This article was first published in MoneyWeek magazine issue no 996 on 24 April 2020. To make sure you don't miss out in future, and get to read all our articles as soon as they're published, sign up to MoneyWeek here and get your first six issues free.
In 1796, Edward Jenner demonstrated that injecting people with pus from cowpox sufferers could stop them getting smallpox. Ever since then, vaccines have played a crucial role in public health. They work by training the immune system to recognise and fight viruses or bacteria, a process that begins when an inactivated form of a virus (one that has been rendered harmless) is given to a patient.
Despite their importance, however, they have typically been considered a backwater by drug companies, who have left them to governments, universities and charities to develop. This is time-consuming and expensive; even successful vaccines have made only a limited amount of money for the firms that created them.
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But this is starting to change. The coronavirus crisis has sparked a massive hunt for a vaccine. According to the World Health Organisation, there are now five separate potential vaccines undergoing clinical trials, with groups in China and Oxford at the head of the pack. Another 71 are in pre-clinical evaluation.
Furthermore, it appears that recent blockbuster vaccines are prompting the big companies that dominate vaccine development to rethink their overall approach. Changes in the way vaccines are developed, moreover, are opening up the market to a wider range of companies, especially in the biotechnology sector. All this means that vaccines are becoming an increasingly appealing sub-sector of the pharmaceuticals market for long-term investors.
A structural growth market
While vaccines still account for a fraction of total healthcare spending, the market has grown sixfold to $35bn in the past two decades, says Ketan Patel of EdenTree Investment Management. This has been driven primarily by a “growing global population that can now be screened for illnesses that were once mass killers”. The governments of developing countries recognise that when it comes to saving lives by preventing diseases, vaccination programmes can be as important as access to clean drinking water.
Research by Johns Hopkins University estimates that “every dollar spent can yield a societal return of $44 in mid- and lower-income countries”, says Alex Hunter, global equity analyst at Sarasin & Partners. Even in a rich country vaccinations can save many lives. The US Centers for Disease Control and Prevention estimates that the US Vaccinations For Children (VFC) programme between 1994 and 2013 “saved 732,000 lives and benefited society by around $1.3trn”.
The vaccine market is likely to keep growing in the long term: one in four deaths worldwide are caused by infectious diseases. Hunter points out that more than 80 new potentially harmful viruses have been discovered since 1980 (including Zika, Nipah and Mers), but only 4% of them have a commercially available vaccine.
While emerging markets are giving the vaccine industry new impetus, developed countries are also starting to spend more thanks to “some very large products for a few specific diseases”, says Lydia Haueter, senior investment manager in Pictet Asset Management’s Health Fund. These include Gardasil, which prevents the human papillomavirus (HPV) linked to cervical cancer. Thanks to routine mass-immunisation programmes, Merck received $3.2bn in revenue from Gardasil in 2018 alone.
Such high-profile successes have convinced the big drug companies that “vaccines can be economically viable”, says Haueter. As a result, they are starting to seek vaccines for hitherto neglected conditions. The next blockbuster vaccine could come from finding a way to prevent respiratory syncytial virus (RSV), which can cause serious problems in the very young and very old. It hospitalises up to 125,000 children under two every year in the United States alone. While no RSV vaccine has been approved yet, several possibilities are undergoing clinical trials.
From Big Pharma to small biotech
Despite the success of individual vaccines, the big drug companies will always be more interested in the “more lucrative markets” such as cardiovascular diseases, says business historian Professor Louis Galambos of Johns Hopkins University. But there are still plenty of opportunities for investors.
Advances in molecular genetics have transformed the structure of the industry. The upshot is that smaller biotechnology firms are playing a growing role in the development of new vaccines. That boosts their profits and makes them attractive acquisition targets for bigger firms.
Anthony Ginsberg, founder and managing director of GinsGlobal Index Funds, believes that most of the really interesting vaccines in development are “now coming from Silicon Valley, not the laboratories of the big giants”. He predicts that a new development model is starting to emerge that involves biotech firms doing much of the basic research and development before joining forces with a large company to help them bring the products that they have developed to market.
More bang for your buck
The rise of smaller biotech firms in vaccine development not only widens the range of investment opportunities, but it also makes it much easier for investors to bet on the growth of the sub-sector. This is because each successful vaccine will have a much bigger impact on the bottom line of a small biotech than on the profits of a large pharmaceutical conglomerate. Examples of biotech companies that are starting to challenge the big players in vaccines include Gilead Sciences, Regeneron Pharmaceuticals and Moderna. Moderna made headlines when it began human trials of a coronavirus vaccine in March, even before many governments had declared public emergencies.
Ginsberg points out that the biotechnology sector’s involvement with vaccines isn’t limited to those firms that are directly developing them. Most vaccines now involve the use of technology to sequence, or genetically “map”, the virus. So firms producing equipment and technology that speeds up this sequencing, as well as gene-editing firms, also stand to benefit. Change has been rapid: we “can now sequence genes around four times faster than was possible only a few years ago”.
Cutting red tape
The profitability of vaccines should also be enhanced by recent moves to reduce the red tape associated with vaccine development. Up until now even the most promising vaccines have had to undergo trials that in some cases can last nearly a decade and involve large numbers of people, says Geoffrey Hsu, general partner of OrbiMed and manager of the Biotech Growth Trust. Of course vaccines require rigorous testing to ascertain that they actually work and don’t have nasty side-effects.
Still, regulators are now starting to realise that overly stringent rules can be counterproductive, not only during serious viral outbreaks, when time is of the essence, but also in the case of therapeutic vaccines “where the patient already has a serious disease”. In both these instances, government bodies are increasingly accepting that the burden of disease “is high enough that a more expedited approach is possible”. Indeed, the ongoing crisis has prompted the normally cautious US Food and Drug Administration to accelerate the vaccine-testing process, while UK regulators have allowed a team in Oxford developing a coronavirus vaccine to hold animal trials in parallel with early-stage human tests.
Ginsberg thinks that the crisis will prove to be a “game changer” in that people, even within government, are realising that many of the rules that have existed for years have little impact on safety. As a result, he thinks that people will realise that it will be “too risky” to move back to the regulatory status quo once things settle down, which will have a positive impact on innovation and reduce the time required to produce all types of vaccines.
Another key change in the vaccine industry is the rise of plant-based vaccines. At present most vaccines “are still manufactured in chicken eggs”, says Haueter. (Finding a vaccine involves growing viruses in a cell, which they then take over; they can’t reproduce on their own.) This process takes time, which can be a problem when seeking vaccines against viruses that are constantly mutating, such as the flu vaccine. In the case of flu, extended production times mean that scientists have to guess which strain will be dominant during the next season months in advance, which is why the effectiveness of the flu jab varies from year to year.
While there has been limited successes with approaches that manufacture vaccines from human cells or insects, the most promising alternative manufacturing technique is plant-based vaccines. Tobacco plants appear particularly well suited to this task. This is because the elements of the vaccine accumulate in tobacco plants much more quickly than with other methods, allowing vaccines to be produced in weeks, “compared with several months using conventional methods”, says David O’Reilly, director of scientific research at British American Tobacco (BAT).
In addition to reducing production times, plant-based vaccines could also lower the risk of delays related to contamination. This is because tobacco plants “can’t host pathogens, which cause human disease”, says O’Reilly. BAT has been working with the US Food and Drug Administration for a decade, via its biotech subsidiary Kentucky BioProcessing (KPB), and in 2011 produced ten million seasonal flu vaccine doses in one month. In 2014/2015 KBP used tobacco plants to produce the only source of the Ebola treatment ZMapp, which was used effectively by US key personnel during the outbreak in west Africa. A coronavirus vaccine that it has produced is undergoing pre-clinical trials
A universal flu vaccine?
More rapid production of vaccines, especially those that are seasonal, is an important breakthrough, but there has also been some encouraging progress in the development of a universal flu vaccine. By protecting against all strains of influenza, a universal jab could eliminate the need to guess which flu strain will be dominant and prevent the death of many of the estimated 650,000 people who die each year from seasonal influenza. Sudip Saha of research group Future Market Insights notes that several organisations have progressed to the first stage of clinical trials, which suggests that there’s a good chance that a universal flu jab could be in the market “in the next five to six years”.
Pictet’s Lydia Haueter is a little more sceptical, suggesting that the “cat and mouse” game with the rapidly mutating flu virus will continue for some time. Still, she notes that changes in the way that flu vaccines target the virus could make them less vulnerable to being wrong-footed by sudden shifts. For example, instead of going for the exposed parts on the surface of the virus, researchers are trying to go for the stems of those proteins that are “a bit more tucked away and mutate less”, although it remains unclear whether such a vaccine could produce a sufficient immune system response to enable the body to ward off the disease.
Haueter also thinks that so-called mRNA vaccines could help improve the efficiency of flu jabs. Instead of injecting a deactivated version of the virus into a patient’s body in the hope of stimulating an immune system reaction, they get the muscle cells to produce a mini-vaccine themselves, creating proteins that stimulate the immune system. While no flu vaccines based around this technique have yet been approved, there are signs that mRNA vaccines can work for other viruses.
At present virtually all vaccines are used to prevent disease. However, recently there has been a focus on using vaccines to treat existing diseases, says Saha. In the case of cancer, the idea is to use vaccines “to get the patient’s immune systems to mount an attack against cancer cells”, a field known as immunotherapy. Drug companies are exploring several methods, including using vaccines made up of cancer cells. Another is to remove immune cells from the patient and then expose the extracted cells from the patient to the virus in order to create the vaccine.
Immunotherapy is a relatively new field, but as Geoffrey Hsu points out there have already been some notable success, with the US FDA approving some vaccines. Prominent examples include Provenge, which was developed by Dendreon Pharmaceuticals for the treatment of advanced prostate cancer, and Imlygic, developed by Amgen to treat inoperable melanoma.
The vaccine makers to consider now
Pfizer: (NYSE: PFE) is a drug giant that owns the rights to Prevnar, which it acquired when it bought Wyeth in 2009. Prevnar, which is used to protect infants, young children, and adults against pneumonia, was the first “premium-priced” vaccine marketed by a drug company, says Geoffrey Hsu of the Biotech Growth Trust.
Prevnar has proved to be incredibly lucrative for Pfizer, generating nearly $6bn a year, just under 15% of Pfizer’s current sales. Pfizer is working on a third-generation version of Prevnar. Pfizer trades at 12 times 2021 earnings with a solid dividend yield of 4%.
The British pharmaceutical company GlaxoSmithKline (LSE: GSK) has been producing vaccines since 1882. Last year it made around £7.2bn in revenue from vaccines, over 20% of its total revenue, selling 701 million doses of 30 vaccines for 21 diseases. A further 14 are in development.
One possible blockbuster drug is a respiratory syncytial virus (RSV) vaccine intended for pregnant women and young children that is currently undergoing phase-two trials (the penultimate stage of clinical testing, before a drug is submitted to regulators for approval). Despite increasing revenue by an average of around 8% a year between 2014 and 2019, GSK trades at a reasonable 2021 price-earnings ratio (p/e) of 14, with a dividend yield of 4.8%.
The French pharmaceutical company Sanofi (Paris: SAN) is one of the other major producers of vaccines, thanks to its subsidiary Sanofi Pasteur, which accounts for 13% of the parent group’s revenue. Sanofi Pasteur produces vaccines for a wide range of conditions, including seasonal flu.
It has a full pipeline of potential vaccines, including ones for RSV and HIV. It also recently announced a partnership with GSK to produce a vaccine against coronavirus that aims to begin clinical trials in the second half of this year. Sanofi trades on a 2021 p/e ratio of 12.6 and yields 3.8%. Those willing to take on more risk should look at biotechnology company Moderna (Nasdaq: MRNA). It focuses on vaccines that use mRNA, which essentially gets the body to produce its own vaccines against diseases.
While it isn’t making profits yet, it recently landed a $483m grant from the US Biomedical Advanced Research and Development Authority to help develop a coronavirus vaccine, which has been one of the first to undergo clinical trials. It has five other vaccines that are also undergoing testing, including a personalised cancer vaccine that it is developing in conjunction with US conglomerate Merck.
Matthew graduated from the University of Durham in 2004; he then gained an MSc, followed by a PhD at the London School of Economics.
He has previously written for a wide range of publications, including the Guardian and the Economist, and also helped to run a newsletter on terrorism. He has spent time at Lehman Brothers, Citigroup and the consultancy Lombard Street Research.
Matthew is the author of Superinvestors: Lessons from the greatest investors in history, published by Harriman House, which has been translated into several languages. His second book, Investing Explained: The Accessible Guide to Building an Investment Portfolio, is published by Kogan Page.
As senior writer, he writes the shares and politics & economics pages, as well as weekly Blowing It and Great Frauds in History columns He also writes a fortnightly reviews page and trading tips, as well as regular cover stories and multi-page investment focus features.
Follow Matthew on Twitter: @DrMatthewPartri
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