Aussie pharma stocks running long race to a COVID cure

Picture 8,000 Boeing 747s crammed with glass vials and syringes – no, it isn’t a novel solution to airlines’ COVID woes, but a stark illustration of the logistical nightmare of inoculating 7 billion people worldwide. Even when a safe, approved vaccine is available, the race to a cure is far from run, says T. Rowe Price healthcare analyst Kim Tracey.

A mind-boggling distribution program will be required to roll-out a coronavirus cure, which dwarfs the delivery of the rubella vaccine – the closest comparison of immunisation coverage. When a rubella vaccine was first licensed in 1969, it took two years for 200 million people to receive it.

“Even if we win this vaccine race, there’s going to be challenges past the finish line,” said T. Rowe’s Tracey during a recent Australian equities webinar.

In the case of COVID, billions of doses of several types of vaccines must be manufactured, distributed and administered across the globe.

“How do we scale up manufacturing? Not just for the vaccine itself, but also the packaging?” says Tracey.

“Distribution and storage isn’t as simple as chucking a cardboard box into the back of a van. The glass syringes for Moderna need cold storage.”

And then there’s anti-vaxxer sentiment to deal with. Tesla founder Elon Musk is among millions worldwide who’ve already said they won’t have a COVID jab even when it’s available.

More than 100 individual vaccines are in various trials, none of which have yet passed phase three. The majority are still in the pre-clinical phase and only 11 are in phase three, which measures drug effectiveness and monitors for side effects in a sample audience of between 1,000 and 3,000 people.

“This is the phase I call the real deal, but not yet a done deal,” Tracey says. Despite signs of early progress, delays are common. Just this week, one of the front-runners Johnson&Johnson paused its trial due to “rare responses” among some participants, Eli Lilly has delayed its progress on Regeneron, and Astra Zeneca also hit snags a couple of weeks ago.

Tracey places the Astra Zeneca and Oxford University team in “pole position, with Pfizer and Johnson&Johnson also on the podium”.

Among Australian pharmaceutical firms, CSL (ASX: CSL) is leading the pack. It’s biggest business is blood plasma, where it is a leader, followed by vaccine development, where it ranks second.

“COVID is generally positive for its flu business, with governments everywhere urging citizens to get their annual flu shots,” says Tracey. She also notes CSL may have a part to play in the Astra Zeneca-Oxford University vaccine.

The pandemic has knocked CSL’s plasma business, as potential donors have stayed away from collection centres in droves amid virus fears and lockdowns. Plasma donations in CSL’s largest market of the US were running at about half normal levels during the worst lockdowns, and are currently around 10% behind pre-virus rates.

“But we think those will rebound. If we look at prior cycles when there’s been higher unemployment, we see collections increasing in the US , partly because people need the money,” says Tracey.

Other T. Rowe Price Australian holdings in the space are ResMed and Fisher & Paykel Healthcare. “All are high quality offshore earners, global leaders in their fields, play in attractive long-term growth markets and all have a strong moat,” says Tracey. This competitive advantage is driven by a combination of their respective scale, intellectual property and brand strength.

ResMed and Fisher & Paykel sit in the respiratory portion of COVID treatments. Both manufacturers of ventilators, and Fisher & Paykel also provides humidification and oxygen treatments.

ResMed saw a pronounced drop in the number of sleep apnoea diagnoses – a key customer base – due to COVID lockdowns. Fisher & Paykel derives around 60% of its revenue from selling equipment and consumables to intensive care units (ICUs) and hospitals in the areas of invasive/non-invasive ventilation and respiratory support.

“We don’t think COVID will be a lasting negative on any of our holdings, and for some it’s actually a key positive,” says Tracey.

Positioning for different scenarios

Macro market effects of the pandemic were also discussed during the webinar by T. Rowe’s portfolio manager Randal Jenneke, who outlined how investors should be positioned for 2021.

Possible US election outcomes

He identifies three key scenarios:

1. US election – either party wins with a split congress
2. US election – a Democrat “blue wave” victory
3. Vaccine – a successful vaccine is developed with efficacy of between 40% and 70%.

In the first of these, growth stocks would continue to do well, says Jenneke. In the second, both cyclical and value stocks would do well – in the event of higher debt but persistently low interest rates – and cyclicals would also benefit.

Government spending: COVID-19 versus world wars

Randal Jenneke splits the growth universe into four broad areas: cyclical growth; defensive growth, recovery and extreme growth.

Cyclical growth stocks – those that are supported by secular or durable growth but with cyclical earnings, as opposed to value stocks – is where the Australian equity strategy focuses around 38% of its weighting. Jenneke cites building materials company James Hardie (ASX: JHX), property portal Domain (ASX: DHG) and jobs website Seek (ASX: SEK) as examples of stocks he likes here.

On the other hand, Jenneke’s team has taken profits in the most extreme part of its growth portfolio, selling down positions in firms like Wisetech in favour of cyclical names.

Defensive growth – where firms like CSL, ResMed and FPH sit – is another key area in the T. Rowe Price portfolio.

“We remain very positive on equity markets into the long term...to us, stocks still look attractive and valuations don’t look stretched,” says Jenneke.

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