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Biotech stocks get a boost from coronavirus fears -- but here's why investors should be wary

Anjalee Khemlani
Senior Reporter

Pharmaceutical stocks, which have seen temporary spikes during the coronavirus crisis as investors bet on the possibility of a vaccine, may be getting ahead of themselves.

Markets are speculating that some products may prove instrumental in the fight against the deadly disease, which has infected thousands in China, left 200 dead and rattled global markets.

However, biotech experts say that buyers should certainly be wary of trying to trade on coronavirus fears, given that most companies lack an established track record — or are simply trying to position themselves to benefit from public health crisis.

“There’s two things that biotech companies, especially small ones, are always looking for: Attention and cash,” Brad Loncar, a biotech investor, told Yahoo Finance on Friday.

“And, sadly, a lot of them take advantage of situations...putting out a press release saying they are working on something and you see their stocks zoom,” Loncar added.

To be sure, not all pharma companies are created equal. To fight the coronavirus, large cap companies like Johnson & Johnson (JNJ), AbbVie (ABBV) and Gilead Sciences (GILD) announced they were repurposing HIV, Ebola and Zika products that had been developed — but are not on the market — to create a vaccine. Separately, Roche is planning to disseminate testing kits for the virus.

Meanwhile, China and Hong Kong’s biotech companies may hold more promise for finding a treatment or cure, amid a rise of domestic Chinese companies competing with U.S. or European brands.

“A lot of people don’t know there’s a biotech boom happening in China today,” according to Loncar, who manages a Chinese biotech exchange-traded fund. “It’s an example that China can rise to this call.”

‘Really unlikely’

People wear face masks and walk at a shopping mall in Taipei, Taiwan, Friday, Jan. 31, 2020. People wear face masks as they walk through a shopping mall in Taipei, Taiwan, Friday, Jan. 31, 2020. According to the Taiwan Centers of Disease Control (CDC) Friday, the tenth case diagnosed with the new coronavirus has been confirmed in Taiwan. (AP Photo/Chiang Ying-ying)

Yet finding effective treatments and cures for the virus is easier said than done. It took five years for the first Ebola vaccine to hit the market, and the coronavirus vaccine is likely to follow the same pattern.

Barring a dramatic breakthrough, it means the sickness could rage for an extended period before a solution is found — which means investors should be particularly careful about sinking money into biotech and pharma companies making big promises.

That includes stocks of smaller companies, which saw fleeting rallies last week on vaccine speculation. Inovio (INO), Moderna (MRNA), Novavax (NVAX), Meridian Biosciences (VIVO), Vir Biotechnology (VIR) and BioCryst (BCRX). Virtually all of them have pared or completely reversed the week’s initial gains.

“It’s important to know how big the potential universe for any vaccine is likely to be,” Chris Meekins, a biotech analyst, told Yahoo Finance this week.

“So companies that have a partnership with the government … those would be areas that are better to invest in than companies that don’t have government funding, because I don’t believe there’s a sustained investment,” he added.

Robert W. Baird research analyst Brian Skorney told Yahoo Finance the companies who do end up making something are likely not to make any money either.

“It is really unlikely that anyone is going to get paid for product that even does treat coronavirus,” Skorney said. “it’s not going to be something that companies are going to be able to generate a substantial profit,” he said.