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Supplements » ETF Report March 2022

Biotech: Biotech ETFs look beyond Covid-19

SyringesWhat does the progression of the Covid-19 pandemic mean for medicine-related ETFs, which hold companies such as Pfizer and BioNTech?

Pfizer, which is on the front line of the fight against coronavirus, enjoyed a share price rise of 48% year-on-year to February 10, providing a shot in the arm for medically flavoured ETFs that hold the stock.

And good news continues to drive Pfizer’s share price. Recently it was announced that it would continue a partnership with BioNTech – whose own share price soared 45% in parallel with Pfizer’s – as clinical trials began for a new vaccine targeted at the Omicron variant.

GlaxoSmithKline has expanded the armoury available to Covid patients by developing an antibody called Sotrovimab. Meanwhile Moderna, another Covid vaccine producer, saw a 143% return in 2021.

ETFs weighted towards biotechnology continue to see the pandemic as a driver. Yet overall, the biotechnology sector experienced considerable weakness throughout 2021, according to fund manager BlackRock’s ‘Global Healthcare Outlook Report’ for January. This weakness was reflected in the equal-weighted S&P Biotechnology Select Industry Index, which fell 20% last year compared to the year before.

BlackRock said the reversal in fortunes was driven by factors beyond Covid-19, such as lacklustre clinical progress being made away from the pandemic, and a rotation in investment factors in the market. So, what are the prospects for medical-related ETF funds in the short to medium term, as vaccine and antiviral capsule treatments for Covid-19 improve in efficacy and ingenuity? And can medical ETFs grow beyond Covid?

A bit of protein
In December last year, ETF provider Direxion announced that it was to create a messenger RNA (mRNA) ETF, as mRNA technology has made huge strides during the pandemic. mRNA vaccine technology produces a harmless piece of Covid-19’s spike protein in order to trigger the immune system. Direxion’s fund is exposed to BioNTech’s fortunes as initially, 9.4% of the ETF was weighted towards the company.

At the time of writing, the ETF was down 19.7% for the year to date. Its price peaked at $19.1, up from $18.5 at the beginning of the year, and at its nadir this year on January 27, the price was $16.4. 

David Mazza, managing director and head of product at Direxion, says one of the most exciting things about firms such as Moderna and BioNTech is that they have helped legitimise research around mRNA technologies.

Previously, and for many years, the investment community and even the scientific community were not so enthused about mRNA. It was difficult to find funding, and there have been reports that researchers were even struggling for lab space.

“The share of Covid-19 vaccine revenue is really the only source of mRNA revenue right now, but that’s all going to change going forward because now the application for mRNA ranges from Lyme disease, HIV, the flu, hepatitis and malaria. So, it has wide-ranging potential,” says Mazza.

UBS Asset Management has a medicine-related ETF with exposure to AstraZeneca, and its return net of fees reached 54.3% on February 7. In March 2020, the fund was at a zero rate of return. 

A spokesperson for the fund manager’s global healthcare says: “While we hold companies with Covid-19 exposure in the portfolio, this is not a key investment theme, and thus does not have a significant impact on the overall portfolio.”

UBS AM considers the pandemic to be an additional tailwind for the healthcare sector alongside strong fundamental drivers such as changing demographics, growth in emerging market healthcare, and lifestyle factors that increase the prevalence of chronic diseases.

“That said,” the spokesman adds, “we believe demand for Covid testing, vaccines and therapeutics will continue longer than many investors currently assume, and this backdrop further bolsters our belief that healthcare remains attractive for the year ahead.” 

At investment research firm Morningstar, Karen Andersen, a healthcare strategist, says that performance for large-cap biopharma names will be increasingly tied to drivers that are more typical, such as upcoming earnings results and M&A.

The biggest possible exception is Pfizer, which could continue to see strong demand for both its vaccine and treatment. 

If countries see another variant and require broadly administered fourth doses, that would drive sales of both treatment and vaccine. 

Omicron surge changes picture
Typically, at this stage in a pandemic, a virus gets weaker but has increased transmissibility. This has happened with Omicron. A subvariant of the virus called BA.2 is thought to be more infectious and perhaps is set to become more dominant, but there is no indication that it’s more severe. 

Andersen says that if we leave the initial vaccine treatments aside, demand for other parts of the treatment spectrum – including vaccine boosters, antibodies, antivirals and hospital beds – remained high at the start of 2022.

Amid reports of the virus showing up in white-tailed deer in 13 US states, Direxion’s Mazza says preparedness needs to be maintained.

“There is the opinion that the virus could create other mutations of this nature. For the time being, there remains this idea that the mutations have evolved in a positive way, but that doesn’t necessarily mean that the revenue streams for companies producing vaccines will dry up,” he adds.

However, BlackRock’s report concluded that the durability of Covid-19 related revenue for ETFs may be in question, as a higher transmission rate could translate into herd immunity.

Future vaccinations
When it comes to vaccinations, a huge amount of work still needs to be done. Only 61.8% of the world’s population has received a first dose, according to Our World in Data figures up to mid-February. A World Health Organisation body called Covax remains in place to facilitate fair vaccine distribution.

Looking to the future, it’s feasible that a Covid vaccination programme could become more regular, in the manner of flu vaccinations. Morningstar’s Andersen says if broad vaccination is recommended on an annual basis, investors could expect shares of Pfizer (among others) to increase, and ETFs that contain a significant holding in Pfizer to appreciate too.

Nonetheless, blanket vaccinations would be a ‘bull’ case. It may be that only vulnerable populations such as the over-65s would require annual jabs, Andersen suggests. 

She adds: “We expect continued government contracts for antivirals like Paxlovid could help drive sales of the drug and Pfizer’s share price, and related ETFs to some extent. 

“However, as the pandemic ends and the virus becomes endemic, we would expect sales of treatments and vaccines to also begin to transition to private markets, requiring less government involvement in procuring vaccines and treatments.”

Direxion’s mRNA-based fund is more of a technology fund, notes Mazza, and to a greater extent is isolated from government actions. 

It’s a point that signals how biotech ETFs can be positioned for the post-Covid world.

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