Should you buy a stock basket of late stage coronavirus vaccine?

There is no doubt which drug companies are leading the coronavirus vaccine race. Of the 48 candidates for clinical trials, 11 are in late clinical studies, according to the World Health Organization.

We can further narrow this list for US investors. Only six state-owned companies with late-stage COVID-19 vaccine candidates are traded on U.S. exchanges. Some investors will try to pick the security they feel is most likely to be the biggest winner among this group.

However, there is another potential approach: purchasing a basket of stocks of late-stage coronavirus vaccine. Would this be a better strategy for investors?

Fill the basket

Two late-stage COVID-19 vaccines appear to be the closest potentially reaching the U.S. market. Pfizer and BioNTech last week announced excellent efficacy results for its investigational vaccine BNT162b2 and may file for emergency use authorization (EUA) in the United States within days. Modern could also very soon submit the EUA of its candidate vaccine against the coronavirus mRNA-1273.

AstraZeneca and Johnson & Johnson have experienced temporary pauses in late-stage testing of their respective COVID-19 vaccine candidates, but are now back on track. AstraZeneca plans to release the results of AZD1222 by the end of this year. J&J seems more likely to report late stage results for JNJ-78436735 in early 2021.

Novavax already has an advanced stage study underway in the UK for the COVID-19 vaccine candidate NVX-CoV2373. The biotech hopes to start a pivotal study in the United States later in November.

You can simply invest equally in each of these six stocks. Another alternative is to follow the approach of many index funds and weight stocks based on market capitalization. If you chose this route, this is what your basket of stocks would look like:

Data Source: Yahoo! Finance. All market capitalizations as of November 13, 2020.

Potential scenarios

How would a basket of late-state coronavirus vaccine stocks behave? Much depends on the success of each experimental vaccine. However, performance also depends on the amount of movement of each stock in response to the success (or lack of success) of the vaccines. Let’s look at four potential scenarios.

1. All vaccines win

The best outcome for investors and the world would be for all coronavirus vaccines in advanced testing to pass clinical studies and get regulatory approvals. The shares of all drug manufacturers would almost certainly increase somewhat.

There is no way to know the size of the gains for each stock in this scenario. Here is an estimate of the percentage change for each stock and its impact on the two types of late-stage coronavirus vaccine baskets.

Of course, my assumptions about the percentage changes could be wrong. However, I suspect that the proportionate responses are at least in the right direction. Smaller biotech stocks would jump much higher than stocks of large pharmaceutical companies. This is particularly the case with Novavax, the smallest member of the group. I also think Moderna would move much higher than BioNTech since the former fully possesses its COVID-19 vaccine. BioNTech has authorized BNT162b2.

2. All vaccines lose

What if all advanced COVID-19 vaccines fail? I really don’t think that will happen, but let’s look at the potential scenario anyway.

Again, I’m guessing how each action would react. It makes sense, however, that smaller biotechs fall the most because they depend more on the success of their COVID-19 vaccine candidates. However, these actions would not lose all of their value since they still have other potential candidates who could materialize.

3. Mixed results in favor of large drug manufacturers

There is a real possibility that some late-stage COVID-19 vaccines will be successful while others are not. Here’s how the two types of baskets might behave with mixed results favoring the big drugmakers.

This scenario shows the potential drawbacks of an equal weight basket. The losses of the smaller biotechnology companies would more than offset the gains of the large pharmaceutical companies.

4. Mixed results in favor of smaller biotechnologies

What if small biotech coronavirus vaccines really work, but big drugmaker vaccines don’t? The returns on our equity baskets would be very different.

A basket of equal weight would give investors a considerable gain. However, the higher weighting of large pharmaceutical stocks in a market cap weighted basket would push the portfolio returns down into negative territory.

A winning strategy?

Investing in a basket of late-stage coronavirus vaccine candidates could be a winning strategy. However, as the scenarios above show, this is not a guaranteed winner.

There is always a certain level of risk involved in investing. The main benefit to remember, however, is that the basket approach can lower your risk – especially if you buy a basket of advanced-stage coronavirus vaccine stocks weighted by market capitalization.

Is the basket approach better than trying to pick the individual stocks that could be the biggest winners in the coronavirus vaccine race? Not if you are Nostradamus, or just very lucky. But predicting with precision which vaccine stocks will gain the most with so many remaining uncertainties is certainly no picnic.