Probably never before in history has the stock market's fortunes hinged in large part on the fate of one drug. But here we are. All eyes are on Gilead Sciences' (GILD 2.32%) antiviral drug remdesivir.

The Dow Jones Industrial Average rallied more than 700 points on April 17 after healthcare industry news website STAT reported encouraging results from a late-stage study of remdesivir in treating COVID-19. Those results weren't officially released, though. STAT's report relied on videoconference footage of a meeting with University of Chicago faculty involved in the study. But that didn't matter much to investors, who immediately celebrated the positive news.

When another report inadvertently posted on the World Health Organization (WHO) website on April 23 indicated that remdesivir didn't provide a clinical benefit to COVID-19 patients in a Chinese study, another stock market rally largely fizzled out.

Why is the stock market hanging its hopes on Gilead's remdesivir?

A magnifying glass over cubes spelling out Remdesivir

Image source: Getty Images.

First-mover advantage

There are quite a few candidates for treating COVID-19. More than 20 publicly traded companies are working on evaluating drugs that could potentially treat the novel coronavirus disease. Several of these are large drugmakers that are household names in the U.S., including Bayer and Eli Lilly

President Trump has spoken several times in press conferences about the potential for anti-malaria drugs chloroquine and hydroxychloroquine. Two reports, one in China for chloroquine and another in France for hydroxychloroquine, indicated that the drugs could be effective in treating COVID-19. In an international survey of doctors, hydroxychloroquine was voted as the most effective therapy for COVID-19 by 37% of respondents, making it the most highly rated treatment in the survey.

So why isn't the stock market rising and falling on news about these anti-malaria drugs or other potential COVID-19 candidates? It's simple: None of these other drugs is as far along as Gilead's remdesivir is in clinical studies that count. The previous studies of chloroquine and hydroxychloroquine didn't follow the protocols scientists use to make sure results are statistically significant. The FDA also recently warned about potential heart rhythm problems associated with the drugs.

Remdesivir, on the other hand, is already being evaluated in multiple late-stage clinical studies that were designed to achieve statistically significant results. Investors are also no doubt more interested in the drug because of its previously demonstrated potential in preclinical testing in treating other types of coronaviruses.

Results from one of Gilead's late-stage studies will be reported this month. The biotech will announce results from another late-stage study in May, around the same time that the U.S National Institute of Allergy and Infectious Disease (NIAID) will also report results from its own late-stage study of remdesivir. Because results from reputable clinical trials will be known so quickly, remdesivir enjoys a first-mover advantage in the eyes of investors. 

Scientist looking through microscope

Image source: Getty Images.

Gilead's Street cred

It also helps that Gilead Sciences boasts an impressive track record in treating viruses, giving the biotech a lot of credibility on Wall Street. The company's first drug, Vistide, was approved by the FDA in 1996 for treating retina inflammation caused by the human cytomegalovirus in patients with AIDS. 

Gilead soon thereafter became a leader in treating the human immunodeficiency virus (HIV) that caused AIDS. The company's HIV drugs have dominated the market for two decades.

In late 2013, Gilead won FDA approval for Sovaldi. It was the first drug to effectively cure hepatitis C. Over the next few years, Gilead launched even more powerful multi-drug hepatitis C virus (HCV) therapies. The company's drugs were so effective that Gilead became a victim of its own success. So many patients with HCV were cured that the numbers of new patients to receive Gilead's therapies began to rapidly decline.

While Gilead is best known for its achievements in HIV and HCV, the biotech also was instrumental in the treatment of influenza. Gilead originally developed Tamiflu, a drug that is routinely given to prevent and treat flu. However, the company licensed the drug to Roche in 1996. 

Left hanging?

In some ways, it makes sense that the stock market is hanging its hopes on remdesivir. A safe and effective treatment for COVID-19 would go a long way toward restoring confidence that life will return to normal. Gilead has earned respect from investors, and its experimental COVID-19 drug could meet the lofty expectations.

However, there's also a strong argument to be made that investors' hopes are misplaced. Remdesivir won't prevent people from getting COVID-19. Only a vaccine will achieve that goal. And the first vaccine is at least a year away and probably more. There's also a real chance that remdesivir won't be successful in treating COVID-19. 

We'll soon know the results from Gilead's first late-stage study of remdesivir. It's likely that positive results will spark a stock market rally while disappointing results could cause another downswing. Wise investors will realize that the market tends to overreact. Any good news probably won't be as good as the hype. But bad news won't be as bad as it first appears, either.