Covid-19 has renewed interest in preventing the spread of viruses. But the appeal of this rapidly growing sub-sector of the pharmaceuticals market should endure far beyond the pandemic. Matthew Partridge explains.
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.
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.