There's no question which drugmakers are leading the coronavirus vaccine race. Of the 48 candidates in clinical testing, 11 are in late-stage clinical studies, according to the World Health Organization.
We can whittle this list down further for U.S. investors. Only six public companies with late-stage COVID-19 vaccine candidates trade on U.S. stock exchanges. Some investors will attempt to pick the stock they deem most likely to be the biggest winner from among this group.
However, there is another potential approach: buying a basket of late-stage coronavirus vaccine stocks. Could this be a better strategy for investors?
Image source: Getty Images.
Filling the basket
Two late-stage COVID-19 vaccines appear to be the closest to potentially reaching the U.S. market. Pfizer and BioNTech announced great efficacy results for their experimental vaccine BNT162b2 last week and could file for U.S. emergency use authorization (EUA) within a matter of days. Moderna also could file for EUA of its coronavirus vaccine candidate mRNA-1273 very soon.
AstraZeneca and Johnson & Johnson experienced temporary pauses in late-stage testing of their respective COVID-19 vaccine candidates, but are now back on track. AstraZeneca expects to report results for AZD1222 by the end of this year. J&J seems more likely to announce late-stage results for JNJ-78436735 in early 2021.
Novavax already has a late-stage study underway in the U.K. for COVID-19 vaccine candidate NVX-CoV2373. The biotech hopes to begin a pivotal study in the U.S. later in November.
You could simply invest equally in each of these six stocks. Another alternative is to follow the approach of many index funds and weight the stocks based on market caps. If you took this route, here's how your basket of stocks would look:
| Stock | Market Cap | Basket Weight |
|---|---|---|
| Johnson & Johnson (JNJ 0.67%) | $391 billion | 48% |
| Pfizer (PFE -0.12%) | $210 billion | 26% |
| AstraZeneca (AZN -0.25%) | $150 billion | 18% |
| Moderna (MRNA -1.39%) | $35 billion | 4% |
| BioNTech (BNTX -0.27%) | $25 billion | 3% |
| Novavax (NVAX) | $6 billion | 1% |
Data source: Yahoo! Finance. All market caps as of Nov. 13, 2020.
Image source: Getty Images.
Potential scenarios
How would a basket of late-state coronavirus vaccine stocks perform? It largely depends on how successful each experiment vaccine is. However, the performance also depends on how much each stock moves in reaction to the success (or lack thereof) of the vaccines. Let's look at four potential scenarios.
1. All vaccines win
The best outcome for investors and the world would be for all of the coronavirus vaccines in late-stage testing to succeed in clinical studies and win regulatory approvals. Shares of all of the drugmakers would almost certainly rise quite a bit.
There's no way to know the size of the gains for each stock in this scenario. Here's an estimate of the percent change for each stock and how it would impact the two types of late-stage coronavirus vaccine baskets.
| Stock | Percent Change | Equal-Weight Basket Percent Change | Market-Cap-Weighted Basket Percent Change |
|---|---|---|---|
| Johnson & Johnson | 10% | 1.7% | 4.8% |
| Pfizer | 15% | 2.5% | 3.9% |
| AstraZeneca | 20% | 3.3% | 3.6% |
| Moderna | 90% | 15% | 3.6% |
| BioNTech | 30% | 5% | 0.9% |
| Novavax | 500% | 83.3% | 5% |
| Total | 110.8% | 21.8% |
Sure, my guesses at percentage changes could be off. However, I suspect the proportionate responses are at least in the right ballpark. The smaller biotech stocks would jump much higher than shares of the big pharma companies. That's especially the case for Novavax, the tiniest member of the group. I also think that Moderna would move a lot higher than BioNTech since the former fully owns its COVID-19 vaccine. BioNTech licensed out BNT162b2.
2. All vaccines lose
What if all of the late-stage COVID-19 vaccines flop? I really don't think that will happen, but let's look at the potential scenario anyway.
| Stock | Percent Change | Equal-Weight Basket Percent Change | Market-Cap-Weighted Basket Percent Change |
|---|---|---|---|
| Johnson & Johnson | (10%) | (1.7%) | (4.8%) |
| Pfizer | (15%) | (2.5%) | (3.9%) |
| AstraZeneca | (20%) | (3.3%) | (3.6%) |
| Moderna | (40%) | (6.7%) | (1.6%) |
| BioNTech | (30%) | (5%) | (0.9%) |
| Novavax | (60%) | (10%) | (0.6%) |
| Total | (29.2%) | (15.4%) |
Again, I'm guessing at how each stock would react. It makes sense, though, that the smaller biotechs would fall the most because they're more dependent on the success of their COVID-19 vaccine candidates. However, these stocks wouldn't lose all their value since they still have other pipeline candidates that could pan out.
3. Mixed results favoring big drugmakers
There's a real possibility that some late-stage COVID-19 vaccines will be successful while others aren't. Here's how the two types of baskets might fare with mixed results that favor the big drugmakers.
| Stock | Percent Change | Equal-Weight Basket Percent Change | Market-Cap-Weighted Basket Percent Change |
|---|---|---|---|
| Johnson & Johnson | 10% | 1.7% | 4.8% |
| Pfizer | 15% | 2.5% | 3.9% |
| AstraZeneca | 20% | 3.3% | 3.6% |
| Moderna | (40%) | (6.7%) | (1.6%) |
| BioNTech | (30%) | (5%) | (0.9%) |
| Novavax | (60%) | (10%) | (0.6%) |
| Total | (14.2%) | 9.2% |
This scenario shows the potential downside of an equal-weight basket. The losses of the smaller biotechs would more than offset the gains of the big pharma companies.
4. Mixed results favoring smaller biotechs
What if the small biotechs' coronavirus vaccines work really well, but the big drugmakers' vaccines don't? The returns for our baskets of stocks would be much different.
| Stock | Percent Change | Equal-Weight Basket Percent Change | Market-Cap-Weighted Basket Percent Change |
|---|---|---|---|
| Johnson & Johnson | (10%) | (1.7%) | (4.8%) |
| Pfizer | (15%) | (2.5%) | (3.9%) |
| AstraZeneca | (20%) | (3.3%) | (3.6%) |
| Moderna | 90% | 15% | 3.6% |
| BioNTech | 30% | 5% | 0.9% |
| Novavax | 500% | 83.3% | 5% |
| Total | 95.8% | (2.8%) |
An equal-weight basket would give investors a tremendous gain. However, the higher weighting of the big pharma stocks in a market-cap-weighted basket would drag the portfolio returns down into negative territory.
Image source: Getty Images.
A winning strategy?
Investing in a basket of late-stage coronavirus vaccine candidates could be a winning strategy. However, as the above scenarios show, it's not a guaranteed winner.
There's always some level of risk with investing. Perhaps the main takeaway, though, is that the basket approach can lower your risk -- especially if you buy a basket of late-stage coronavirus vaccine stocks weighted by market cap.
Is the basket approach better than trying to pick the individual stocks that could be the biggest winners in the coronavirus vaccine race? Not if you're Nostradamus, or simply very lucky. But accurately predicting which vaccine stocks will win the most with so many uncertainties remaining is definitely no picnic.
