In November, markets received the first hopeful phase-III trial data from a Covid-19 vaccine candidate. Pfizer is the name most closely attached to the vaccine rolled out in the UK just before Christmas, but Axa Investment Managers biotechnology fund manager Linden Thomson says it should be known as the Biontech vaccine, given the German business was behind the development of the technology.
“Is it a surprise that the first vaccines getting approved come from biotech rather than large-cap pharma? No, this just demonstrates the innovation that’s going on in biotech,” says Thomson. She reckons biotech companies move quicker and have less bureaucracy.
In a year dominated by the Covid-19 pandemic, the Nasdaq Biotech Index has rallied 25.7%, while the MSCI Healthcare Index was up 9.4%. Thomson is lead manager of the Axa Framlington Biotech Fund and co-manages the Axa Framlington Health Fund with Dani Saurymper. Both outperformed their benchmarks in 2020 returning 32.7% and 16%, respectively. The Axa Framlington Health Fund taps into large-cap biotech and has around a 10% weighting to the sector.
Vaccine makers set to thrive even more
While Axa Framlington Biotech doesn’t hold Biontech, Moderna, which also delivered positive phase-III trial news in November, is one of the fund’s top-10 holdings and represents approximately 3.1% of the fund, according to its latest factsheet. Both vaccines use innovative messenger RNA (MRNA) technology and were the first of their kind to gain regulatory approval.
Valneva, another Covid-19 vaccine developer in Thomson’s portfolio, is taking a more traditional approach by inoculating recipients with an inactivated virus. The French company has been working with the UK government and its product would be available in the second half of 2021 if trials are successful.
The development of the MRNA technology that fuels both the Biontech and Moderna vaccines was rapid, according to Thomson. Only two days after Chinese authorities provided the genetic sequence of the novel coronavirus, Moderna had developed a sequence for its MRNA vaccine. Within 63 days it was being injected into the first trial participant. “That’s almost unheard of,” Thomson says.
She describes the MRNA technology as “injecting the blueprint for a protein into the body” that provides instructions for an immune response if Covid-19 is detected. Moderna gained a good understanding of the Covid-19 spike protein that its vaccine targets through previous work on fellow coronaviruses Sars and Mers. “They have a lot of experience in these kinds of viruses and so the confidence level going into this was high. You still never know, but it’s a good starting position.”
During 2020, Moderna’s stock price rallied from around $19 (£14) at the start of the year to a high of around $170 in mid-December as the US Food and Drug Administration granted approval for the vaccine. Despite its staggering performance, Thomson believes Moderna remains well placed once Covid-19 fades into the rear view mirror.
“They’re focusing on other infectious diseases within their pipeline. The investment they’ve been able to make in manufacturing and the support they’ve had from the US government has accelerated their business model.”
MRNA technology is for more than just vaccines
MRNA technology has initially been focused on vaccines but Thomson foresees “a lot of scope” for other applications, too. “I think there are good opportunities, but it doesn’t worry me as a disruptive threat to other companies in the sector.”
Axa Framlington Biotech hasn’t just tapped into Covid-19 vaccine candidates but also companies developing therapeutics for the virus, such as Regeneron and Gilead, which are top-10 holdings, representing 6.3% and 3.5% weightings, respectively. Although both vaccine and therapeutic developers delivered robust stock performance in the early days of the pandemic, the success of the former took the shine off the latter by the end of 2020.
“As it became clear that vaccines are very effective, the consensus view has been that the market opportunity for therapeutics will not be as large as first estimated,” Thomson says. Regeneron peaked at $660 last summer but closed out the year at $483, still up 32.5% from the beginning of 2020.
Similarly, Gilead rallied during the first months of the pandemic before losing steam and ultimately finishing 2020 lower than it started. Thomson says: “In our view, there will remain a clinical need for the more effective therapeutics for some time despite the roll-out of the vaccine.”
High valuations made playing Covid names challenging during 2020, although prices came in during the final months of the year, according to Thomson. “The therapeutics started selling off as vaccines have progressed. Further, some of the smaller-cap vaccine names have also struggled as the larger companies with more logistical muscle have succeeded.
“The MRNA vaccine stocks have high valuations but have also seen some reversal following approvals of both the Pfizer/Biontech and Moderna vaccines.”
Portfolio exposure is more than just a Covid story
Thomson is pleased with the “broad-based” performance of the fund during 2020. “If you look at the attribution there are vaccine and Covid elements to it, but much more than that, it’s much broader than just Covid.”
She points to Zai Labs and Ultragenyx as examples of strong performers away from the shadow of Covid. US-listed Zai Labs partners with western biotechnology companies to launch therapeutics in China. It also has an early-stage internal R&D pipeline. Ultragenyx Pharmaceuticals is focused on diseases that have limited treatment options and often affect a relatively small number of people.
“Both companies are a good representation of qualities we look for in investments,” Thomson says. “These include, quality management teams that have demonstrated they can execute early commercial launch success, R&D pipeline optionality and good market opportunity.”
The fund invests across the market cap spectrum. “Seventy per cent is invested in companies that have got products on the market, or a product on which they have partnered that is on the market. That is, perhaps, a different profile to what people traditionally think of in a biotechnology fund. People tend to think of it as really early stage and high risk, but that’s not the case.”
Although Covid has brought euphoria to the sector, Thomson says valuations are fair in large-cap stocks with lower growth. “I would say they are cheap relative to a US market that has done well in 2020.”
There are pockets of smaller and mid-cap names where Thomson says valuations are stretched, pointing to oncology as an example. But she adds: “Other areas that are less hot therapeutically are actually overlooked and are good opportunities for today.
“I’m looking at emerging neuroscience and our understanding of genetic mutations behind some of the leading causes of dementia, motor neurone disease, Parkinson’s and so on. We’re just starting to be able to think about how we can design a drug around that.
“That’s why oncology has been so successful in the past decade, because our understanding of the mechanisms of disease for oncology has grown exponentially with our understanding of genetics.” That has been great for patients but it makes for a competitive landscape for biotech companies, she says.
Returning to a more normal way of life
Thomson predicts the second half of 2021 or early 2022 is when the vaccine will allow life to return “fully back to normal” but that the economy will start opening up again earlier than that. “For economic activity to open up you don’t necessarily need everybody vaccinated. You need to protect the hospitals and the ICU units, and for that you probably only need the vulnerable, nursing home patients and the front-line staff vaccinated.
“Once you’ve got that, you’ve probably got enough protection of the beds and the hospital to be able to open up many aspects of the economy. I suspect most of that will be the first and second quarter.”
US election result was good for Biotech
Additionally, she says the US election result was good for biotech. “Traditionally, it’s been said that a Republican president was the best outcome for the sector, but I think there have been concerns over the politicisation of aspects of the vaccines and some of Trump’s commentary on how to treat Covid has not been entirely science-based.”
In contrast, she points out that as vice-president Biden was the architect behind Cancer Moonshot, which supports oncology research, making sure people are diagnosed and have access to the best medicines. She adds he is not to the very left of the party when it comes to drug pricing and that most legislation affecting the biotech sector will require more than a simple majority in the US Senate, which the Democrats nabbed from Republicans in Georgia’s elections in January.
Questions remain about how long immunity from Covid vaccines will last. “The consensus has been that you need yearly vaccinations, and the emerging science is that you probably won’t. So, it’s an interesting set-up right now for these companies where there is an expectation on an annuity business and that might not happen.”
Overall, Thomson believes the pandemic has improved the image of the sector. “Biotech fundamentally looks stronger now than it did this time last year on pretty much every level.”
This fund manager profile is taken from the January 2021 issue of Portfolio Adviser. Read more here.
