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Outlook for biotech companies in 2021

Hartaj Singh, Oppenheimer managing director senior analyst covering biotech, joins Yahoo Finance Live to discuss the future of biotech, and what a COVID-19 vaccine means — and doesn’t mean — for these companies.

Video Transcript

- 2020, certainly a blockbuster year in the medical community, specifically the pharma community, the development of a COVID-19 vaccine, the fastest on record. And now we are seeing distribution begin here in the US. Joining us now to talk about the future for biotech on the backdrop of this news is Hartaj Singh, a managing director and senior analyst covering biotech over at Oppenheimer. And Hartaj, let's just begin high level, what a COVID vaccine means for these companies, what it doesn't mean for them. I think there's been at times some confusion around just how much money some of these companies are going to make from this vaccine. And how are you seeing that and explaining some of these dynamics to your clients?

HARTAJ SINGH: So, Miles, thank you again for having me first of all and Happy New Year, beginning of this year to everyone. I think that you know the real question actually, honestly, among a lot of investors, Miles, is kind of parsing the difference between what is called recurring revenue versus revenue that's going to be one off. I think because this pandemic is such a major impact on economies all over the world, governments will choose to spend a lot of money on vaccines, whether it's Moderna, whether its Pfizer-BioNTech, and others that are approved.

So even at $3 a shot or $15 a shot or $25 a shot, these companies stand to make significant revenues this year and maybe even next year if the pandemic leaks into next year. Once we get into what's called an endemic stage, think of that as like flu every year, where it just occurs during a certain season every year, then we'll see kind of what the recurring revenues of these companies will be and that is still sort of TBD, to be determined. I think that's what a lot of institutional investors are trying to parse out, as to what will be the bolus of revenues that just come from the pandemic versus the recurring revenues that will be there for these companies in 2022 and onwards.

- And it seems like, Hartaj, and thanks again for joining us, that when you're looking at these companies the impact is going to be naturally larger for a Moderna or a BioNTech because they're smaller companies with fewer products than for a Pfizer which is so vast. And also that this is sort of, especially for a Moderna which I know that you are a fan of from an analytical perspective, that this is sort of the first use case, the first proof if you will that its platform works and can be perhaps applied to other vaccines and other drugs as well.

HARTAJ SINGH: Yeah, you're absolutely right. I think that, you know, the Modernas and even Pfizer-BioNTech, I mean, we don't cover Pfizer-BioNTech so I can't really comment on them specifically. But I think generally if you look at the price action, after the vaccines got the emergency use authorization, after that there was some profit taking, I think some analyst downgrades. I think also from the institutional side people are trying to sort of understand, like we talked about recurring revenues.

But also there is a little bit of a fear that these mRNA vaccines, this is the first time mRNA has been approved as a modality of any kind of disease, and that as it's given from tens of thousands to millions of people, could some strange side effects show up? I think that's still something that we need to see. So there will be a little bit of concern around that going forward, to your second question.

And to the first question, look, we like all these companies, Moderna especially. And I think with this pandemic raging, you know, their revenues are going to do well. It's just right now the stocks are weak because again people are trying to figure out what the recurring revenues are going to be. I also think that if you look at how these vaccines are distributed, how much of that will be cost of goods sold? How much sales and marketing?

They don't need any right now, right? But how much is going to be future R&D? So what will the margins look like? These are all things that right now investors, institutional investors, and I think just regular investors are trying to digest, which is why these stocks are a little bit weak as they should be.

- Hartaj, outside of the COVID-19 plays, you cover 17 companies. You have 13 buys and four market performs. What is going on in biotech? What makes you so bullish on the space more broadly? And what are some of your picks for this year and what are they working on?

HARTAJ SINGH: Yeah, great question. I mean, you know it's always a little embarrassing when you've got a lot of buys, as many as our team has. But here's the thing. Biotech right now, large cap biotech is trading at all time sort of lows in terms of the growth profile of the sector. If you look at large cap biotech companies, they're trading on one year future PE at about the same levels that they were trading at 2008, 2009. In fact, a year or two years ago, they were trading even below that.

So we can afford to have a lot of buys on companies that we think are historically cheap. And among these companies, there are others that we like more than others, historically cheap sort of sector. I still don't think you can buy the whole sector. I think you need to be very stockpicking oriented. And with that regards, we look at companies, for example, that have non-COVID-19 sort of exposure, companies like Vertex Pharmaceuticals that are the larger cap companies that have little exposure to COVID-19 but are performing very well and getting the therapeutics to their patients, and other smaller companies, mid-cap companies like United Therapeutics, UTHR, which actually are similar to Vertex in the sense that they're doing a very good job of getting their therapies to patient, but really don't have any exposure to COVID-19 therapeutics.

I think later this year, if the pandemic keeps on raging, I think some of the COVID-19 names will come back into play, like a Regeneron, like a Gilead, and even more so a Moderna. But right now. I think it's a little bit more of a hold and see approach there because of the belief that the economy is going to open up and things are going to go back to normal.

- All right. Hartaj Singh, managing director, senior analyst at Oppenheimer. Hartaj, great to get your thoughts this morning. Thanks so much for joining the show. Do come back and I hope we can talk soon.

HARTAJ SINGH: Thank you, Miles, Thank you, everyone. Me too. Stay safe.