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The market’s erratic response to lukewarm medical research for COVID-19 treatment and vaccine candidates isn’t expected to slow down as investors pin their hopes for a recovery on the high-risk biotechnology sector.
“In the coming few months, the stock market, especially related to COVID-19, will continue to be volatile,” said Difei Yang, a biotech analyst at Mizuho Securities. “It’s driven by retail investors, rather than institutional investors…they react to headline news, and the market reacts.”
Case in point: on May 18, Moderna Inc. MRNA, +3.52% became the first company to disclose data from a clinical trial testing a COVID-19 vaccine in humans. The preliminary data implied efficacy; however, the biotechnology company only shared data from eight out of 45 participants in the Phase 1 clinical trial. The stock jumped 20%, closing at a record high of $80.00, and the Dow Jones Industrial Average soared 3.9%, to finish at 24,597.37, erasing much of the month’s losses.
The next day Moderna’s stock took a dive, closing at $71.67, with analysts attributing the drop to a Stat News story outlining skepticism among vaccine experts. The Dow tumbled 1.6%, to end at 24,206.86, near a session low.
The thing is, the story wasn’t particularly damning. It did raise important questions, including why the data was released for a percentage of the trial’s participants and why the National Institute of Allergy and Infectious Diseases hadn’t put out a news release or comments from NIAID director Dr. Anthony Fauci, as the federal agency had done with clinical-trial data for Gilead Sciences Inc.’s GILD, +0.33% remdesivir. (Fauci later told NPR that the Moderna vaccine data “is really quite promising.”)
“Out of realm of its expertise, [the market’s] got a bias upward,” said Kristina Hooper, chief global market strategist at Invesco. “That creates an environment where you tend to see a very positive reaction by stocks to a development that might seem minor to health experts.”
There are two reasons behind the volatility: individual investors who don’t understand how drug development works may be simply reading a headline before investing in virus stocks. At the same time, there has been a shift in how medical research is disseminated as sites are now publishing COVID-19 studies before they have been vetted by other clinical experts.
“ “It’s a big pocket of froth. ” ”
Much of the scientific and clinical research that has been published since January about the coronavirus has been in the form of a preprint, a type of preliminary study that hasn’t been peer-reviewed. While preprint-style research has been around for decades, notably in physics, math, and economics, a pair of commonly cited preprint websites, BioRxiv and MedRxiv, for coronavirus studies were launched a year ago by Cold Spring Harbor Laboratory in partnership with The BMJ medical journal.
The publication of preprints has likely been a contributor to some of the market volatility, Mellon analyst Amanda Birdsey-Benson said. “They are giving a lot of false hope and a lot of disappointment.”
Separately, some top-tier medical journals have taken to publishing coronavirus research that has not been peer reviewed or is now going through a much speedier review process, perhaps due to pressure from the preprint sites, according to Ivan Oransky, a cofounder of Retraction Watch, a site that tracks retractions in scientific research, and VP of editorial at Medscape. For example, a study of eight people conducted over a few months is contextually “meaningless,” as is a single-arm study with 61 patients, he said.
“The preliminary nature of what I’ve seen published in top journals is eye-opening,” Oransky said. “It forces us to rethink what peer review means, what rigor means, and what prestige means.”
In recent months, the market has risen and fallen on preprint research, and virus stocks have soared and tumbled on limited data disclosures from clinical trials, in-vitro studies of experimental products that haven’t been tested in humans, or even the news that companies are simply planning to join the race. “It’s a big pocket of froth,” said Brad Loncar, a longtime biotech investor and CEO of Loncar Investments.
Since the start of the year, the SPDR S&P Biotech Exchange-Traded Fund XBI, -0.86% has gained 7.8%, making the biotech sector a top three performer among S&P ETFs during a year in which the coronavirus pandemic has hurt markets and decimated jobs. Several virus stocks began rallying by Jan. 23. In comparison, the S&P Low Volatility Index is down 14.9% for the year, while the S&P 500 SPX, +0.34% has declined 6.2%.
“The investor reaction is not entirely surprising,” said Randy Frederick, VP of trading and derivatives for the Schwab Center for Financial Research. “We’ve never dealt with anything of this magnitude.”
In the case of Gilead, the company has added about $12 billion in market capitalization since Dec. 31, as investors put their hopes on remdesivir, an experimental drug that first entered development in 2009, failed as an Ebola disease treatment, and was repositioned as a possible treatment for COVID-19 patients in China in January.
On April 30, when the NIAID said a Phase 3 trial found the drug helped get some severely ill COVID-19 patients out of the hospital four days sooner than those not taking the drug, the stock closed at $84.00. Since then remdesivir received an emergency use authorization from the Food and Drug Administration, and shares of Gilead have dropped to $75.09.
“With shares now down [about] 14% from last month’s highs — that we believe were fueled by constant remdesivir newsflow and overly optimistic expectations for significant NT remdesivir revenues — we now see a greater valuation disconnect and even more attractive buying opportunity,” RBC Capital Markets’ Brian Abrahams wrote in a May 27 note to investors.
For investors without biotech expertise, a bet on a virus stock that could yield an emergency use authorization for a treatment or vaccine used by potentially millions of people seems rational. However, vaccines have never been big moneymakers for pharmaceutical companies, and the ones that do make it to the market have historically taken between five to seven years to develop.
In the current circumstances, the legacy pharmaceutical players have been very clear that they don’t expect their COVID-19 products to boost their bottom lines. Johnson & Johnson JNJ, +0.27% plans to offer its vaccine, if it works, on a not-for-profit basis. Gilead so far has made remdesivir available through donation, with the CEO telling investors it was the “right thing to do.”
“Even the companies that do ultimately come up with useful therapies and vaccines are unlikely to make money,” Schwab’s Frederick said. “How much income are those companies going to make? Is there a net return? It’s something I wouldn’t be too excited about.”
That said, biotech experts said the broad support for the sector may hint at growing respect for what these companies can do, given how quickly many of them have ushered experimental therapies and vaccines into clinical trials to treat a disease that no one had heard of six months ago.
“Biology is where the action is going to be for years,” Loncar said. “People have gotten the message how integral this is to society.”
