Coronavirus Omicron Variant and Overall Market: How Biotech Companies Are Preparing
This week, we use AAII’s A+ Investor Stock Grades to provide insight into three biotechnology and medical research stocks that are at the forefront of combatting new coronavirus variants, presently the omicron variant. For investors focused on opportunities in this industry, should you consider these three biotechnology and medical research stocks of BioNTech SE, Moderna Inc. and Novavax Inc.?
Biotechnology and Medical Research Stocks Recent News
It would be difficult to have missed recent news about the omicron variant or its effects on the market indexes. At the beginning of the Thanksgiving holiday week, reports surfaced from South Africa that a heavily mutated variant of the coronavirus, omicron, was discovered and that it has begun to spread into Europe. Places such as the U.K., the Netherlands, Portugal, Germany, Italy and Belgium have all confirmed cases. Early data suggests that the variant is spreading in South Africa more rapidly than previous variants and, more importantly, that symptoms observed thus far have been “extremely mild.”
Kavita Patel, M.D., of Brookings Institution told CNBC on Monday, November 29 that it would take approximately one to two weeks for scientists to be able to replicate the virus and demonstrate whether it can be neutralized by existing antibodies. Patel suggested travel restrictions would be ineffective and countries should instead focus on testing and isolating cases, since the existing polymerase chain reaction (PCR) testing apparatus successfully detects the new strain. She also suggested that scientists are optimistic about the ability of existing vaccines to fend off omicron.
The three firms of focus — BioNTech, Moderna and Novavax — have all put plans in place to combat the omicron variant. Moderna CEO Stephane Bancel said he expects existing vaccines to be less effective against the new variant, and that it could take months to develop and ship an omicron-specific vaccine if that is the case. The variant is moving quickly, but so is Moderna. The company said Friday that it has launched development of a booster candidate specifically targeting omicron, and it is testing three other booster candidates that are already in clinical trials. The strain-specific candidate could be brought to clinical testing within 60 to 90 days, quick by traditional standards, but not fast enough to limit omicron. The best chance for Moderna likely lies with its current vaccine or the candidates already in trials.
The other two companies have also begun working on a vaccine tailored to omicron. BioNTech, which makes vaccines together with Pfizer, is now researching whether a new vaccine will be needed or if boosters and current vaccines will be effective. In Maryland, Novavax said it has already started working on a version of its coronavirus vaccine to target omicron. Novavax has delayed filing for U.S., European and Canadian approval of its vaccine due to production and quality problems. However, the vaccine has been deployed under emergency use approval in Indonesia and the Philippines. The vaccine being worked on at Novavax contains an actual version of the virus’ spike protein that cannot cause disease but can trigger the immune system and is on track for U.S. approval by the end of the year. The Centers for Disease Control and Prevention (CDC) says it should know in a few weeks’ time what type of vaccine will be required or if current ones are equally effective.
The major indexes — the Dow Jones industrial average, the S&P 500 index and the Nasdaq composite — suffered a pullback from previously increasing levels. The indexes were marking record highs in October and November, but that pattern has come to a screeching halt due to the omicron variant. The severity of the variant could prove detrimental to the market as more research is conducted, or the lack thereof could provide a needed boost. The indexes began to recover during Monday’s trading session.
However, on Tuesday, November 30, the indexes suffered another major blow after Federal Reserve chair Jerome Powell mentioned speeding up the tapering of asset purchases, even amid the omicron threat. The Dow lost more than 650 points, reversing Monday’s rebound as investors reevaluate risk.
Powell, appearing before a Senate committee, stated, “At this point, the economy is very strong and inflationary pressures are higher, and it is therefore appropriate in my view to consider wrapping up the taper of our asset purchases … perhaps a few months sooner. I expect that we will discuss that at our upcoming meeting.” These comments suggest that the Fed’s focus has now changed to fighting inflation and its negative impacts rather than any more potential disruptions in economic activity from new variants of the coronavirus.
Grading Biotechnology and Medical Research Stocks With AAII’s A+ Stock Grades
When analyzing a company, it is useful to have an objective framework that allows you to compare companies in the same way. This is one reason why AAII created the A+ Stock Grades, which evaluate companies across five factors that have been shown to identify market-beating stocks in the long run: value, growth, momentum, earnings estimate revisions (and surprises) and quality.
Using AAII’s A+ Stock Grades, the following table summarizes the attractiveness of three biotechnology and medical research stocks — BioNTech, Novavax and Moderna — based on their fundamentals.
AAII’s A+ Stock Grade Summary for Three Biotechnology and Medical Research Stocks
What the A+ Stock Grades Reveal
BioNTech SE (BNTX) is a Germany-based biotechnology company that focuses on developing cancer therapeutics, including individualized immunotherapy, as well as vaccines for infectious diseases, including the coronavirus. The company’s oncology pipeline contains several classes of drugs, including mRNA-based drugs to encode antigens, neoantigens, cytokines and antibodies; cell therapies, bispecific antibodies and small-molecule immunomodulators. BioNTech is partnered with several large pharmaceutical companies, including Roche, Eli Lilly, Pfizer, Sanofi and Genmab. Comirnaty (coronavirus vaccine) is its first commercialized product.
Earnings estimate revisions offer an indication of what analysts are thinking about the short-term prospects of a firm. The company has an Earnings Estimate Revisions Grade of C, which is considered neutral. The grade is based on the statistical significance of its last two quarterly earnings surprises and the percentage change in its consensus estimate for the current fiscal year over the past month and past three months.
The company reported a positive earnings surprise last quarter of 11.3%, and two quarters ago reported a positive earnings surprise of nearly 43%. Over the last month, the consensus earnings estimate for the full year has increased from $35.11 to $36.83 per share based on five upward revisions and three downward revisions.
BioNTech has an A+ Growth Grade of A. The growth grade considers both the near- and longer-term historical growth in revenue, earnings per share and operating cash flow. The company reported third-quarter revenues of $6.9 billion, experiencing exponential growth from $76 million in the year-ago quarter. The company reported quarterly diluted earnings per share of $12.35. The company reported an operating income of $5.4 billion in the third quarter of 2021 compared to an operating loss of $211 million in the prior-year quarter. BioNTech does not currently pay a dividend.
Moderna Inc. (MRNA) is a commercial-stage biotechnology firm that was founded in 2010 and had its initial public offering in December 2018. The firm’s mRNA technology was rapidly validated with its coronavirus vaccine, which was authorized in the U.S. in December 2020. The company’s mRNA medicines are designed to direct the body’s cells to produce intracellular, membrane or secreted proteins that have a therapeutic or preventive benefit with the potential to address a range of diseases. Moderna had 24 mRNA development programs as of early 2021, with 13 of these in clinical trials. Programs span a wide range of therapeutic areas, including infectious disease, oncology, cardiovascular disease and rare genetic diseases.
A higher-quality stock possesses traits associated with upside potential and reduced downside risk. Backtesting of the quality grade shows that stocks with higher quality grades, on average, outperformed stocks with lower grades over the period from 1998 through 2019.
Moderna has a Quality Grade of A. The A+ Quality Grade is the percentile rank of the average of the percentile ranks of return on assets (ROA), return on invested capital (ROIC), gross profit to assets, buyback yield, change in total liabilities to assets, accruals to assets, Z double prime bankruptcy risk (Z) score and F-Score. The score is variable, meaning it can consider all eight measures or, should any of the eight measures not be valid, the valid remaining measures. To be assigned a quality score, though, stocks must have a valid (non-null) measure and corresponding ranking for at least four of the eight quality measures.
The company ranks strongly in terms of its return on assets and return on invested capital, ranking in the 98th and 89th percentile of all U.S.-listed stocks, respectively. However, it ranks poorly in terms of its change in total liabilities to assets, putting it in the sixth percentile.
Moderna has a Momentum Grade of A, based on its Momentum Score of 88. This means that it ranks in the top tier of all stocks in terms of its weighted relative strength over the last four quarters. The weighted four-quarter relative strength rank is the relative price change for each of the past four quarters.
The company does not currently pay a dividend.
Novavax Inc. (NVAX) is a clinical-stage vaccine company focused on the discovery, development and commercialization of recombinant nanoparticle vaccines and adjuvants. The company focuses on delivering novel products that prevent a broad range of diseases. Its product pipeline focuses on a range of infectious diseases with vaccine candidates in clinical development for respiratory syncytial virus (RSV), seasonal influenza, pandemic influenza and the Ebola virus. The company’s lead adjuvant for human applications, Matrix-M, is in a phase one/two clinical trial for pandemic influenza H7N9 vaccine candidate. It is also testing Matrix-M in conjunction with its Ebola vaccine candidate in a phase-one clinical trial. It is developing additional preclinical stage programs in a range of infectious diseases, including Middle East respiratory syndrome (MERS). Novavax works together with its wholly owned Swedish subsidiary to produce vaccine candidates to respond to both known and emerging disease threats. The company believes its vaccine technology has the potential to be applied broadly to a wide variety of human infectious diseases.
Novavax has a Value Grade of F, based on its Value Score of 91, which is considered to be ultra expensive. The company’s Value Score ranking is based on several traditional valuation metrics. The company has a score of 84 for the price-to-sales ratio, 80 for shareholder yield and 97 for the price-to-book ratio (remember, the lower the score the better for value). Successful stock investing involves buying low and selling high, so stock valuation is an important consideration for stock selection.
The Value Grade is the percentile rank of the average of the percentile ranks of the valuation metrics mentioned above along with the price-earnings, price-to-free-cash-flow and enterprise-value-to-EBITDA ratios.
Novavax has a Momentum Grade of C, based on its Momentum Score of 54, and an average Growth Grade of C. The company does not currently pay a dividend.
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The stocks meeting the criteria of the approach do not represent a “recommended” or “buy” list. It is important to perform due diligence.
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