As the pandemic resurges, early vaccine trials are reaching the home stretch.
Vaccine results now pushed back to mid-to-late November at the earliest, and there have been delays in therapeutic treatments.
Healthcare overall has been burdened by the uncertainty on the Affordable Care Act, but biotechs and medical devices/services shine.
Biotechs are well-positioned to move higher after undergoing a few months of consolidation.
Both Biotechnology and Healthcare present attractive opportunities for material gains during the final quarter, in the absence of a contested election.

Market Pulse

Biotech indexes at the beginning of October were at the same level where they were at the end of May 2020. The 5-month sideways consolidation is setting up the stage for a strong rally higher once the market breaks out. And that can happen soon.

Recently, we wrote about the Stock Market's March Higher irrespective of the election outcome and laid out the reasons. The end of the election cycle will extinguish a significant political risk that looms over the market during the election period. This will prove to be the catalytic event that shifts the market to its next leg higher. This can begin to happen in October as a firm polling gap can diminish the risk of a contested election.

Quest for a Vaccine

The race for a vaccine to overcome the first true pandemic the world has experienced in 100 years has brought in players from across the globe using different approaches. Many US companies are leading the charge. ~

The beginning of the Fall season is changing the dynamics of the COVID-19 spread. The fatality rate in the US, already naggingly high, will begin to climb higher, while it has already begun to surge in the European Union and the UK. ~

In many ways, the race for vaccines is now entering a very crucial home stretch for at least the early starters, with the expectation of trial data during this fourth quarter from three of the leaders - Pfizer (PFE) in partnership with BioNTech (BNTX), Moderna (MRNA), and AstraZeneca (AZN) in partnership with Oxford University.

Setbacks on Vaccines and Treatments

Vaccines are not a straight shot to success and it is routine to have scientific and trial setbacks. In early September, AstraZeneca vaccine trials were stopped. The trials were resumed in Europe and other locations, but a month later have still not resumed in the US.

Last week turned out to be the one when several delays were announced on both vaccines and treatments. Johnson & Johnson (JNJ), a leading candidate with a Q1:2021 target date for Phase 3 results, reported a hold due to an adverse event, which can be unrelated to the vaccine. In an interesting coincidence, both the AstraZeneca/Oxford and the Johnson & Johnson vaccines are using the adenovirus vectors, a newer approach but not a novel one. If the JNJ hold also ends up being due to the same neurological event as Astra's, then it can trigger wider concerns about the approach. The remaining company in Phase 3 trials in the US, Novavax (NVAX), expects results in the first quarter next year.

These setbacks leave Pfizer/BioNTech and Moderna, both using a novel RNA approach, as the most likely candidates to report Phase 3 trial results this quarter. Pfizer, which has been quite aggressive in its timeline for Phase 3 data release, expected its first efficacy data to be reported towards the end of October. However, last Friday, Pfizer stated that its safety data won't be available till mid-November, and if it's positive, the Company will apply for an Emergency Use Authorization (EUA). Moderna had slowed down its trials in order to get a more representative demographic mix, and can also be in a position to begin reporting trial data by early December.

The setbacks are not just on the vaccine side but also on the therapeutic treatments being developed. Last week again, Ely Lilly's antibody treatment was halted over safety concerns. The two other leading players, Regeneron (REGN) and Vir Biotechnology (VIR), have also seen their trials progress at a slower pace, although Regeneron has now applied for a EUA with the FDA. Part of the reason for slower treatment trials has also been a greater focus of Operation Warp Speed on vaccines over therapeutics. Antibody treatments, if successful, are positioned both as a treatment as well as prophylactic or preventives like vaccines.

Remdesivir, the repurposed treatment drug from Gilead (NASDAQ:GILD), received a thumbs-down last week from the World Health Organization (WHO) after a study of 11,000 patients did not show a benefit for COVID-19 hospitalized patients. Remdesivir costs $2,500 per treatment course, and even though the WHO results were published ahead of a peer-review, it does raise questions for the expensive drug's potential market reach.

Resistance to Being Vaccinated Can Prolong The Pandemic's Impact

The yearning for a vaccine is being weighed down with the burden of political interference that has diminished the trust in the process and the respective agencies.

A full economic and social revival cannot occur until a majority of the population has been vaccinated, bringing down the infection rate to a level that makes it a manageable disease like the flu. Confidence is necessary for growth to be restored close to pre-pandemic levels.

Presently, surveys are indicating that public trust has been eroded in the vaccine process even though a COVID-19 vaccine remains a priority for most. This has been due to the perceived undermining of scientific practices and federal agencies. Nearly a majority of people expect to wait once a vaccine is available to mitigate any safety issues. ~ Vaccine

The first meeting of the Vaccines and Related Biological Products Advisory Committee for COVID-19 will be held on October 22 and will provide insights into the specific guidelines which will have to be met before approval. While no vaccine would have filed for approval by then, the Board will be in the news even in the days ahead as they publicly meet and review future filings and submit their recommendation to FDA, which is hoping that the public scrutiny of the process would begin to rebuild trust in the approval process.

Biotechs to Lead Healthcare Higher

The tight five-month consolidation has been masking a lot of biotech activity while preparing biotechs for an eventual powerful breakout. ~ IBB Biotech Index

M&A has continued to strengthen in the second half and a couple of high-profile deals were announced over the past month. Industry giant Gilead Sciences made its largest acquisition by acquiring Immunomedics (IMMU) in a $21-billion deal for its coveted oncology drug, Trodelvy. Earlier this month, Bristol-Myers (BMY) announced the acquisition of MyoKardia (MYOK) in an $11-billion deal for its heart-condition drug, Mavacamten. On the same day, BridgeBio (BBIO) announced the acquisition of Eidos Therapeutics (EIDX) for $2.8 billion. M&A has been gaining momentum with each passing month in the second half. August had more M&A deals than the entire first half, while September eclipsed August. ~ Biotech M&A 2020

As political risk and market uncertainty diminish after the election, including a clearer path to another round of fiscal stimulus, it is quite likely that the fourth quarter can be the strongest M&A quarter for the year.

Biotech has always been an active industry group in the IPO market and has now become even busier, easily outpacing other industry groups. Through last week (Oct. 16), nearly 70 biotech IPOs have occurred this year raising over $15 billion. It's a seller's market and there is a strong risk-appetite for biotech stocks.

While biotechs are the leading healthcare group and the largest one, representing more than 50% of healthcare companies, medical devices and services is also an area showing significant promise. But healthcare overall has lagged the major indexes and was up less than 4% at the beginning of October.

Political uncertainty for healthcare has become elevated, as the court case, supported by the administration, to annul the Affordable Healthcare Act or Obamacare is due for a Supreme Court hearing in November, after the elections. With no concrete details of a potential replacement plan by the administration, the uncertainty is adversely affecting segments of healthcare. If the election leads to a change of administration, the ACA is expected to survive and expand, and that should help diminish the healthcare uncertainty. At some point, most likely after the vaccine program has become widespread and the pandemic under control towards the end of 2021 or early 2022, we believe the drug pricing issue will re-emerge. But that is not a near-term risk. ~ Covid 19 medicine 2020


After leading the stock market recovery, biotechs have been tightly consolidating. We believe this will serve as a platform for the next leg higher as the election risk, discussed here, diminishes and dissipates in early November.

As noted earlier, when an economy emerges from a recession, it is best to have at least a 1-2 year horizon and stay invested in stocks. Sizeable and relatively consistent gains are achieved in the earlier stages as the recovery eventually picks up momentum and consistency. The long-in-the-tooth old bull market risk is over and a new one has begun, and speculative segments are attractive when risk-taking appetite is strong.

In the biotech second-half outlook, we had expected the Nasdaq Biotechnology Index to be up around 20% for the year. The biotech index at the beginning of the fourth quarter was up 11%. We believe it is quite likely that the index can double the returns during the fourth quarter if elections don't go into a prolonged contested mode.

The S&P Healthcare Index (XLV) at the beginning of the final quarter was up 2% for the year. We believe healthcare overall can easily triple these modest returns by end of the year, and even approach 10%, if there is relatively more clarity on the path of the Affordable Care Act, and it is not rescinded by the Supreme Court.

A few promising biotechs and other healthcare companies, some of which may be now or in the past part of the Prudent Healthcare or Prudent Biotech model portfolios, include Regeneron Pharmaceuticals (REGN), Seres Therapeutics (MCRB), Invitae (NVTA), ShockWave Medical (SWAV), Moderna, BioNTech, Revolution Medicines (RVMD), CareDx (CDNA), Celldex Therapeutics (CLDX), NovoCure (NVCR), Trillium Therapeutics (TRIL), TG Therapeutics (TGTX), Covetrus (CVET), Denali Therapeutics (DNLI), Kura Oncology (KURA), Cassava Sciences (SAVA), CRISPR Therapeutics (CRSP), Replimune (REPL), and Personalis (PSNL).

Industry exposure can also be acquired through ETFs like the one tracking the Nasdaq Biotech Index, IBB, and another tracking the S&P Biotechnology Select (XBI). Healthcare investing, particularly biotechs, is volatile and high-risk. Investors should pursue a concrete investment strategy preferring a portfolio approach by investing in a basket of promising companies that can assist in managing risk and overcoming mistakes.