Biotechnology stocks are a current favorite with investors amid the pandemic. They might not be the best investments, though.
Hopes of a vaccine breakthrough have boosted biotech stocks. As hordes of investors pile into this sector, the Nasdaq Biotechnology Index has gone up by nearly 20% year-to-date.
The mad clamor for vaccine makers has hit millennial investors especially hard. Half of the top ten stocks on Robinhood the past week have been biotech companies.
Is it wise to jump in on the biotech bandwagon over hopes of a vaccine for the pandemic? This is one of those cases where following the herd would be a colossal mistake. There are three reasons why.
With both public and private institutions involved in the search for a vaccine, no effort is being spared. Across the globe, there are more than 165 vaccines under development and dozens in various trial stages.
Hopes are rising that by the end of the year, there could be a couple of vaccines available. The stiff competition will make the vaccines less lucrative for manufacturers.
While the total addressable market is enormous (potentially the entire global population), there are just too many players to make pandemic vaccines the cash cow they would otherwise have been.
So far, there are a lot of mysteries surrounding the pandemic. Some of the unanswered questions include how long the disease will last. Questions abound over whether the pandemic will become regular like the seasonal flu. If it is a one-off occurrence, it eliminates the possibility of recurring revenues for vaccine makers.
Additionally, it is still unclear how devastating the mutations of the virus will become. The pandemic is less than a year old, and picking out the mutations that are potentially worrying is a challenge. Some mutations may reduce the effectiveness of vaccines, which could make investments made by some biotech firms worthless.
Some studies have additionally shown that a vaccine might be useful in preventing severe disease but not stopping the spread. It is unclear whether antibodies will be potent enough and how long they will last in the body.
The World Health Organization has developed a global access facility for the vaccine. So far, over 150 countries have joined. This banding together by countries will reduce the bargaining power of vaccine makers.
Additionally, governments are buying vaccines for their populations at cost, further reducing the potential for making a killing by the biotech firms. For instance, the U.S. has entered into agreements with biotech firms such as Johnson & Johnson (NYSE:JNJ), AstraZeneca (NYSE:AZN), Pfizer (NYSE:PFE), and BionTech to buy potential vaccines.
In the deal between Washington and AstraZeneca, 300 million doses of the vaccine will be sold at cost.
Johnson & Johnson’s deal will provide over a billion does, which will be offered at no profit.
AstraZeneca will equally supply Europe with a vaccine it is co-developing with Oxford University at cost.
With some public-funded institutions involved in developing vaccines, including Chinese state-owned firms, the possibilities of making profits are in doubt.
Although not all biotech firms have entered into such deals, these agreements will place them under severe pricing pressure. It will not be surprising if such biotech firms making vaccines at a profit find themselves shamed into lowering their prices drastically.
Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com. The author holds no investment position in the above-mentioned securities.