Coronavirus vaccine stocks might have been investors' biggest bet this year. And, in general, it paid off. As companies brought investigational vaccines through clinical trials and released encouraging data, shares soared. This was particularly true of clinical stage biotech companies.
Today, as 13 vaccine programs approach the finish line and 2020 draws to a close, we might wonder: Will this investment theme continue in 2021? The answer is "yes." And will it be as profitable for investors? The answer to this is also "yes." But the game will be a bit different. Let's take a closer look at what to consider when buying coronavirus vaccine stocks in the coming year.
In 2020, risk was high
First, a glance at what coronavirus vaccine investing was like this year. When we started talking about these stocks, risk was high. Companies' vaccine candidates were in preclinical studies, or at most, in phase 1 trials.
Moderna (MRNA 2.96%), which recently requested Emergency Use Authorization (EUA), in March became the first to launch a coronavirus vaccine trial in humans. Buying shares of Moderna back then meant investing before we had any inkling of whether its vaccine candidate would be safe and efficacious. In return for taking that big risk, investors reaped great rewards.
Also, coronavirus vaccine stocks have brought in rapid gains. Moderna stock has jumped 631% this year, and biotech rival Novavax (NVAX -0.18%) has surged more than 3,000%, for example. As a result, the market value of both companies also has soared.
Now, let's see what's changed since the debut of this investment theme. It's as simple as this: risk, returns, and a focus on revenue.
Authorization doesn't equal approval
Let's start with risk. Of course, risk still remains. The U.S. Food and Drug Administration hasn't yet granted EUAs to vaccine makers. If and when it does, authorization doesn't equal approval. The FDA will continue evaluating data as it considers whether to grant full approval. Failure can happen even at this stage.
Still, companies that have brought a vaccine candidate into phase 3 trials carry less risk than those with earlier stage programs. That's because, by late-stage studies, we know more about the candidate's safety and efficacy. And that helps us gauge whether we're backing a strong player. So, today, investing in coronavirus vaccine stocks has become less risky.
As for returns, I'm optimistic there are more gains to come. But the pace will slow. Companies that have brought programs into late-stage trials -- or those who will win EUAs -- no longer are risky bets on near-term share performance. They are becoming long-term bets.
This brings me to my next point: Revenue. With vaccines closer to market, the next share price catalyst for their developers is vaccine revenue. If investors like what they see, shares will climb. And if revenue continues to grow, share gains are likely to last.
How should you invest?
So, considering these elements, how should you invest in coronavirus vaccine stocks now and into 2021?
This year, companies such as Moderna and Novavax were best left to aggressive investors. These biotechs don't have other products on the market. So, they're more dependent on an eventual coronavirus vaccine for revenue than big pharma rival Pfizer (PFE -1.03%), for instance.
Now, with Moderna's vaccine candidate under FDA review, the more cautious investor may take a second look. That investor might even consider a small position in the stock today -- or wait for a potential EUA and then bet on Moderna's future revenue. Novavax is worth a second look too. The company plans to report phase 3 data early in the first quarter.
So, for the cautious investor, the best way to invest in coronavirus vaccine stocks in 2021 is to focus on companies that are almost sure to soon generate revenue from the potential product. That doesn't mean the more aggressive investor should leave vaccine stocks behind, though. Some companies with exciting earlier stage programs are ultra-risky -- but offer potential for steep share gains.
This year, investing in coronavirus vaccine stocks was all about risk. It brought wealth to many but wasn't the right fit for a cautious, long-term investor. What's most exciting about coronavirus vaccine investing in 2021 is that the theme is broadening, making room for everyone -- regardless of investment style.