AstraZeneca (AZN +0.00%) marked the first upset in the coronavirus vaccine race when it temporarily halted its clinical trials this week. The reason? One case of unexplained illness in a U.K. phase 3 trial participant. An independent panel will examine safety data concerning the participant before the trial can resume.
The path so far has seemed relatively smooth for coronavirus vaccine developers. But marketing authorization isn't a given, even for companies that have reached late-stage trials. A study published on The Journal of the American Medical Association Network showed 54% of products that reached phase 3 trials failed in that stage. It's too early to predict the fate of AstraZeneca's coronavirus vaccine candidate. But this event can be useful for investors. The most important lesson we can learn from this right now is: Invest in companies for an entire pipeline or suite of marketed products -- not just for one holy grail.
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Protecting your portfolio
Let's take a look at how using that strategy can protect your portfolio. AstraZeneca's shares only fell about 2% when it announced the trial setback. Investors aren't sanctioning the stock because they know that no matter what the outcome of the coronavirus vaccine trials, AstraZeneca can deliver on revenue. The company has more than 160 programs in the pipeline and nine blockbuster drugs on the market.
Here's another example: Last month, the U.S. Food and Drug Administration rejected Gilead Sciences' (GILD 2.18%) much-awaited rheumatoid arthritis drug candidate, filgotinib. The agency requested more data so a second chance may be farther down the road. Still, this initial rejection was not good news. And yet, Gilead shares only slipped 4.9% and haven't fallen much more since. In spite of the disappointment, investors still can count on Gilead's HIV business to drive revenue. Sales of blockbuster Biktarvy rose 44% to $1.6 billion in the second quarter.
Driving share performance
Now, let's look at share reactions of companies that are more dependent on one program. Clinical stage biotech Inovio Pharmaceuticals (INO +0.95%) has about 15 candidates in its pipeline, but its potential coronavirus vaccine has driven share performance this year. When the company reported positive interim data from its phase 1 trial, the shares sank 27%. Investors were disappointed that Inovio didn't offer detail on participants' levels of neutralizing antibodies. (This is seen as important as neutralizing antibodies block infection.)
Moderna (MRNA 0.62%) -- another clinical stage biotech -- further illustrates this point. When company executives sold shares after Moderna reported encouraging interim trial data, the stock tumbled 35% in seven trading sessions. Investors feared management was losing faith in the coronavirus program. (As it turned out, the stock sales were pre-set to execute at a certain date and therefore didn't reflect the executives' view of the vaccine program.)
Should we favor big players?
So, does this mean that, when investing in coronavirus shares, we should favor big pharma and larger biotech companies and avoid clinical stage players? No. But I do recommend caution. Clinical stage companies -- even those with solid pipelines -- are highly sensitive to coronavirus news. After reporting a failure, the shares are likely to plunge even if other pipeline programs hold potential.
That said, these companies -- because of their dependence on the coronavirus program -- are likely to post the biggest gains on good news. If you're an aggressive investor, you may not want to miss out. In that case, make these holdings part of a diversified portfolio, including lower risk stocks. That way, if the company's program fails and the stock drops, the performance of other holdings may compensate.
If you're more of a cautious investor, stick with larger pharma or biotech companies that have other products on the market. You probably won't benefit from massive gains if the companies' coronavirus programs are successful. But you're less exposed to a devastating share drop in case of a failure.
In both cases, you can apply the lesson learned: Invest in a company for its entire program. Even the riskier clinical stage companies may reward you for that in the long term.
