Investors appear to be pricing in significant future financial rewards which may ultimately disappoint
Thursday 23 Jul 2020 Author: Martin Gamble

Having been out of favour with investors for the last few years healthcare stocks have become hot property with some remarkable share price performances since the outbreak of Covid-19.

The response to the virus has been impressive with over 90 candidate vaccines currently being tested globally with positive early signs from several trials, but the share price reactions are becoming harder to justify.

For example, respiratory drug development company Synairgen (SNG:AIM) soared as much as 430% to 193.5p in a single day (20 Jul) following a major breakthrough in the treatment of hospitalised Covid-19 patients.

On the same day medical diagnostics company Omega Diagnostics (ODX:AIM) surged 30% to 46.5p on no news at all. The company is part of the UK’s Rapid Test Consortium which is developing a home antibody test kit. As recently as 23 March the shares were trading at 6.6p.

AstraZeneca’s (AZN) shares saw a brief 6.5% spike on 20 July after it said initial results of its trial led by Oxford University had generated a robust immune response against the Covid-19 virus in all participants.

Investors seem to be jumping on every news release regardless of the content and likely economic benefits. Meanwhile the underlying landscape has become a lot more competitive which raises the risk that perceived financial benefits could quickly disappear if another firm finds a better or cheaper solution.

US firms Moderna Therapeutics and Gilead Sciences have also seen their share prices driven up each time they release news on clinical trials. On 18 May Moderna’s shares surged 23% after its experimental vaccine showed promise in a small early-stage trial and the shares are up 314% year-to-date. Moderna is no tiddler either with a market cap of $32 billion.

‘The first clinical data for at least three of the Covid-19 vaccine frontrunners has now been formally published (namely mRNA vaccines from Moderna and Pfizer/Biontech respectively and Oxford/AstraZeneca’s adenovirus-based vaccine),’ says Tara Raveendran, healthcare analyst at Shore Capital.

‘While it is difficult to make cross-trial comparisons and draw specific conclusions from such early data, we are overall encouraged by the data to date, at both the level of neutralising antibodies (particularly Pfizer/Biontech’s BNT162b1 – with antibody levels two to three times those seen in recovered patients vs Astra’s c.1x) and the T-cell responses for BNT162b1 and Oxford/Astra’s AZD12222.’

US strategist David Rosenberg has been keeping tabs on virus-related drug and trial news and estimates that most of the gains in US markets since March can be attributed to the days following news about positive drug trials.

Not all the hope priced into biotech shares will be justified by future revenues and profits.

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