Here's Why Hype Around Companies Working on Coronavirus Treatments Is Overblown - The Motley Fool

As the COVID-19 coronavirus outbreak deepens, biotech and big pharma companies are entering the race to find a treatment or a vaccine for SARS-CoV-2, the novel coronavirus causing the illness. And the stock market is already rewarding some of them.

Shares of Gilead Sciences (NASDAQ:GILD) rose nearly 5% on Monday, after the World Health Organization said its drug might help people with COVID-19. Regeneron Pharmaceuticals (NASDAQ:REGN) has climbed more than 30% since its Feb. 4 announcement of an expanded agreement to work on a treatment with the U.S. Department of Health and Human Services (HHS).

More positive news may give these and other companies developing coronavirus treatment and prevention a lift. And of course, their involvement in such a high-profile subject is getting these companies plenty of attention.

That's the good news. The bad news is, it's unlikely coronavirus treatment and prevention projects will add much to earnings, so stock market gains may be transient.

Image source: Getty Images.

Limited in time

Why won't work on such a massive project with worldwide attention make a significant contribution to earnings? There are a few reasons. Outbreaks are usually limited in time, offering companies a short window of opportunity for revenue. For example, severe acute respiratory syndrome (SARS) was first identified in 2003 and resulted in more than 8,000 cases. Since 2004, cases have dwindled to almost none. Though the current outbreak of COVID-19 includes more than 80,000 cases and more than 2,000 deaths, one could expect that, as with SARS, transmission will slow and result in fewer and fewer cases. In the meantime, if a company is first to market with a treatment or vaccine, it might offer revenue a short-term boost. The problem is, as soon as the outbreak is over, so is that revenue stream.

By comparison, a company such as Gilead Sciences has more to gain with filgotinib, the rheumatoid arthritis treatment currently under priority review at the U.S. Food and Drug Administration. That market is vast -- Fortune Business Insights forecasts it will reach $34 billion globally by 2025 -- and isn't limited in time. Clearly, drug companies have more to gain over the long term by treating diseases instead of addressing outbreaks.

So, how much can a company make by developing a vaccine or treatment for COVID-19? According to press reports, Bank of America predicts that Gilead Sciences' remdesivir may result in one-time revenue of about $2.5 billion. To put that figure into perspective, a blockbuster drug brings in at least $1 billion annually. The Bank of America analysts said the unfavorable economics of addressing epidemics and pandemics might be explained both by the relatively short time frame of most outbreaks and by ethical questions behind the pricing of vaccines and treatments.

Letter to the president

In the case of the SARS-CoV-2 coronavirus, lawmakers recently stepped in to address the question of ethics. Nearly 50 members of Congress wrote a letter to President Donald Trump this month requesting that any vaccine or treatment developed with taxpayer money be reasonably priced. Citing Regeneron's work with HHS, the lawmakers wrote that "there must be guardrails in place to prevent Regeneron from monopolizing the medicine and maximizing profits." Whether the government manages to control prices on an eventual vaccine or treatment remains to be seen. But it is clear that if Regeneron or any other company working on coronavirus therapies doesn't propose a price that is considered reasonable, the move will be damaging to that company's reputation and will likely result in a political battle.

As if those issues aren't enough to weigh on profit prospects, here's one more: the question of patents. Gilead Sciences filed a patent application in China to use remdesivir against other coronaviruses four years ago and is still waiting for an answer, the Associated Press reported. This year, amid the current outbreak, the Wuhan Institute of Virology applied for a Chinese patent covering the use of the drug to treat coronaviruses. The institute said its move was to protect national interests. Separately, Chinese company BrightGene recently said it has copied remdesivir and manufactured the drug -- but BrightGene said it wouldn't pursue commercialization without licensing from Gilead. Following those moves by the Wuhan Institute and BrightGene, investors might wonder about the consequences if remdesivir is commercialized. Will Gilead Sciences truly be able to sell the product in China, or would it be pushed to license the drug to a local company? Would China grant the Wuhan Institute the patent it's requesting, and what would that mean for Gilead Sciences? There are too many significant questions without answers.

And all of these points lead to one more concern: a rise in short-selling. When investors sell a stock short, they bet on its eventual declines by borrowing the stock today to sell it at a high price -- then purchasing it later at a lower price. Gilead Sciences, Regeneron, and Novavax (NASDAQ:NVAX), which is working on a vaccine effective against SARS-CoV-2, have each seen an increase in short interest recently; it's likely some investors are trying to benefit from gains on short-term news while expecting a subsequent drop.

Investor takeaway

This doesn't mean avoiding Gilead Sciences, Regeneron, or any other drugmaker developing coronavirus treatments. Instead, biotech investors should look at these companies' other programs, and base buying decisions on their full pipelines, or on specific products addressing markets that represent growth over time. That increases the chance of a long-term gain, one that will play out well beyond the temporary outbreak.

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Here's Why Hype Around Companies Working on Coronavirus Treatments Is Overblown - The Motley Fool
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