Picking a Winner in the Race to a COVID-19 Vaccine

As COVID-19 cases continue to grow across the US and the world (total global cases over 16M and total deaths over 600K), the need for treatments and more importantly a vaccine is growing exponentially.  Indeed, in the US given the struggles with containment in many of the southern and western states, there is a growing consensus that that a return to normal will be very much dependent on a vaccine.  The stock market's reaction each time there is positive vaccine news is testament to this.  Certainly the public's desire to get on a plane, go to a restaurant, or go to work (or even leave the house) will be impacted for quite some time until they feel "safe" in doing these activities.  A safe, effective and widely available vaccine would go a long way toward helping.  Below is a table summarizing nine pharmaceutical companies who appear to be ahead in the race for a vaccine that appeared in a recent Forbes article: 

As an investor, it's an intriguing opportunity, since the "winner" or "winners" in this race to a vaccine will be rewarded with a tremendous surge in revenue and stock valuation.  If the vaccine is like the annual flu, it may require an annual booster shot which will guarantee future revenue for many years to come.  This is another reason why many in the investing community have been following these developments closely, including announcements around Phase I and II trials and the safety / efficacy of the vaccine candidates.  Each company working on the vaccine is taking a slightly different approach.  Some are taking a novel approach of using Messenger RNA (mRNA), which has the advantages of a shorter development timeline, lower dosage requirements and more rapid mass-production.  Other companies are using a weaker version of the common cold as a base in some combination of COVID-19 genetic material.  Regardless of approach, the goal is to develop the body's innate ability to recognize and attack COVID-19 when infected.  The approach using the common cold (also a coronavirus) appears to be more "traditional" and would seem to have a better chance of success than a more novel approach like mRNA.  The two companies that are regularly mentioned in this regard are Astra Zeneca (AZN) and Johnson and Johnson (JNJ).

AstraZeneca Plc is a holding company, which engages in the research, development, and manufacture of pharmaceutical products. Its pipeline are used for the following therapy areas: oncology, cardiovascular, renal, metabolism, and respiratory. The company was founded on June 17, 1992 and is headquartered in Cambridge, the United Kingdom.  The Company has a $145B market capitalization, pays a 2.46% dividend yield and generated $2.4B in operating cash flow in its most recent fiscal year (2019).

Johnson & Johnson is a holding company, which engages in the research and development, manufacture and sale of products in the health care field. It operates through the following segments: Consumer, Pharmaceutical, and Medical Devices. The Consumer segment includes products used in the baby care, oral care, beauty, over-the-counter pharmaceutical, women's health, and wound care markets. The Pharmaceutical segment focuses on therapeutic areas such as immunology, infectious diseases ad vaccines, neuroscience, oncology, cardiovascular and metabolism, and pulmonary hypertension. The Medical Devices segment offers products used in the orthopedic, surgery, cardiovascular, diabetes care, and eye health fields. The company was founded by Robert Wood Johnson I, James Wood Johnson and Edward Mead Johnson Sr. in 1886 and is headquartered in New Brunswick, NJ.  The Company has a $390B market capitalization, pays a 2.73% dividend yield and generated $23.4B in operating cash flow in its most recent fiscal year (2019).

Both of these companies being large, stable companies with strong financials and a solid dividend yield would be good investment candidates and a good addition to a diversified dividend portfolio, even absent the potential windfall of a COVID-19 vaccine.

The US Government recently ordered 100 million doses of vaccine (when available) from Pfizer (PFE) and BioNTech (BNTX), which might indicate the government feels like they could be successful in their novel mRNA approach, but they are still in an early (Phase I) stage.   It could also just be a government strategy to secure the necessary vaccines if an when available and not a commentary on potential for success.  Pfizer in particular has struggled overall compared to its peers over the past several years.  Pfizer has a market capitalization of $209B, a dividend yield of 4% and $12.6B of operating cash flow in its most recent fiscal year (2019).  Operating cash flow has declined for each of the past three years and the high dividend yield could be a red flag.  Maybe a COVID-19 vaccine will provide a big boost?  Time will tell. 

If you are looking for another way to invest in a potential vaccine and maybe diversify a bit more, an index fund that owns these companies might be a good idea.  Here are three that popped up on my review (courtesy of Investopedia):

SPDR S&P Biotech ETF (XBI)With net assets nearing $4 billion, the SPDR S&P Biotech ETF (XBI) aims to provide returns that correspond to the S&P Biotechnology Select Industry Index. Moderna commands the largest single stock allocation in the fund's portfolio of 123 holdings, with a weighting of 4.53%.  

Invesco DWA Healthcare Momentum ETF (PTH)Charging a 0.60% management fee, the Invesco DWA Healthcare Momentum ETF (PTH) tracks the performance of the Dorsey Wright Healthcare Technical Leaders Index – a benchmark comprising U.S. health care firms selected and weighted by price momentum. Although not strictly a biotech fund, the ETF allocates 42.25% of its $265.46 million asset base to the sector. The fund's basket holds about 45 stocks, with Novavax taking the top weighting at 7.81%. 

VanEck Vectors Pharmaceutical ETF (PPH)Created in 2011, the VanEck Vectors Pharmaceutical ETF (PPH) has an investment mandate to provide similar returns to the MVIS US Listed Pharmaceutical 25 Index. The fund, which has an expense ratio of 0.36%, holds 216,632 shares of Sanofi, representing 4.48% of its net assets, while GlaxoSmithKline carries a similar weighting at 4.79%. 

Of course, you will need to do your own homework and invest where you feel comfortable.  I'm not recommending any particular stock or strategy.  Stay safe, healthy and positive.  I hope you find this post useful as you chart your personal financial course and Build a Financial Fortress in 2020.

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