Biotech current stock performance is ‘actually pretty rational’: analyst

Yahoo Finance’s Julie Hyman, Brian Sozzi, and Myles Uldand discuss expectations in the health care sector with Oppenheimer Analyst Hartaj Singh.

Video Transcript

JULIE HYMAN: This is "Yahoo Finance Live." I'm Julie Hyman. March tends to be a seasonally weaker time of the year for biotech stocks. But does the excitement around the coronavirus vaccine and health developments, medical developments, generally does that change that calculus at all?

Let's bring in Hartaj Singh. He is an analyst over at Oppenheimer who covers the sector. So, Hartaj, how should we be thinking about biotechs right now, again, given that March is sometimes a rocky time for these stocks?

HARTAJ SINGH: Yeah, Julie, so biotech is actually acting pretty rationally right now. You know, historically we've gone back and looked over the last 10 to 13 years. And January and February tend to be very strong for biotech, actually the strongest two months of the year. And then March tends to be very weak. It tends to give back some of the gains from January and February.

It's pretty consistent actually. It's happened 10 out of the last 12 years. So March is kind of the, sort of, early year trade started unwinding in about mid-February. And it continues on.

I think part of what's adding to that is that folks are sort of-- we're seeing some exiting of COVID-19 winners. You know, in the vaccine space, I think some people are possibly taking profits because of the reopening trade.

And some fear that as more entrants come into the market, some of the early COVID-19 vaccine manufacturers, like Moderna, could see some headwind. So I think what biotech is doing right now is actually pretty rational.

MYLES UDLAND: Hartaj, I'm really interested to-- and this is a little bit wonky-- to dig into your modeling beyond this year. So for a company like Moderna, you know, what happens after the mass vaccination of this year? What does their financial trajectory look like over the next three to five years?

HARTAJ SINGH: Yeah, Myles, so this is actually really the key question for Moderna. What we've seen historically in biotech, companies that have launched products, where there have been the first year or two years of just really large sales, you take Gilead as actually a perfect example, where they had fantastic sales in year one of their launch in hepatitis C-- which was a cure for patients which rarely ever happens-- and since they were curing patients, those patients were not coming back. Then they started losing revenue going forward.

Same thing with COVID-19, as COVID-19, it will not go away. It'll be endemic, meaning there will be flares. But there will be lesser and lesser need of vaccines compared to the pandemic space.

We're not really watching the sales in 2021 and 2022. What we're looking for are sales beyond that. What is the tail of the franchise for Moderna? And I think most institutional investors are focused on that.

I think that if people believe that that tail could be $5 billion or above, which we think is very reasonable for the leading candidate in this space, then I think Moderna is possibly cheap at this point in time and space at their current valuation. But if they're only going to do $1 or $2 or $3 billion of sales going forward from 2023 onwards in COVID-19, then that becomes a headwind.

JULIE HYMAN: So, Hartaj, to get a little bit more specific on Moderna, if this whole situation is a validation of the mRNA vessel, right-- vehicle, if you will-- what other specific diseases could this be applied to in terms of vaccinations? And does Moderna have an advantage over Pfizer, which is using the same-- or Pfizer-BioNTech, I should say-- which is using the same platform?

HARTAJ SINGH: Yeah, so you know, I can offer you my opinion, which is speculative, I like to think a little educated. But we can also start with maybe looking at other examples before, from history.

A company called Genentech launched monoclonal antibodies in the 1990s and was manufacturing constrained for a while, which also hampered other entrants in that market in the late '90s and early 2000s. As a result of that, Genentech now has about 15% to 20% of sales of, like, 100-plus billion antibody sales that occur worldwide as a part of Roche Group.

You know, the same thing will probably occur with Moderna. Moderna and Pfizer-BioNTech are the first two entrants. They are somewhat manufacturing constrained. But that manufacturing constraint also serves as a way to limit other entrants into this market because Moderna and Pfizer and BioNTech are so far ahead.

I think between the two, I think-- we don't cover Pfizer or BioNTech. I think their vaccines are very good. But I do think from a manufacturing stability perspective, Moderna still wins out.

On your last point about other diseases, so think about it this way. Moderna-- mRNA essentially is a way to give a human cell mRNA, which is the software that encodes what protein should be made.

So any disease where there's a protein that's missing or a disease where you need a protein to activate a certain effect in the body, for example stimulate the immune system in cancer, could be a candidate for Moderna, which is why their 20-plus projects in the clinic, to us, makes sense. And I think in the next year or two years, it'll be 40-plus to tell you the truth because of all the areas they can go.

MYLES UDLAND: You know, and, Hartaj, just to kind of wrap this up and think more broadly about the biotech space, it wasn't so long ago that we were worried about drug pricing regulations and sort of where innovation goes. And obviously COVID has kind of turned all that on its head.

How are you thinking about-- what kind of questions, I guess, are you getting from your clients about the future of this space, where we've all been quite animated by the possibilities of science, I think? There's a lot of exciting things that now seem to be unlocked by COVID. Where does the whole sector, I guess, go from here?

HARTAJ SINGH: You know, it's actually interesting you say that because it's actually gone a little bit quiet in the biotech space. I think that people are looking to the vaccine rollout, the logistics there, and making sure we get to some sense of normality.

I think people have learned a lot about biotech and the basic science behind it. I mean by that generalists. So what we do see is interest from some generalist investors, actually the generalist news media, also, more and more.

But you know, I think specifically in biotech right now, since the end of last year and beginning of this year, we've seen a little bit of an air pocket in terms of interest. I think that will come back in the summer if we do get localized flares with the endemic part of COVID-19.

JULIE HYMAN: And until we face the next pandemic, as well, which unfortunately it seems like there probably are more coming down the pipe. Hartaj Singh, it's always great to get your perspective. Thank you so much for your time today-- Oppenheimer analyst who covers the biotech sector so thoroughly and shares his insight with us.