1. The high efficacy rate creates winners all around
Virus experts like Anthony Fauci were hoping for at least a 50%-60% reduction in symptoms from the Pfizer PFE, -1.32% and BioNTech BNTX, +7.59% vaccine. So the 90% reduction in symptoms was a slam dunk — and welcome news all around.
Obviously, it’s great news for people in high-risk groups who want to avoid severe health problems from the virus, or worse. But the high efficacy is also good for investors. It suggests a return to normal is in sight — and more gains lie ahead for the S&P 500 index SPX, -0.14% and the Dow Jones Industrial Average DJIA, +0.90%. “This is a nearly unmitigated win,” says Cowen pharma analyst Steve Scala.
Pfizer may apply for emergency use authorization (EUA) from the Food and Drug Administration by the third week in November. Former FDA chief Scott Gottlieb estimates it will take the FDA two to four weeks to review the data and issue an EUA.
If approved, Pfizer could have 50 million doses out this year, plus another 1.3 billion doses in 2021, says Cowen biotech analyst Yaron Werber.
While the vaccine does not prevent infection, a big reduction in symptoms will shorten hospital stays sharply. This is good news at a time when hospitalization rates are up sharply off the mid-September lows — and back up to record levels seen in July.
The excellent symptom reduction rate also suggests we could hit all-important herd immunity if 60% of people get the vaccine, calculates Deutsche Bank analyst Robin Winkler. “This should be feasible over the course of 2021.”
Next, the Pfizer data suggest more vaccine results will land very soon. Pfizer reported results on the basis of 94 cases. This infection rate suggesting that Moderna MRNA, -2.17% and AstraZeneca AZN, +4.66% AZN, 1.92% have also neared critical mass on case counts and could be “much closer to reporting preliminary results than the market has been assuming,” says Winkler.
The list of winners doesn’t stop here. The results are a big endorsement of messenger RNA (mRNA) vaccine technology, says Jefferies biotech analyst Michael Yee. “This is a home run for mRNA-based technology,” he says.
These vaccines work by inserting an mRNA strand into cells, spurring them to produce antigens that trigger the immune system to combat a virus. RNA vaccines are faster and cheaper to produce, and probably safer, than attenuated virus vaccines.
The Pfizer results also suggest that Moderna’s mRNA vaccine efforts will pan out. “They are similar in terms of how the vaccine triggers neutralizing antibodies. So, I’d expect Moderna to have positive results as well,” says Jing He, a biotech analyst at Gabelli Funds.
2. The Pfizer results tell us to stay with cyclicals and public-space stocks
Since March, I have been very bullish on cyclical names, and what I call “public-space stocks.” Why? We knew that sooner or later there would likely be vaccines. Meanwhile, the Federal Reserve and Washington, D.C. have pumped record levels of stimulus into the economy, notes Leuthold Group strategist Jim Paulsen.
The upshot: By next June we could be in economic melt-up mode. Stocks most sensitive to the economic cycle do well in this environment, and also when economies transition into rapid growth from recessions.
The eight stocks I put in my public-gathering-place portfolio in my stock newsletter on March 17 were up 101% by the close on Nov. 9, compared with 40% gains for the SPDR S&P 500 ETF Trust SPY, -0.14%. I suggest continuing to hold these names if you own them, or adding on significant weakness.
The eight stocks are: Churchill Downs CHDN, +0.95%, Royal Caribbean Cruises RCL, -2.25%, Carnival CCL, -13.09% CCL, 2.04%, Planet Fitness PLNT, -6.46%, Lowe’s LOW, +1.47% , Home Depot HD, +2.07%, Howard Hughes HHC, +2.28% and Cedar Fair FUN, -1.81%.
The reason: Many doubters remain on the sideline. A Pfizer vaccine by year-end would be a game changer for investor sentiment, says Emmanuel Cau, Barclays head of European equity strategy. “We expect the reflation trade to gather speed and broaden out.”
3. There’s still plenty of room for setbacks
To finish the first stage of vaccine study, Pfizer and BioNTech still have to collect results from 164 people who get infected with COVID-19, up from the 94 reported Monday. They’re more than halfway there. But the remaining data could bring down efficacy considerably. We just don’t know.
We also don’t know how long the vaccine works since Pfizer only looked at patients seven days after the second of two injections, points out Jefferies biotech strategist Jared Holz. We only have preliminary safety results.
Plus we don’t know how Pfizer’s BNT162b2 vaccine works on COVID-19 mutations. The good news is that mRna vaccines can be adjusted quickly to handle mutations so this might not be a problem, says He, the Gabelli biotech analyst.
4. The Pfizer results are potentially bad news for several biopharma companies
Pfizer’s efficacy is so good that it sets a high bar for competitors.
“Where does this leave everyone else? Is the market big enough for more than a few players? I would say no,” says Holz, at Jefferies.
That would be bad news for what might end up being runner-up vaccines at AstraZeneca, Johnson & Johnson JNJ, +1.50%, Inovio Pharmaceuticals INO, +35.41%, Novavax NVAX, -12.81% and Sorrento Therapeutics SRNE, +2.25%.
“I think all of these stocks will be irrelevant in the COVID conversation over time,” says Holtz.
That doesn’t mean they are bad companies — just that their vaccine efforts might not be very material for investors unless they match on efficacy.
The Pfizer results also cast a shadow on companies offering therapies — like remdesivir from Gilead GILD, +2.65%. Pfizer’s results “will potentially lead to lower demand for COVID-19 treatments such as Gilead’s remdesivir,” says Goldman Sachs biotech analyst Terence Flynn.
5. Biotech investing will be more of slog from here
For much of 2020, biotech was an amazing outperformer. Because biopharma company earnings rely on fairly predictable demand from people who are ill, these companies were deemed to be relatively “safe.” Plus, biotech companies were viewed as the potential saviors in the COVID-19 environment. This attracted generalists and suggested politicians would be hands-off about regulating drug prices.
Those positives go by the wayside in a successful vaccine scenario. Winning in biotech will now be more about the hard slog of understanding companies and their prospects.
There’s good news for biotech too, though. The Senate and House are split among Republicans and Democrats. This reduces the likelihood of draconian drug price regulation that hurts biotech. And President-elect Joe Biden will bolster the Affordable Care Act, not dismantle it as many on the right want. By extending health insurance to more people, the ACA boosts demand for health-care services and therapies.
6. Work-from-home stocks, gold and bonds will continue to suffer
Stifel analyst Brad Rebak thinks pressure on work-from-home names could continue as investors rotate into economically sensitive areas like travel, financials and energy. He thinks this will be bad news for Zoom Video Communications ZM, -9.00% and Citrix Systems CTXS, -0.44%, among others.
Part of the allure of gold GLD, +0.33% – and the reason for its phenomenal strength this year – is its perceived defensive characteristics. As investors now move into risk-on mode, defensive plays are less interesting. This will hit demand for gold, and spark selling.
Bond yields jumped Monday, which is no surprise since the vaccine results point to a stronger economy and possible inflation ahead. I don’t know about near-term moves, but this bond weakness is only the beginning of what will play out over the next 10 months. Yields on 10-year bonds could back up to the 1.6%, as inflation worries mount. If you want to go for yield, you need to do it through cyclical stocks.
7. Conspiracy theorists will debate Pfizer’s timing for years
Pfizer originally intended to release interim results after 32 people in its trials got infected. Then it punted on that plan, which likely would have had results coming out before the election.
Would positive results before the election have thrown the outcome in favor of President Donald Trump? We will never know. But that is exactly what makes this great fodder for conspiracy theorists. They live to fill in the vacuums created by the unknown and the unknowable.
Michael Brush is a columnist for MarketWatch. At the time of publication, he owned PFE, CHDN, CCL and HHC. Brush has suggested PFE, AZN, CHDN, RCL, CCL, PLNT, LOW, HD, HHC, FUN. JNJ, NVAX and GILD in his stock newsletter, Brush Up on Stocks. Follow him on Twitter @mbrushstocks.