Moving Beyond COVID In Biopharma

Apr. 15, 2021 9:31 AM ETIBB, XBI, LABU, HQL, LABD, FBT, BBH, PJP, GNOM, CNCR, XPH, PBE, BBC, IHE, GERM, PPH, PILL, BBP, IBBJ, FTXH1 Comment2 Likes
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Summary

  • Just over one year after COVID-19 disrupted our lives, we are now getting to the point where multiple vaccine options are nearly ubiquitous for those in the United States.
  • Per the CDC, as of April 12, 36% of the entire US population has received at least one vaccine, and 79% of those aged 65 years and older.
  • The biopharma industry has been materially underperforming this year as ramping regulatory concerns and disappointing results from a variety of pipeline candidates weigh on sentiment.
  • We think the market overreacted to a few disappointing test results, and we see several innovative businesses whose R&D pipelines are being substantially undervalued.

Covid-19 Coronavirus Vaccine vials in a row macro close up
Photo by MarsBars/E+ via Getty Images

Never before have so many biopharmaceutical companies been household names. Pfizer (PFE), Moderna (MRNA), J&J (JNJ), AstraZeneca (AZN); the vaccine rollout has become something of a fun guessing game: which did you get?

Just over one year after COVID-19 disrupted our lives, we are now getting to the point where multiple vaccine options are nearly ubiquitous for those in the United States. This is, of course, great news in our fight against the pandemic.

We hope this will mark a final turning point before our lives return to normalcy, and it reminds us of all that we have learned throughout this arduous process (see our event last fall, Understanding COVID and Its Controversies).

Looking Back and Lessons Learned

Looking back on last year, we felt we were being both realistic and optimistic in our analysis. Realistic in that we believed there were still hard days ahead, and optimistic in that we believed we would eventually discover a vaccine.

Our views were proven mostly right. There were hard days ahead, and the second COVID wave this winter was arguably more damaging than the first. And the biopharmaceutical industry did soon develop several highly effective vaccines.

More than anything, we feel we underestimated how effective they would end up proving to be and how quickly we would be able to roll them out. And, while we expected most people would eventually decide it was safe and sign up to take it, we did not think it would be so universally embraced as it has been so far. Per the CDC, as of April 12, 36% of the entire US population has received at least one vaccine, and 79% of those aged 65 years and older.

The medical industry has come together as a whole – the scientists who developed the vaccines, the logistic agencies who have been overseeing dosage deliveries, and the local and federal government agencies. They’ve done tremendous work, and the finish line is finally in sight.

Regulatory Clouds

The pharmaceuticals and biotechnology industries have been the ultimate private sector hero. But beyond simply generating goodwill and positive feelings, we think there may also be tangible investment implications too.

These companies and their drug pricing policies have been facing regulatory challenges for years. At times, rumors of government reform have been so concerning that pharmaceutical company valuations have been dramatically impacted. While we’ve always appreciated medical and scientific innovation, these issues have been on our radar for a while, and they have previously been severe enough to cause our research team to reduce investments in these otherwise compelling companies.

It is always difficult to predict which political promises eventually become passable legislation, but we now believe some type of reform is coming to the biopharmaceutical industry. However, we don’t think the legislation that will be proposed and passed will materially impact their business models, especially for companies with highly efficacious products for hard-to-treat diseases that have little to no competition.

The biopharma industry is innovative, and it can also be very profitable. Historically, these companies have occasionally needed to take their medicine from government regulators in order to be left alone for a few years. For this reason, the best time to buy has been when regulatory concerns are actually ramping up. Investors tend to become overly pessimistic on what laws will be passed, leading to unusually low prices.

Today, we think we are nearing this regulatory crescendo. Last week, the Biden Administration infrastructure proposal included talk of putting drug pricing reform into the package as a ‘pay for.’ We also know that many influential segments of the Democratic party, including House Speaker Nancy Pelosi, are keen to finally do something. We think these fears are causing investors to overlook the fundamental innovations of the industry.

More than Zero Pipeline

Yet not all opportunities within the sector are the same. While we believe politics are creating a buying opportunity, this is where the bottom-up process of finding individual stocks comes into play.

Biopharma tends to get a reputation as being hit-driven. Their research & development (R&D) efforts take years, and when they develop a drug/medical solution, they typically sell them at high prices with patent protection to recoup the R&D costs and make a profit. That is why many of these companies have very sophisticated R&D programs with robust pipelines of potential drug candidates. A few will succeed, and most won’t.

Usually, these businesses end up developing a portfolio of a couple highly successful core products with monopoly positions, few real competitors, and dozens of patents. But what often gets overlooked is that there typically is a demonstrated competency underpinning these R&D efforts with certain types of molecular research unique to the business. Often, a biopharma company with a molecular breakthrough for one drug, such as recent discoveries in hemophilia and AATD, will have related use cases as well.

When major, unproven drug candidates release disappointing clinical trial results for drugs in their pipeline, it can cause substantial volatility in the underlying stock. Depending on how badly the drug candidate fails its tests, investors may call into question the entire research stack (i.e., other related candidates with similar molecular underpinnings). Investors can become overly bearish, at times discounting the entire R&D pipeline, causing the stock to be far oversold.

Our goal is to value biopharma companies on what we know will work and get good value on what we think may work - sort of like owning both the stock and a call option on the stock - by asking questions like: What is the end market size, what is the probability of success, and what would the distribution ramp look like? These factors can give us a ballpark estimate of the value of the drug candidate and the stock itself. In our view, we see a number of biopharma companies right now with attractive R&D pipelines that are currently overlooked by investors.

Putting the Pieces Together

The biopharma industry has been materially underperforming this year as ramping regulatory concerns and disappointing results from a variety of pipeline candidates weigh on sentiment.

We think this creates an attractive risk-reward backdrop for the sector, and we tactically added to a variety of biopharma companies last month in our traditional, bottom-up investment strategies. We think the market overreacted to a few disappointing test results, and we see several innovative businesses whose R&D pipelines are being substantially undervalued. Additionally, we are optimistic that ongoing regulatory fears will be less severe than many expect, and we believe that once the regulatory overhang passes, the underlying businesses themselves will be ready to shine.

Original Post

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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Manning & Napier (NYSE: MN) provides a broad range of investment solutions through separately managed accounts, mutual funds, and collective investment trust funds, as well as a variety of consultative services that complement our investment process. Founded in 1970, we offer equity and fixed income portfolios as well as a range of blended asset portfolios, such as life cycle funds, that use a mix of stocks and bonds. We serve a diversified client base of high-net-worth individuals and institutions, including 401(k) plans, pension plans, Taft-Hartley plans, endowments and foundations. For many of these clients, our relationship goes beyond investment management and includes customized solutions that address key issues and solve client-specific problems.
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