By Gregory Zuckerman
As drug companies race to discover treatments for the new coronavirus, big investment firms are placing cautious bets on likely winners.
Hedge funds and venture-capital firms, which are in the business of predicting the future for companies and economies, are growing more confident researchers will develop effective drugs to fight the pandemic.
Yet, successful efforts that could help millions -- or even billions -- of people, might not result in big profits for shareholders, the investors argue. Some are even placing bearish wagers on pharmaceutical companies they believe are attracting excessive excitement over their progress on Covid-19 treatments.
"Most of the stock prices don't bear semblance to reality," says Joseph Edelman, who runs Perceptive Advisors, a $4.2 billion New York hedge health-care fund, which is focused on what it sees as the disconnect between the price of stocks like drug company Gilead Sciences Inc. and their potential profits from any treatment or vaccine.
Gilead is up about 20% this year, thanks to remdesivir, an antiviral drug administered intravenously that shortens the recovery time of hospitalized Covid-19 patients, according to recent data.
It's always hard anticipating successful drugs, but those wagering on coronavirus treatments face unique challenges. Some of the most innovative and promising approaches are wholly unproven. Companies are competing with foreign nations and not-for-profit organizations determined to achieve their own breakthroughs. Successful drugs or vaccines may run into pricing, manufacturing and distribution difficulties.
Among the issues investors are struggling with: Can Covid-19 treatments help those sick while also protecting individuals against the virus, or will that require different drugs? Will vaccines render treatments less necessary? Will governments allow companies to charge high enough prices to generate sizable profits?
Larry Robbins, who runs health-care hedge fund Glenview Capital Management, is avoiding bets on possible coronavirus treatments, partly because he expects researchers to find a vaccine, limiting the need for even the most effective treatments.
"We are all cheering for a treatment on a humanitarian level, but as an investor, you have to believe a treatment works, and that sales last long enough for it to have a material impact on a company," he says.
Gilead is among the stocks that has investors thinking twice. The company expects to manufacture more than one million treatment courses of remdesivir by the end of this year, and the drug could have billions of dollars in new annual sales, investors say. If Gilead can develop an inhaled version of the drug or other alternatives to receiving it intravenously, its popularity could increase, bullish investors argue.
But Gilead has promised to donate 1.5 million doses of Covid-19 treatments to hospitals free of charge, and the price it would charge thereafter is unclear, raising questions about eventual profits. In the past, Gilead has been criticized for placing high prices on its HIV and hepatitis treatments. It may feel pressure to keep a lid on remdesivir's cost -- especially given President Donald Trump's past public criticism of drug prices.
If Gilead charges about $4,000 per course, as some investors predict, that would result in $4 billion of revenue for a million patients. That figure would be well below Gilead's $14.4 billion of added market value this year -- without taking into consideration the drug's development costs, estimated to be about $1 billion, a figure that would reduce any profits.
Some bearish investors are not yet convinced of remdesivir's efficacy.
"Even if the drug has only a modest effect, people will still prescribe it, but Gilead won't make a lot of money," says Dr. Joseph Lawler, who runs hedge fund JFL Capital Management, which is shorting, or betting against, Gilead.
Gilead's company spokesman said the drug company has not yet set a price for remdesivir.
"At this time, we are focused on ensuring access to remdesivir through our donation," he said. "Post-donation, we are committed to making remdesivir both accessible and affordable to governments and patients around the world."
Dr. Luciana Borio, who was director for medical and biodefense preparedness at the National Security Council, argues that smaller, private companies may emerge with the most effective treatments, not publicly traded companies, another challenge for investors.
"For technology that's truly innovative and disruptive there's opportunity for funding and interest in partnerships," she says.
Some investors are focusing on treatments that may help those who are sick but also can prevent people from getting the virus, a larger potential market. These investors are betting on therapies that use antibody proteins generated by the body's immune system. These antibodies may be able to block the action of the coronavirus's "spike" protein, preventing the virus from infecting healthy cells.
Mr. Edelman, of Perceptive, owns shares of Regeneron Pharmaceuticals Inc., a leader in antibody therapies. The company is using a "monoclonal" antibody approach, where scientists select the most powerful antibodies from recovered coronavirus patients -- or, in the case of Regeneron, from mice that have been given human immune systems -- clone them, and turn them into drugs.
Regeneron plans clinical trials in early summer and is preparing to manufacture hundreds of thousands of doses each month beginning in late summer.
Robert Nelsen, who helps run venture-capital firm Arch Venture Partners, which made early and successful bets on cancer immunotherapy, is backing VIR Biotechnology Inc., which plans trials for its own monoclonal antibody therapy this summer.
"I'm pushing them every day," Mr. Nelsen says. "We don't know if the virus will be weaker or stronger or the same in the fall, but in 1918 it came back stronger, so we have to be prepared."
Regeneron shares are up 50% this year, adding $23.7 billion in market value, while VIR is 145% higher and has added $2.2 billion in value.
Some investors say if a vaccine is discovered it could limit these shares' potential. Mr. Nelsen counters that it could take longer than expected for researchers to find vaccines, creating a huge market for antibody treatments.
"Vaccines are never 100% effective," he argues, "so antibody therapeutics may be key to preventing a re-emergence."
One high-risk, high-reward strategy: Buying shares of tiny companies with potential upside. Messrs. Edelman and Nelsen hold big chunks of ownership in VBI Vaccines Inc., an unproven biotech company claiming an experimental vaccine approach. The stock closed at $1.79 on Wednesday.
Forecasting a winning vaccine is perhaps even harder than predicting coronavirus treatments. By some measures, Chinese companies and a group at Oxford University are in the lead. Some companies say they will distribute a vaccine they develop at cost, potentially reducing profits for others. Still, the potential market is huge -- some investors believe a combination of vaccines may be necessary to meet global demand, perhaps a low-cost option for younger, healthier individuals and a more potent one for those who are immune-compromised.
Moderna Inc. has attracted the most excitement among vaccine makers, sending its stock soaring 225% this year, as it is currently moving through human trials. Moderna's strategy is to produce a vaccine using the virus's genetic sequence, rather than its actual genetic material. It uses programmed material, called messenger RNA, or mRNA, with the goal of directing a patient's immune system to produce antibodies to the coronavirus.
The approach, which may be able to produce a vaccine quickly, was described as "impressive" by Dr. Anthony Fauci, director of National Institute of Allergy and Infectious Disease. Pfizer and Germany's BioNTech are working on their own mRNA vaccine.
But analysts note that mRNA technology is expensive and has never produced an approved medicine or vaccine. Moderna is already worth $23.4 billion, up from $6.5 billion at the beginning of 2020. As for Pfizer, the company already is worth $206 billion, so it's not clear how much a vaccine would increase the company's value.
Some investors are skeptical of some of the highest-flying coronavirus stocks. Mr. Lawler of JFL Capital is shorting Inovio Pharmaceuticals Inc., a small Pennsylvania company that's up 320% this year despite limited past success.
A spokesman for Inovio says it's in phase one trials for a Covid-19 vaccine and expects results in June, while working on other medicines.
"The general public is throwing money at headlines," says health-care investor Brad Loncar at Loncar Investments.
Write to Gregory Zuckerman at email@example.com
Correction & Amplifications
This story was corrected at 10:10 p.m. ET. The original incorrectly said Moderna Inc. is moving closer to human trials for its Covid-19 vaccine