By Charley Grant 

Researchers are racing to develop a Covid-19 vaccine, and investors are in a mad dash to profit from it. The financial side of this exercise is likely to run into trouble.

Promising news in the hunt for a vaccine continues to pour in. Several companies have revealed encouraging, albeit preliminary, data in clinical trials, and the U.S. government has its wallet wide open to defray research and manufacturing expenses. GlaxoSmithKline and Sanofi said Friday that the U.S. government will pay up to $2.1 billion to develop and manufacture a Covid-19 vaccine. Other companies such as Moderna and AstraZeneca have received similar contracts. These deals include the upfront purchase of hundreds of millions of doses if trials prove successful. Heavyweights Merck & Co. and Johnson & Johnson also have candidates in development.

While it won't be clear if any candidate is successful until at least the fall, investors aren't waiting around. A broad index of biotechnology stocks has surged 65% since March. Within that group, the Covid-19 vaccine makers have led the way, both large and small. The gain in market value for these companies since the spring matches the total value of some major drugmakers that generate roughly $20 billion in annual sales.

There are ample reasons for caution, despite the clearly positive news. For starters, most drug candidates in development don't reach the market. Huge research investments won't change that reality.

And, even if successful, pricing power may not be as strong as investors are hoping. The first round of doses are already paid for and priced into stocks. Pfizer and its partner BioNTech, which didn't take any government research funding, have a contract to deliver 100 million doses for a total of $1.95 billion. That comes out to about $39 per two-dose treatment.

Companies that hope to charge more than that over the long term will need to meet a very high safety and efficacy bar to make their case -- especially those that took public funds upfront. While drug pricing hasn't attracted much scrutiny this election cycle, it has been a recurring theme in American politics with major consequences for shareholders. That dynamic likely makes visions of windfall profits more dream than reality.

Granted, some risk-taking is always necessary to make money in biotech. And story stocks have a way of maintaining their upward momentum while hopes for the future are still intact -- particularly in today's euphoric investing environment.

But investors shouldn't forget that hot drug stocks can suddenly plunge even if things go according to plan. Gilead Sciences shares surged nearly 25% from March to April as anticipation built for its antiviral Covid-19 treatment remdesivir, but the stock has since lost nearly all of that ground. Those losses came despite a string of successes: The drug has been authorized for emergency use, and Gilead began selling it this summer after donating its initial supply. Last week, the company increased the midpoint of its 2020 adjusted profit guidance to $6.95 a share from $6.25.

Don't dismiss the possibility that Gilead's descent will repeat itself on a much larger, uglier scale.

Write to Charley Grant at charles.grant@wsj.com

 

(END) Dow Jones Newswires

August 03, 2020 07:14 ET (11:14 GMT)

Copyright (c) 2020 Dow Jones & Company, Inc.
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