market indices to record highs, as well as triggering an enormous jolt to the stock index, with investors shifting away from stocks that were seen as COVID-19-era winners, like tech, to sectors that are more closely associated with the health of the global economy.
Global energy stocks made the greatest rebound, soaring by 35%, as shown by Figure 2, after the announcement of the COVID-19 vaccine, having lost half their value due to the rapid decline in oil demand. These were followed by financial companies and European bank shares, increasing by 30%, and whose affluence is largely linked to economic growth. In contrast, technology stocks, which surged as the pandemic reshaped economies to working and consuming goods from home, have not kept up with the old-economy sector gains in November (such as energy and industrials).
Figure 2: Vaccine Breakthroughs Instigate Shift to Cyclical Stocks in November. Factset.
The increases came despite a second surge in COVID-19 infections and renewed lockdowns across the globe that continue to pose a threat to the tentative economic recovery attained after the first wave in March. However, the global economy is likely to shrink 4.4% this year, according to the International Monetary Fund (IMF), a decline not seen since the Great Depression. Still, following the vaccine announcement the IMF has projected a 5.2% expansion for the global economy in 2021 as life returns to normality and economic activity is renewed.
With this in mind, these unique circumstances would be an imperative time to invest; with some stocks priced attractively given the economic growth anticipated for next year. Notable amongst them is the Biopharmaceutical and Big Pharma companies, having regained the confidence of society and dignity in delivering value for patients, providing a compelling answer for long-term investors. According to IQVIA, a healthcare-focused data science company, the Big Pharma industry has seen a 3% compound annual growth rate since 2014 and is projected to exceed 1.1 trillion dollars by 2024. Overall, with quicker drug approvals, an ever-expanding consumer market and increased innovation, investing in pharmaceutical stocks would be an astute decision.
By Josie Grist
Sector Head: Hermione Scott