By Tom Wickers, Hottinger Investment Management
In the wake of the Covid-19 crisis, very few companies have flourished. Those that had infrastructures tailored towards the lifestyles of homebound consumers, such as Amazon and Netflix, have been the main success stories. As such, Big Tech led the charge in the US April stock market rally, leaving the NASDAQ in the green for 2020[i] at the time of writing. The other main sector that has had a strong influence over market movements, albeit with scattered success, is the pharmaceutical industry. Global interest in pharma may never have been higher as a result of its potential to free up economies with new tools to battle the spread of the virus. While encouraging results for one pharma company do little to directly affect index values, the sentiment swings and resultant market movements can be compelling, demonstrated by Moderna’s vaccine news last week. Sentiment turns on a dime in these markets and pharmaceuticals have had a pocket full of them.
The pharma products that are being developed to combat the coronavirus can broadly be split into three categories: diagnostic instruments, treatments and vaccines. Progress in any of these areas bode well for the recovery of the economy. Diagnosis allows governments to implement more precision in their policies to stem the viral spread. Effective treatments lessen the load on emergency care facilities and should reduce the death rate, providing more capacity for higher infection rates. A vaccine is the holy grail and maps the route back to normality, provided it is scalable.
As Figure 1 shows, since the start of the pandemic, the global pharmaceutical sector has performed extremely well in comparison to the S&P 500 market, galvanised mostly by the momentous performance of a small number of companies. In particular, the biotechnology sector has outperformed even the FANG+ stocks which have shocked the world with their rapid recovery. Biotechnology focuses on medicines derived from living organisms, which is naturally more geared towards vaccine creation, suggesting a significant amount of the sectoral value creation has been developed in vaccine candidates and testing. The heft of the 10 FANG+ stocks should not be discounted, as the combined market value currently stands at $5.5T[ii] while the whole of the MSCI World Pharma, Biotech & Life Sciences index weighs in at $3.6T[iii]. Regardless, the contributions that pharmaceuticals and biotech have made to the recent stock market rally are notable, even before economic implications and sentiment shifts are accounted for.Figure 2 exhibits the market performance for the business days surrounding big positive global pharma news since the start of the crisis. So far, these have all coincided with upward swings in momentum in the S&P 500, regardless of other news at play. While we only have a limited number of events to analyse, the sheer prevalence of pharmaceutical news in the financial press would support the conclusion that the effects on sentiment from news on coronavirus combatants are vast. The sentiment ties and strong industry performance together have meant that the correlation between global biotech and the S&P 500 has risen significantly since the start of the crisis, even on a relative basis, and what may come as a surprise is that it has risen even more than the correlation between the FANG+ stocks and the S&P 500[v].
The purpose of this article is not to encourage or discourage readers to invest in biotech. On the company level, finding treatments is an inherently risky business and on the sector level, it is difficult to say whether there is much more value to be extracted. However, what is clear is that if investors want to better understand and predict market movements in this crisis, then they should be keeping one eye fixed on the pharma industry and its developments as it currently has the power to move markets.
[i] The NASDAQ Composite Index was priced at 9,375.78 on May 20th, 2020 according to Infront Finance data.
[iii] https://www.msci.com/documents/10199/ecd9bc5a-b100-4ff8-bfae-3e7340d04631[iv] Hydroxychloroquine: On April 4th, Donald Trump advocated for the drug and pressured health agencies to make it more available (https://www.reuters.com/article/us-health-coronavirus-usa-guidance-exclu/exclusive-pressed-by-trump-u-s-pushed-unproven-coronavirus-treatment-guidance-idUSKBN21M0R2)
Moderna vaccine: On May 18th, Moderna announced that the phase 1 trials of their market-leading vaccine had shown positive results (https://investors.modernatx.com/news-releases/news-release-details/moderna-announces-positive-interim-phase-1-data-its-mrna-vaccine)
Remdesivir: On April 29th, Gilead Sciences announced that they had received positive results from their drug that suggested it shortened the symptomatic period (https://www.gilead.com/news-and-press/press-room/press-releases/2020/4/gilead-announces-results-from-phase-3-trial-of-investigational-antiviral-remdesivir-in-patients-with-severe-covid-19)
Roche & Abbott antibody tests: Starting on May 3rd, Roche and Abbott Laboratories received a series of antibody test approvals from public health bodies, verifying the accuracy of the products (https://www.roche.com/media/releases/med-cor-2020-05-03.htm)
[v] The daily returns correlation coefficients (with the adjusted R squared values in brackets) between MSCI World Biotechnology & the S&P 500 from 3rd February, 2020 to 21st May, 2020 was 1.15 (R^2 = 0.83). The equivalent for the NYSE FANG+ index was 0.87 (R^2 = 0.78). The respective correlations for 1st February, 2019 to 31st January, 2020 were 0.51 (R^2 = 0.40) and 0.45 (R^2 = 0.65). Source: Bloomberg.