Vaccine relief rally
6 November 2020
Stocks to buy into ahead of vaccine announcements Leaders in the race to develop Covid-19 vaccines are due to report trial results as early as late November (best case) or December (base case). If just one of these meets the US Food and Drug Administration’s criteria for approval, we expect a strong sentiment rally to follow. In this note we discuss the progress on the main vaccine candidates and identify the companies we believe stand to perform the best across our coverage.
Announcements on leading vaccine candidates are due soon. BioNTech/ Pfizer could be the first in the vaccine development race to report interim trial results. The trials are “event driven” (ie depend on the relative number of infections in the vaccinated and control groups), so the timing is uncertain. The earliest potential date for data disclosure is November, in a scenario where the specified minimum number of infections show a big difference between the two groups (a best-case scenario). We believe December is a more realistic base case, opening up the field for AstraZeneca, Pfizer, Moderna and Janssen to meet their own interim analysis targets that balance patient numbers (eg 50-75 infection events) with attainable efficacy thresholds (c.60-70%).
What vaccine results can (and can’t) tell us
For investors, there are two distinct considerations for parsing the upcoming announcements from vaccine developers:
• Effect on sentiment should be swift and strongly positive: Investors and company management teams we speak to broadly believe that the availability of a vaccine will be the most meaningful key to unlocking growth. This broadbased belief is likely to mean that the stock market reaction will be strongly positive on the day the first vaccine developer announces it has generated clinical data sufficient to secure FDA approval of its vaccine candidate. In this note we identify the sectors and companies we believe will see the sharpest positive re-rating on such an announcement.
• Effect on real-world progress to re-open economies: Beyond the shortterm sentiment boost, there may be devils in the detail. In the sections below, we summarise some of the reasons that the arrival of the first approved vaccine may not in and of itself be the “on/off” switch for the global economy that many investors and management teams hope for. To sustain the short-term sentiment bounce, steady underlying progress in activity levels will be needed. In our view, the approval of a first vaccine candidate is probably necessary, but not sufficient, to ensure this. Hastily-developed vaccines bring their own risks, and logistical hurdles may mean timelines for mass vaccination are longer than some expect. Nevertheless, economic recovery need not be solely dependent on achieving mass vaccination; complementary strategies continue to improve in parallel, and some economies have already achieved impressive levels of recovery without a mass vaccination program.
Timeline for Covid-19 vaccine data
We believe BioNTech/Pfizer’s will be the first to reach an interim analysis hurdle (in late November 2020) but the efficacy hurdle, on what is a small patient group, could be too demanding given that first efforts at a vaccine are unlikely to be perfect. We also do not expect inconclusive findings to be presented/published. On balance, therefore, a meaningful clinical announcement is more likely to fall in December 2020, crowding the race, with all of AstraZeneca, Pfizer, Moderna and Janssen in the running to meet their own interim analysis targets that balance patient numbers (eg 50-75 infection events) with attainable efficacy thresholds (c.60-70%). Whilst there are nuances associated with each (eg manufacturing capacity/scale-up, associated regulatory approvals eg Moderna and Pfizer; paused trials, eg AstraZeneca; or genuinely small patient numbers, eg Janssen at just 20 for an interim analysis), the market is unlikely to be concerned by this and respond strongly – initially at least – on sentiment.
What can we hope for from vaccine trial data, and when?
As we describe earlier in this document, global efforts to develop a vaccine are seeing a number of Pharma companies now coalesce around a date for some meaningful clinical data. The UK’s deputy Chief Medical Officer (Jonathan VanTam) has even suggested that we might see roll-out as early as December 2020 (for the Oxford-AstraZeneca vaccine), whilst Pfizer is hopeful of an emergency use approval from the US FDA in early/mid November.
What is a vaccine?
Vaccines (or immunizations) are intended to be a safe way of providing protection against disease causing viruses and bacteria (collectively “pathogens”). Vaccines achieve this by prophylactically helping our immune systems recognise and build protection against these pathogens before we actually encounter them. Vaccines, alongside the development of antibiotics and the use of anaesthetics, perhaps represent one of the greatest advances in medicine. In spite of their importance though – and highlighting the undertaking that Pharma took on with coronavirus – it is easy to forget that vaccines are rare and challenging to develop. For instance, all of the benefit that global populations enjoy from immunisations come from vaccinations against just 20 life-threatening diseases (the WHO estimate that 2-3 million deaths per year are avoided from diphtheria, tetanus, pertussis, influenza and measles vaccinations alone).
The current candidates for a vaccine
There are 154 vaccine candidates in pre-clinical stage and a further 44 vaccine candidates in clinical evaluation (as at 19 October 2020). Of these, 10 vaccines are in late stage phase 3 clinical trials in various geographies (eg the US, UK, UAE, Brazil, Russia, China, South Africa etc), and interim data are expected to fall before the end of 2020, giving us an understanding of the efficacy and safety of these expedited vaccines. Please see Table 1 for the vaccines closest to approval (where each of the four different types of vaccine are represented). The most relevant to the US/UK/EU are the Oxford-AstraZeneca and Pfizer/BioNTech vaccines, and these are perhaps closest to a data read-out too (showing whether the vaccines actually confer immunity) in November/December. We note that Wuhan/Beijing and potentially Russia (via Gamaleya) have started dosing some members of their populations already.
Regulatory hurdles and guidelines to date – clear as mud
Beyond the positive sentiment that the market will likely attach to any successful trial data, there remains some red tape that Pharma need to navigate before we get to roll-out of any of the vaccines (to say nothing of the logistics of a roll-out nor the appetite of the public for a vaccine – more below).
Despite the usually intense scrutiny levied on all process/steps in the development of a new therapy or vaccine, manufacturing (and the associated facility inspections) has been noticeable in its absence (from the FDA at least). One feature of the FDA’s EUA is that it doesn’t require site-inspections (though they are required for ‘full approval’ and we note that Moderna has never had a facility inspected by the FDA (Bloomberg). In place of this usual inspection process, EUAs require submission of detailed information on the manufacturing processes, which will require the companies to set up internal quality control groups. Though Moderna has partnered with Lonza to boost its capacity and capability in manufacturing (these sites have been inspected by the FDA several times), the nature of the new technology (that is Moderna’s vaccine) means that Moderna should be looking to provide some further detail on how they are ensuring quality in the process.
Population uptake of a vaccine
We believe that a silver bullet is unlikely, with efficacy rates unlikely to match the best-in-class vaccines already approved (note – the global, historical research into vaccines has yielded just 20 successful vaccines). However, once we have a vaccine(s) that meets any sort of efficacy hurdle, and it has been manufactured and rolled-out (no small feat), the next question is what uptake might we expect from the population? A September 2020 poll from Ipsos Mori revealed that 74% of people (n= 20,000 from 27 countries) would get a vaccine for coronavirus if it were available (see Chart 2). We note that there are significant worries already about effectiveness (29%) and side effects (56%) and any perception that an approved vaccine is anything less than a 100% effective/a silver bullet may see a significant proportion of the 74% reconsider their position. See Chart 3 for the reasons that the population provide for not taking any vaccine candidate.
Can fundamental progress sustain a vaccine sentiment rally?
Vaccines are likely to play a role in returning the global economy to a more normal footing, but it is unlikely that mass vaccination will be a “silver bullet”. Recovery is more likely to be a function of sustained progress achieved through multiple complementary initiatives. Whilst vaccine news will likely drive a strong short-term sentiment bounce, the “cure” for the pandemic will probably be broader based, and the path to normality may not be strictly linear.
No single strategy has led to clear “winners” or “losers” so far
Various behavioural changes have been employed to differing extents across the globe already in an effort to dampen the impact of the virus, including lockdowns, testing and contact tracing, social distancing, masks, frequent disinfection of hands and surfaces and so forth.
Current progress and past pandemics belie vaccines as a magic cure
Countries and regions that have executed relatively well on the behavioural modulation and testing fronts discussed above have in many cases already seen stronger and faster improvement in leading indicators of economic activity (or avoided the worst of the downturns), even without an approved vaccine (Chart 8). We believe this bolsters the view that a vaccine should be seen as one tool among many to improve confidence in a “return to normal”.
UK fiscal & monetary policy implications of a vaccine
Fiscal policy since the initial Covid-19 outbreak has been dominated by the need to respond to negative developments, so the Chancellor would no doubt be
be unlikely to change his immediate priorities. Those lie primarily with preventing further damage to the labour market, in particular from the introduction of the new lockdown restrictions in England from 5 November. Hence the extension of the Coronavirus Job Retention Scheme (CJRS), now extended further to March next year, and a more generous adjustment to the terms of the Self-Employment Income Support Scheme (SEISS).
Within the Consumer sector, Greencore (Hold, TP 100p) (-66% ytd) and Bakkavor# (Buy, TP 125p) (-58%) have been most impacted by the pandemic. We would favour Bakkavor in a recovery as it is less exposed than Greencore to the changed consumer trends. Greencore would see an improvement from a return to the new normal, but would still be impacted by the shift to more working from home, increased use of online shopping and a sharp increase in unemployment. Food to Go depends on people being on the move and short of time and this is unlikely to recover to previous levels for some time.
A significant part of the Financials sector has been little impacted by the pandemic (for example, the asset and wealth managers), whilst the consequent volatility has actually benefited the trading platforms. However, any reduction in volatility is likely to impact the propensity of customers to trade in the shortterm, which would hit Plus500 (Reduce, TP 1,375p) more given its focus on retail customers.
Sector less likely to react strongly to vaccine-driven sentiment rally Our small & midcap healthcare universe is relatively insensitive to levels of broader economic activity and therefore likely to underperform other sectors on a sentiment-driven short-term rally on the back of a vaccine announcement. In general terms, biotech companies (PureTech Health (Buy, TP 480p), Syncona (Add, TP 286p), Horizon Discovery (Hold, TP 185p), Sensyne Health# (Buy, TP 195p), Silence Therapeutics (Buy, TP 605p)) are likely the least affected by the wider fluctuations in the economy. The biggest (but likely still moderate) benefit is likely to come from a rebalancing of healthcare systems’ priorities away from acute Covid-related activity and back to broader healthcare provision.
Housebuilders, Materials, Merchants and Estate Agents
As evidenced by the government’s decision to keep the housing market and wider construction industry open through the nation’s second lockdown period, the direct risk of Covid, and therefore upside from a vaccine, is fairly limited. Where the Housebuilders are concerned, a more relaxed working environment that could result from a vaccine would help increase construction activity on site, moving the industry from an average of c.85% of previous output level to 100%, improving overhead recovery on site. This would particularly be the case for those operators with higher than average apartment exposure, where the logistical challenges of operating at an appropriate social distance are greater. Most impacted would be players such as Berkeley Group (Add, TP 4,735p) and Bellway (Hold, TP 2,840p).
Post the initial lockdown, the sector has generally recovered well with strong cash generation, which has led to an increasing list of companies returning to the dividend list. Key subsectors such as auto, heavy trucks, construction, steel, mining and even oil & gas have seen improving trends, albeit with the caveat that an extended second lockdown would have a negative impact. The subsector that remains in cold storage is commercial aerospace – GE’s recent Q3 numbers highlighted a bleak reality, with 26% of its engine fleet still grounded, aviation orders down 54%, engine installs down 45% to 50% and shop visits down 50%. If a vaccine is developed, we can see a significant change in investor sentiment towards the subsector as travel, both business and domestic, starts to open up. It will not immediately change production plans at Airbus and Boeing but there will be a look-up rather than down. In this context we see Melrose (Buy, TP 170p) as a major beneficiary. The stock is down 46% ytd, with commercial aerospace accounting for 63% of its 33% total aerospace sales on a group-wide basis. A change in sentiment would add to the positive momentum in auto and Nortek.
The introduction of an effective vaccine that can immunise the wider population across nations would boost the growth outlook for commercial lines insurers:
• Commercial lines insurers would benefit from a rebound in economic activity (eg trade) during a period of significant rate increases. This would boost top-line growth.
• Liability and credit risk that comes along with double dip (lockdown driven) recessions would ease.
• Event cancellation risk would materially decline for 2021.
• UK business interruption exposures are already declining as policy wordings are being tightened; nevertheless, no further lockdown risk would remove any remaining overhang.
• Rising interest rates would underpin future investment returns.
• Personal lines insurers, Motor names in particular, have proven to be very resilient during the Covid-19 pandemic. Motor insurers in particular will therefore benefit less from the introduction of a vaccine than commercial lines insurers.
• Claims frequency will materially increase as car usage normalises.
• Underlying claims severity is already rising in the mid- to high single digits.
• Combined this will drive up (burn cost) claims inflation materially.
• Insurers will be under pressure to increase rates. However, this will come with a lag and we may therefore see short-term margin pressure.
Within the media sector there are two clear subsets of companies that would benefit from the successful launch of a vaccine. The primary beneficiary would be the B2B events companies whose operations have effectively ceased in western economies during Covid-19. The announcement of a working vaccine alongside more effective treatments would be the cornerstone to a realistic reopening of the trade show industry. The first step in the industry returning to normal will be regulatory approval of large-scale gatherings. The introduction of a vaccine would give credibility to the timeline for this, even if in practice it would take some time. In our view, the role of trade shows should prove resilient, being an efficient method of bringing buyers and sellers together. Conferences, where the delegate pays and which may not always have the immediate commercial return, may prove slower to respond.
Vaccine likely to drive recovery in the industrial metal laggards
The economic recovery as vaccination allows the world to return closer to “normal” is likely to see rising demand for industrial metals and commodities. It may well be that a more consumer-led recovery drives a surge in demand for more consumer-orientated commodities such as diamonds, platinum group metals, stainless steel (nickel and chrome) and pigments (ilmenite and rutile). As the world resets back to normal, we may well see copper, in particular, appear to lag this recovery. We do not think this would be a function of weak demand or either a surge in mine supply. Rather, as economies normalise there will be rising scrap availability. We suspect it was this lack of scrap, combined with the large Chinese stimulus that has supported copper prices through 2020.
Oil & Gas
In 2019, c.65% of global oil consumption was for transportation. Hence progress on a Covid-19 vaccine and the subsequent loosening of travel restrictions is most likely to increase the oil price (rather than gas), and so principally improve the cash flows of E&Ps with oil weighted production. A second filter when looking for E&Ps with share prices most sensitive to an oil price rally is too look for those with a high debt to equity gearing.
While the pandemic has expedited structural trends that were already playing out in the real estate space, such as the rise of omni-channel retailing and the increased flexibility demanded from office space, restrictions on the movement of people have impacted assets where we continue to see a long-term value underpin and where occupational demand should return as the economy recovers.
The impact of Covid-19 on consumer behaviour has driven a number of trends in retail. While some of these are more permanent than others, a vaccine will start to pave the path to more normality. We highlight a number of factors that a vaccine may bring about:
• Footfall recovery in city centres and shopping malls.
• A return to browsing and shopping as a leisure activity.
• We’ll need something to wear.
• A spending switch into leisure & travel will impact home spending.
• It’s all about relevance & market positioning.
Within the Support Services sector, Johnson Service Group (Add, TP 136p)
(-54% ytd) and John Menzies# (Buy, TP 180p) (-77% ytd) have been particularly severely impacted by Covid-19 due to their exposure to the travel industry (via hotels/restaurants and airlines respectively). A ‘return to normal’ following the roll-out of a vaccine would result in a material increase in EPS expectations for both companies. We would favour Johnson given the strength of its balance sheet following the successful equity placing in May and the consolidation opportunities within the HORECA market.
The tech sector was largely a winner from the lockdowns; consumers spent more time on digital entertainment and online shopping, while companies were forced to accelerate digital transformation (DX) projects in order to adapt to the new world.
Nearly all of the stocks within the Transport sector have been hard hit by the pandemic, particularly the Airlines and Bus and Rail operators. We anticipate that Airlines will rally most on the sentiment, but that the Bus and Rail operators will see the fastest fundamental improvement to trading.
Travel & Leisure
The share prices of the bowling operators have halved due to Covid-19. Ideally positioned to provide a wide range of experiential leisure, both Hollywood Bowl (Add, TP 160p) and Ten Entertainment Group# (Buy, TP 300p) were generating close to 10% LFL sales group in Q1 2020 before the pandemic. Given this pent-up demand and the potential to expand, we expect both shares to recover strongly if there is a vaccine, but envisage greater upside in Ten Entertainment Group (2022E EV/EBITDA: 3.8x) than Hollywood Bowl (2022E EV/EBITDA: 7.1x) on valuation grounds.
*corporate client of Peel Hunt