As Covid-19 returns to being an endemic disease, the pandemic has taken a back seat in recent weeks as other, more pressing crises come to the fore. While certain pharmaceutical companies benefited greatly from the pandemic, as illustrated by Astrazeneca’s 41% rise in revenue for 2021, the irony holds that the industry failed to gain in equity markets as much as firms in other industries (E.g. in hospitality/catering), from the re-opening that they enabled. That said, in the US alone the Pharma industry is valued at approximately $2.8 trillion. Given this, alongside the impressive speed of vaccine developments, and the heightened importance placed on what pharmaceutical firms can offer by the pandemic, the potential for growth exists if it can be capitalised on. The pharmaceuticals industry is highly volatile and hugely speculative, with history illustrating that news of final-stage trials, testing success, or acquisitions, can cause huge share price swings. Therefore, this article is meant to be a conversation-starter, and provide food for thought, rather than provide any investment advice or know-how, regarding what is next to come for the pharmaceuticals industry.
A Deep Dive Into Some Pandemic Performers:
Astrazeneca: Potential to grow
AstraZeneca’s development of the Covid-19 vaccine broke headlines in late 2021, leading the company to become a household name. While the firm’s promise of providing vaccines at cost boosts its ESG commitments, since November 2021 it has backtracked on this policy, taking minor profit from advanced economies, but remaining not-for-profit for low-income countries. This is an understandable policy not only as Covid-19 begins to become endemic, but also for Astrazeneca’s own business model (its core vaccine rivals Moderna and Pfizer have always sold Covid-19 vaccines at a profit). Despite this policy, Astrazeneca’s revenues were still very strong in 2021, meaning that in February 2022 they increased the annual dividend for the first time, as sales are forecast to be just as strong, if not stronger, for 2022 – notably from new cancer and kidney disease drugs, alongside its research into rare conditions. The latter of these stems from Aztrazeneca’s acquisition of Alexion Pharmaceuticals in July 2021, which would serve to boost its experience in rare diseases. Interestingly, from 7,000 rare diseases today, only 5% have treatments that are certified by the FDA, illustrating the room for growth and development within this sector, something that Astrazeneca is certainly capitalising on. While this suggests promise to this firm, the earnings per share (EPS) have dropped to very low levels (0.04), meaning there may be concerns towards future profitability, particularly in a competitive, volatile market – and one where fast development and adaptivity is required. Furthermore, the price to equity ratio is (by historical standards) very high, suggesting the share price is overvalued, and further signaling that the market has concerns about Astrazeneca’s future profitability. Therefore it is worth exploring whether this is a common trend among other Covid-19 vaccine suppliers.
Pfizer: Consistently strong performer
Having paid a quarterly dividend for more than 83 years, and increasing this by 25% for the past 5 years, Pfizer was performing strongly prior to the Pandemic, which only certified its status as the world’s leading pharmaceuticals company (by revenue) in 2021. Furthermore, its stronger EPS, at 3.83, alongside its much more promising price-equity ratio (compared to AstraZeneca’s), symbolise that perhaps some pharmaceuticals firms are emerging out of the pandemic in a better position than others. Pfizer are utilising some of the lessons learned during the pandemic to complete its aim of delivering 25 drug breakthoughs by 2025. This ambition is possible due to Pfizer’s size, meaning that while the Covid-19 vaccine was a boost to revenue, it did not have as significant an impact compared to its core rivals. This diversification and broad range of interests means that Pfizer has a lot of room to grow with fairly minimal risk. Meanwhile, its strong ESG awareness and policies illustrate a focus on sustainable growth, alongside solid investment opportunities in an age of impact investing. Finally, Pfizer’s partnership with BioNTech in vaccine development is symbolic of the collaborative possibilities held by the firm, illustrating further room for growth and opportunities for research and development.
This is in contrast with Moderna, which saw a colossal rise in revenue between 2020 and 2021, from $803 million to $18.5 billion, largely driven by its Covid-19 vaccine development. However, this illustrates its dependency on the vaccine’s development, which, as the Pandemic begins to subside, risks impacting revenue drastically by 2023. Furthermore, Moderna are striving to replicate their Covid-19 mRNA vaccine success into other areas, focussing on adapting and developing vaccinations with a similar technology. However, this lack of a broad base is highly risky, particularly in pharmaceuticals, where trials may not be a success. Therefore, the question of whether Moderna can continue performing into the future depends on whether it is able to adapt and perhaps diversify its interests slightly, to ensure its ability to compete with its major rivals.
Johnson & Johnson: A more streamlined approach
In a differing strategy, Johnson & Johnson (J&J), like many large firms, have recently decided to streamline operations and heighten their focus through divesting multiple sections of its core business. This could see a profits increase, as is anticipated next year. Notably, while morally contentious (potentially impacting its ESG ratings), J+J recently divested its talcum powder business into its own company (which subsequently filed for bankruptcy), reducing the impact of its asbestos-related liabilities on profits. Additionally, plans to make its consumer health unit a standalone entity next year would leave the company focussed on pharmaceuticals and medical equipment. The latter gained increased sales of almost 18% in the last year, and the former is also one of the firm’s fastest-growing units, illustrating the potential for growth when focussing on these sectors. Furthermore, J&J are currently inundated with late-stage clinical trials, meaning that imminent breakthroughs are highly possible, providing the potential to rack up profits in the coming year.
What to Watch:
Given that pharmaceuticals stocks have slightly outperformed the overall market over the past twelve months, it is unsurprising that the above companies are not the only strong contenders in this promising industry. Alongside Pfizer, which has held a strong 12-month trailing total return, other firms, namely Amphastar Pharmaceuticals and Intracellular Therapies, the latter of which focuses on neurological disorders, with a particular focus on Alzheimer’s Disease (illustrating strong room to grow in an aging world), have shown high momentum in the past year, with the possibility this could continue. Furthermore, Dynavax’s revenue grew 897.8% in the last year, a firm that specialises in immunotherapy. Given this, alongside its interest in vaccine production, Dynavax could capitalise on the lessons learned over the Pandemic, namely regarding immunology and vaccine production, to continue this path towards revenue growth.
In a dynamic and well-contested market, growth and a focus on research & development are crucial for Pharma firms, and drawing on lessons learned from the pandemic to ensure adaptability and innovation will be key. Additionally, given the presence of potential lawsuits, alongside the long-term focus (due to the amount of time taken to create a new drug) for many pharmaceutical companies, ESG considerations in this industry are particularly key, and should be at the forefront of competitive firms’ decisions. Thus, the pharmaceuticals industry still has a lot of room to grow, and as long as firms can capitalise on this, perhaps streamlining their R+D in a particular area, while ensuring strong ESG commitments, then the industry shows a lot of promise.