“Vaccine” is probably the second-most uttered word these days, after “Coronavirus” or “Covid.” Yet not everyone has looked much beyond the timing of an effective one. That is until HCR Wealth Advisors did just that.
The history of vaccines
Today, vaccines are not devoid of controversy. People fall somewhere between two extremes: those strongly for and those strongly against. Some see vaccines as invaluable contributors to public health, wiping out (or at least controlling) entire diseases, as was the case of smallpox in 1979. From cholera and typhoid to tetanus and polio, one disease after another has been tamed.
Others are more suspicious. While the CDC still insists the mercury-based preservative is safe (even to children), in 1999, the American Academy of Pediatrics and those producing the vaccines agreed it should be reduced or eliminated in pediatric vaccines as a precautionary measure. But it is still used in multi-dose adult influenza vaccines, for example. So, if you ask someone today if they get annual flu shots, you might hear, “They only work 40% of the time at best, and I don’t want that stuff in my body.” Or you might hear, “I wouldn’t miss mine; I get one every year.”
The economics of vaccines
Developing and producing a vaccine is economically complicated. One obstacle is that many of the diseases requiring a vaccine, such as malaria, tuberculosis, and HIV, exist primarily in low-income countries. Because there’s limited revenue potential, biotech and pharmaceutical companies don’t have much financial incentive to invest in them. For that reason, vaccines are almost always developed with public funding, even though the profits go to private companies who control pricing and availability.
In the past, the response to epidemics has been slow-walked by the few pharmaceutical companies capable of the large-scale production required for vaccines, as they negotiate favorable terms from governments, including indemnification and market guarantees.
Mergers and buyouts have resulted in the vast majority of the global vaccine market being in the hands of five multinationals, giving them extraordinary market power. Precious months can be lost even in the case of urgent, life-or-death outbreaks. And the traditional drivers of market supply and demand are distorted.
From an investor’s point of view, the focus is often on the biotech side, in hopes of betting on a company with the technology that breaks through, and then riding that stock to success. On the production side, viewing investments in major pharmaceutical companies, vaccines often represent a small-but-steady portion of sales for the company selected to produce the vaccine, ideally with patent protection and solid market demand lasting for many years.
So, what’s different this time? The pandemic.
According to the World Health Organization (WHO), over 160 potential Coronavirus vaccines are currently being tested worldwide. The entire globe is wrapped in the Coronavirus crisis. The number of confirmed cases of Coronavirus worldwide has surpassed fifteen million, with over 10 million recovered. Deaths have gone above 600,000. While people may argue the accuracy of individual statistics, the numbers are of such a magnitude that it matters very little. The fact is that the world is struggling with a pandemic that does not seem to be going away on its own. And, for most, the ray of hope is the arrival of an effective vaccine.
HCR Wealth Advisors is aware that the (profit) potential are high, in fact, astronomical. Many major governments are pouring billions of dollars into potential vaccines as they turn the search for a Coronavirus cure into the equivalent of an arms race. Existing institutions and agreements that traditionally set the boundaries for the vaccine industry are being pushed aside by large-scale investments seeking to grab first access.
In the past, the financial interest in a vaccine would be tightly focused on the company or companies that participate in and profit from its production. In the case of Coronavirus, the impact of a vaccine on the nation’s economy is so far-reaching that any good or bad news — which appears at least daily — drives markets at least for that cycle.
A day in the life: How vaccine news affects the markets
To understand the impact that good news about a vaccine can have on markets, HCR Wealth Advisors suggests looking at just one trading day. (It’s similar for bad news, just in reverse.) The day in question is July 21, 2020.
That day, the United States agreed to pay $1.95 billion to Pfizer (and its German partner BioNTech) in what has come to be known as a “Coronavirus vaccine deal.” In return, Pfizer would produce 100 million doses of its Coronavirus vaccine if it proves effective, with 500 million more doses available for purchase under the agreement.
What was the impact on the markets? The Dow Jones gained over 165 points to close over 27,000 at a 6-week high. The S&P 500 hit a 5-month high on Day 4 of a 4-day winning streak, and the Nasdaq closed at over 10,700.
Firms like HCR Wealth Advisors know that this activity didn’t occur in a vacuum. That same day, the Chinese government warned of strong countermeasures in response to the U.S. closing China’s Houston consulate. And the increased civil unrest across the country raised investor apprehensions. Then, late in the day, some news was made on the next U.S. government stimulus package. For the day, Pfizer’s stock rose more than 5%, and BioNTech’s U.S.-listed shares went up by 13.7%.
What’s next for the economy?
In HCR Wealth Advisors’ experience monitoring markets, a new vaccine can take a decade to pass through all the required stages of development and testing. But the global reach of the Coronavirus — a highly infectious virus that doesn’t differentiate between who it infects and who it doesn’t — has led to medical resources being mobilized like never before.
Ian Goldin is an ex-vice president of the World Bank and today a professor at the University of Oxford. Because of the degree of interconnection of the world’s economies, or globalization, he believes that if the global population isn’t inoculated against COVID-19 there would be long-term economic implications.
As Goldin says, “As long as some parts of the world are suffering from the coronavirus, the global economy can’t recover. As long as it’s present somewhere, the virus can mutate, it can move, and parts of the world economy will be devastated.”
Raghuram Rajan, former chief economist of the IMF and now Finance Professor at the University of Chicago, feels that the pandemic’s economic hit will have a long-lasting impact, even if one or more vaccines are approved and in distribution in fourth-quarter 2020.
Rajan has said, “You have to vaccinate a lot of people. So, the earliest people are going to feel safe going into crowded restaurants is probably going to be by the middle of next year.” His comments were made as promising data was being released on Coronavirus vaccine trials, right around July 21, 2020.
Even countries that have managed the pandemic well can only be expected to operate at 95% until two things occur: the fear of proximity to others dissipates and small businesses — an essential driving force in any economy — can reopen. The longer it takes for that to happen, and the longer small companies go without revenue, the more of them that will close down forever.
What will turn the economy around?
Ultimately, the keyword is “confidence.” As HCR Wealth Advisors sees it, a return to some form of normalcy requires that people have the confidence to be in public spaces, particularly in high-contact service industries such as restaurants, air travel, and entertainment.
That confidence will come when many are vaccinated or recently tested to ensure that they don’t carry the virus. Or when the virus — conveniently — mutates itself out of existence.
The next question is the timing. If confidence cannot be returned relatively quickly, what is the sense in keeping unviable entities alive at an enormous cost? Take the airline industry, for example. Do you keep airlines propped up as they exist today, or do you accept that air travel will be downsized for some time to come? Do specific industries need restructuring? If so, where are the risks and where are the opportunities?
Joseph Brusuelas, chief economist and co-designer of the RSM Middle Market Business Index, says, “Absent a vaccine, we’re just going to see a sawtooth pattern of openings and re-openings, better growth, slower growth, perhaps a little bit of a contraction mixed in.” He feels the U.S. economy — with its innovation and technology — shouldn’t fall behind other countries in the long term.
The availability of a vaccine against Coronavirus plays a pivotal role in the future of the U.S. (and the global) economy. A side concern is resistance to vaccines in general. A recent WebMD poll of 1,000 readers showed that fewer than 50% plan to get a Coronavirus vaccine in the first year it is available (and 28% said not at all).
The return to a robust U.S. economy is not impossible. But several elements would have to align for it to occur and for it to be sustainable. Meanwhile, risks and opportunities abound.
HCR Wealth Advisors acknowledges that successful personal finances require strategies that protect investors against contractions and position them to benefit from change and transformation.
About HCR Wealth Advisors.
HCR Wealth Advisors works with its clients to guide them toward their ideal financial outcome. These days, that means it helps clients navigate through the unchartered waters of a pandemic, rolling lockdowns and re-openings, massive job losses, and extreme market volatility.
Originally published at https://profinanceblog.com on August 21, 2020.
*This article is for informational purposes only and should not be considered investment advice.