The information flow about the coronavirus pandemic is truly electrifying, with big public market swings in the life sciences industry. That said, exactly what sort of impact is the disease known as Covid-19 having on biotech stocks?
In the last few months, the Covid-19 pandemic situation has rocked the stock markets, causing intense swings across all sectors. For example, the stock prices of airlines are plummeting, while oil, motor, and real estate are in a depressed mood. Even the shares of blue-chip tech companies are suffering. Others, mainly online education and entertainment businesses, are taking advantage.
However, one sector stands out: Biotechnology. Investors are paying special attention to the vagaries of healthcare and biotech company shares. The course of every industry depends, more or less, on what will happen in the biotech sector. This global crisis will end sooner or later, but what seems certain is that biotech stocks will never be the same.
Coronavirus: the starting gun for a health race
Other economic crises have disrupted European biotech stocks before, but Covid-19 is different. Brokers are closely examining stocks related to virus research, treatments, or tests, and long-term sector projections continue in earnest.
Right now, the big question is which biotech can provide the pandemic solution the quickest. Some companies, focused on the making and testing of Covid-19 test kits, are expected to play a critical role in managing the outbreak, and have consequently gained a lot of value. Much more than that, developing a coronavirus vaccine would send shockwaves through the stock markets.
Most countries are scrambling to find a cure, their companies have taken the lead to defeat Covid-19, and financial media sources trumpet biotechs that could cross the finish line first.
A clear example of a company under the ‘coronavirus effect’ is the UK life sciences stock Genedrive, which achieved an astonishing 280% price increase on the London Stock Exchange on a single day in late March. This was when the company reported it was close to coronavirus test production.
Another UK stock, Tiziana, followed a similar path to Genedrive, spiking on the London Stock Exchange in early March when the company announced a potential treatment for certain respiratory failure patients.
Novacyt is also one of the frontrunners. The French diagnostics company received the green light to distribute its tests in Asian markets in late March, and later declared the tests will be used in US hospitals and laboratories. Subsequently, its value has continued to grow consistently since the start of April.
The NASDAQ stock price of the German giant BioNTech went up by 60% in the middle of March when it announced plans to start Covid-19 vaccine human trials in collaboration with Pfizer and Fosun Pharma, a Chinese pharmaceutical company.
The best-performing European healthcare stock at the moment is that of the Danish company Ambu. This firm supplies single-use bronchoscopes, which are used to look in the patient’s lungs. The company recently reported that current reusable bronchoscopes can get contaminated and help spread the novel coronavirus. By designing sterile, single-use versions of this technology, the company aims to reduce the virus’ spread.
The stocks of many biotech companies fighting Covid-19 have soared, mainly on Nasdaq. Although biotechnology and healthcare stocks are generally performing better than those of other industries, the fact remains that not all biotech stocks across the board have performed well.
For example, the French big pharma Sanofi is using its research in severe acute respiratory syndrome to fight coronavirus, but its shares have not seen the same boost as some US stocks. However, this may soon change.
At the end of March, Sanofi signed a collaboration deal with the US firm Translate Bio. The two companies now aim to produce coronavirus vaccines based on messenger RNA (mRNA), technology that forms the basis of some of the most advanced Covid-19 vaccines right now.
Meanwhile, in the US, financial circles are abuzz about Moderna, whose phase I-stage Covid-19 vaccine is the most advanced in the mRNA race; Gilead Sciences, whose antiviral drug remdesivir has shown some early promise for treating Covid-19; and Inovio Pharmaceuticals, which began a phase I trial of its DNA vaccine for Covid-19 earlier this month.
According to analysts, investors prefer to bet on clinical-stage biotech companies for fast-moving innovation. This also applies to companies that haven’t focused their efforts on developing treatments for coronavirus.
The share price of the Belgian company Galapagos, which develops small molecule medicines for rheumatoid arthritis and other inflammatory conditions, is starting to show signs of recovery after it was pushed downwards by the uncertain climate starting in February.
Other companies that suffered strong falls at the end of February and are getting back on track include the Swiss drug developer BB Biotech, the Italian dermatology company Cassiopea, and the Spanish epigenetics company Oryzon Genomics. The French immuno-oncology company Innate Pharma has experienced an even quicker improvement.
A state of fear and survival
Share prices are volatile, especially on biotech stocks, which can quickly spike or dive, depending on the latest developments. However, in this crisis, biotech stocks are not being fundamentally moved by financial or trials results, but rather by the news and the emotions of investors.
According to Damien Choplain, Senior Biotech Equity Analyst at the French financial services company Kepler Cheuvreux, a fear and survival mode has fully manifested in investment portfolios right now.
“The high volatility seen in several stocks such as [the French biotechs] Pharnext and Innate was probably triggered by retail investors who speculate on news they often do not understand well,” Choplain told me.
In this climate of volatility, some brokers may decide that is better to sell their stocks cheaply before a collapse; others prefer to stand firm during the unexpected storm; some shelter behind products that will sell in almost any economic state; and, of course, there are those who sniff the big opportunity to beat the market.
Nevertheless, compared to many industries, we are seeing relative strength in the biotech and pharmaceutical sectors in the middle of this market instability.
Trials and new drug launches will suffer
One reason for the volatile biotech and pharma stock prices worldwide is that the drug pipelines for many companies are being delayed due to quarantine measures. In terms of clinical development, patients’ requests for new tests or in-person visits to physicians and hospitals are also extremely limited.
“All biotech companies will suffer delays in their clinical activities such as in-patient enrolment and staff shortages,” Choplain said. “We also expect a slowdown of the regulatory process in the EU and the US.”
“At this point, four- to six- month delays are probably not a bad bet as partner hospitals have other short-term priorities,” Nathanaël Mauclair, Managing Partner at Aldebaran Global Advisors, added. “The same is true for companies that were about to launch their clinical trials by recruiting patients.”
Most biotech stocks not related to virus research will suffer the markets’ collateral effects, for example, companies developing treatments for Alzheimer’s disease.
The Swiss company GeNeuro’s stocks sank in mid-March when it was forced to delay its phase II trial in multiple sclerosis. According to Choplain, GeNeuro is just one in a long list of examples of this happening, including other companies such as the French allergy firm DBV Technologies and the Swiss company Addex Therapeutics.
“DBV Technologies indicated that the vaccine division of the FDA is currently fully dedicated to the Covid-19 crisis, leading to delays in the approval of several drug candidates,” Choplain continued. “And, more recently, Addex has been forced to hit the pause button in relation to its registrational study of its Parkinson’s disease candidate.”
While many drugs are being delayed, it is also noteworthy that governments worldwide are willing to offer a vaccine to their citizens as soon as possible. Compared with most pharmaceutical drugs, a coronavirus vaccine may be approved much more quickly.
Fundraising is becoming a rockier road than ever
From the viewpoint of companies, private and public investment is generally becoming hard to come by with the uncertainty of the pandemic.
Several companies were fortunate to raise capital right before the markets started to fall, such as the Belgian company Iteos Therapeutics, which raised a €114M Series B2 round in early April.
“The big announcements of fundraising were decided upon weeks or months before Covid,” said Jan De Kerpel, Managing Director of Life Sciences & Healthcare at the Dutch merchant bank Kempen Corporate Finance.
On the contrary, some biotechs with very promising science in their labs could be damaged badly due to a lack of resources. “Overall and as always, small cash-strapped companies will be screwed,” De Kerpel lamented. “Those with strong balance sheets are already now being favored.”
Generally speaking, small biotech companies short on cash will face a funding crunch if the stock market keeps down.
“Refinancing risk is high, especially for small companies that need to raise funds in the coming months and who do not have a robust shareholding structure,” Choplain noted. “More than ever, cash runway is an important criterion for investment.”
Even the larger biotech companies will not be without new difficulties. They will likely face problems convincing big investors who may want clearer signs of progress. There will also likely be a withdrawal of investment from other main healthcare sectors, such as antibiotics. As a result, financial experts assume that some companies will be forced to license out or abandon non-core research projects that burn cash.
“We expect to see rescue operations, which will require substantial sweeteners such as discounts and warrants to participate,” De Kerpel said. “Deal-making should thus become more popular as large players will continue to have substantial cash resources, but do not expect near-term surprises.”
In terms of initial public offerings (IPOs), the signs are that most biotech IPOs will be shelved. Until recently, the German mRNA biotech CureVac intended to go public to raise funds for the development of a Covid-19 vaccine. Despite this announcement, a CureVac IPO is improbable.
“Investors’ positive sentiment towards innovation will come back but, for now, the IPO market is closed,” Mauclair concluded.
“The months of May and June are traditionally quite active in terms of new IPOs. Unless the health situation gets better soon, which is very unlikely, the IPO market shutdown will continue for several months. Many biotech stocks will feel the heat, unfortunately.”
Public investors are becoming cautious
Before this new reality emerged in Wuhan, China, general expectations about the performance of biotech stocks for 2020 were quite promising. This was going to be ‘the year’ for therapies related to the human immune system, gene editing, the microbiome, and other trends.
While circumstances have changed, there is still a long way to the end of the year, and, in any case, health companies will always be needed, even during a recession. An economic crisis does not stop the demand for medicines, hence the stocks of biotech companies will be probably less impacted long-term than other sectors.
“Healthcare and pharma are now considered a safer haven than any other industry,” De Kerpel explained. “We do expect generalist [investors] to increase their exposure but most likely more in the larger names.”
In general, though, De Kerpel clarified that institutional investors are more likely to avoid risks right now. “There is no room for heroism in these markets,” he added. “People don’t get fired for taking less risk.”
Broadly, the current predictions for biotech stocks are a minimum of two or three months before they can make significant progress again. Some commentators anticipate that this year will experience a transitory first-half slowdown, after which the outlook will be more promising. However, other pundits urge caution against this projection.
To address the situation, many European biotech companies and traders are keen for an agreement in Brussels, a solid economic stimulus, or at least a common direction for the European Union. These measures could mitigate the economic bleeding that we have been dangerously plunged into.
Dangers of biotechs with big promises
The value of some pharma and biotech stocks may keep shooting up during the coming months. However, some experts warn that the hopes for Covid-19 treatments have lifted a variety of weak small-cap companies, with most of their development in early stages, perhaps years away from the market. Furthermore, there is no guarantee that their experimental drugs will pass clinical trials and obtain EMA or FDA approval.
“There are various biotechs claiming to be advancing a coronavirus vaccine that make similar claims with the medical crisis of the day,” stated Marc Lichtenfeld, Chief Income Strategist at The Oxford Club in an interview with The Observer.
“When Ebola and Zika were making headlines, some of these companies suddenly had a vaccine development program for those conditions too.”
So rather than trying to pick the winning company in the race to develop a Covid-19 treatment, public biotech investors should concentrate more on the company’s fundamentals, management team, and history. Furthermore, it should not be forgotten that there are other players in the coronavirus race, such as universities and other institutions, that are not publicly listed.
Despite the big challenges posed by the crisis, there are undeniably some silver linings. Citizens have rarely been so eager to hear what scientists have to say, with many traders’ watchful eyes glued to biotech stock charts. Scientific information will probably become a bigger mass media priority, and audacious investors will concentrate more on life sciences companies.
While biotech stocks will certainly hit rough times in the short run, the positive outcomes of the situation may be promising in the years to come.
Images from A. Slynko and Shutterstock