By David Bailin
Chief Investment Officer
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With the US presidential election now concluded, we look ahead to the distribution of a COVID vaccine and fiscal stimulus. We believe a notable change in market sentiment is in store.
The trifecta for the global economy in 2021 is the successful conclusion of the US presidential election, the announcement and launch of distribution for an approved COVID vaccine and the passage of a fiscal stimulus package by February 2021. With the election now behind us, it is important that we understand the status of vaccine development, with a focus on when there will be a clear line of sight to its distribution.
It is our view that two dates – the announcement of an efficacious treatment and the safe delivery of the initial 10 million doses – will cause a notable change in market sentiment. These events will mark the “end of the pandemic”. (While it may look like the stock market has looked further ahead than anyone expected since the pandemic struck, the composition and dispersion of share price performance shown in Figure 6 suggests otherwise.) We think that these two “dates” will be markers that kick start a two-part market transformation. The first is a rotation from COVID-Defensives to COVID-Cyclicals – as markets begin to return to normal, relative valuations. The second is a robust global recovery based on fiscal tailwinds, the refilling of the world’s inventory supply lines, a snap-back in demand for leisure travel, social-close services such as entertainment, with the beginnings of a normalization in commercial real estate markets and business travel.
The status of vaccine development
The rapid development of a COVID vaccine was made possible by huge federal funding provided by Operation Warp Speed in the US and similar government support elsewhere. When one or more vaccines are approved for use, this will be the fastest development and release of a vaccine in human history.
There are five, Phase 3 COVID-19 vaccine trails underway. This is very good news as it means there five viable vaccine candidates in their last stage of development in the US alone. In their Phase 1 and 2 trials, the five candidates triggered sufficient production of antibodies in people who had been immunized. However, none of the vaccines under study in the US has yet to be proven to prevent COVID-19. This is the purpose of the Phase 3 studies.
In order for a vaccine to be released broadly in the United States, the sponsor needs to complete a Phase 3 study and the FDA needs to grant an approval for use of the vaccine. A Phase 3 trial is large and randomized. A group of 30,000 or more volunteers is randomly split into two cohorts, one that receives the vaccine and the other that receives a placebo vaccine. These “trial participants” are then exposed to the disease as it naturally exists in various communities.
In order for a trial to be successfully concluded, a sufficient number of participants must get COVID so that scientists can see if the trial participants randomly assigned to receive the actual vaccine were infected at a lower rate than people who were assigned a placebo injection. In addition, the trial has to ensure that the vaccine itself does not cause major side effects, illnesses and/or fatalities.
It is common for vaccine trials to be paused or stopped entirely due to unforeseen adverse patient reactions. Two of the Phase 3 COVID vaccine trials have already been halted thus far. AstraZeneca halted its Phase 3 trial in multiple countries in September when one trial participant experienced neurological symptoms consistent with transverse myelitis, a serious inflammatory disorder. Johnson & Johnson paused its Phase 3 trial in October when a young, male volunteer had a cerebral hemorrhage consistent with a stroke. Both trials resumed after five and two weeks, respectively. The resumption of both trials indicates that the FDA is currently comfortable with the safety profiles of the vaccines after further evaluation.
Source: Citi Private Bank as of October 30, 2020.
In addition to the aforementioned trials, Novavax has also started a Phase 3 trial in the UK, and their Phase 3 trial in the US is expected to start by the end of November. The company recently disclosed that interim data from their Phase 3 UK trial may be announced as early as the first quarter of 2021.
Efficacy and the end of the pandemic
Once each Phase 3 trial is concluded, the FDA reviews the trial data independently. It reviews both the efficacy of the vaccine and its safety. These “Readouts” are publicly released.
The efficacy data will say a lot about the timing of the end of the pandemic. According to Evercore/ISI, “a 75% effective vaccine could return the population to normalcy in 6-7 months, whereas a 95% effective vaccine with 95% uptake should return population to normalcy in 2-3 months. On the other hand, a 50% effective vaccine with 40-50% uptake will take significantly longer to return population to normalcy.” Thus, we will need to see the data from each of the Phase 3 trials to determine just how fast the pandemic might end.
Marc Lipsitch, Professor of Epidemiology at Harvard University, noted on October 29 in a presentation to Citi, that while “nobody aims for 50% efficacy, even 50% efficacy will be a massive help” in the fight against the disease. When asked about his expectations for the trial efficacy rates, Lipsitch said, “I would be surprised if it was below 60% or above 80%.”
The FDA’s choice between speed of vaccine delivery and safety protocols will have a large impact on the public perception of the vaccine and its rate of uptake. Physicians, nurses, Managed Care Organizations and pharmacies are critical stakeholders. Their confidence will be needed to overcome a patient’s natural “vaccine hesitancy” that itself can slow down the “end of the pandemic” timeline. The FDA will be under pressure to issue an “Emergency Use Authorization” under which it can fast track the release of the vaccine for general use much more quickly than through its normal processes. However, the FDA has stated that it will likely follow the participants in Phase 3 studies for a short time to continue to accumulate safety data.
Watch for antibodies and T-cells
When the results of Phase 3 trials are released, an important quality of the vaccines will be their ability to stimulate the production of both antibodies and killer T-cells. “Antibodies protect against infections by binding to pathogens in order to prevent them from entering or damaging cells, and by coating pathogens to attract white blood cells to engulf and digest them. Longer-lasting killer T-cells work by finding and destroying infected cells in the body that have been turned into virus-making factories.” (see Reason, 7/17/20). This matters because patient antibody levels appear to decline swiftly in patients who have had COVID-19. So, if vaccines cause the immune system to create T-cells, the vaccines may provide some level of longer-term protection.
The two vaccine platforms
Pfizer and Moderna are using mRNA platforms, which utilize mRNA that encodes for a specific antigen. AstraZeneca and J&J are using Viral Vector platforms. Rather than delivering DNA or mRNA directly to cells, Viral Vector vaccines use a harmless virus or bacterium as a vector, or carrier, to introduce genetic material into cells. By delivering genetic material into our cells, the body is able to produce antigens, which elicit an immune response.
The mRNA vaccines will be harder to distribute than the Viral Vector ones. First, patients will require two doses of the mRNA vaccines. Second, the mRNA vaccines require deep cold storage transportation as well as cold storage at point of distribution. The Viral Vector vaccines require less special cold delivery or storage systems, and some – like Johnson & Johnson’s vaccine candidate – only require one dose.
Given that the patient’s choice of vaccine will depend upon their respective efficacy and availability, the Phase 3 trial data will be of major consequence in determining demand for one versus another.
When will the first doses be administered?
At this point, Pfizer is likely to provide the first vaccine to market. It has been the most aggressive in rolling out an international Phase 3 testing program with 42,000 trial participants. And its Immune response was north of 50% based on earlier Phase 1 testing. However, in its most recent shareholder call, Pfizer indicated that it had not reached its “First Interim Analysis”, meaning that an insufficient number of trial participants had not yet been infected to reach the first of four pre-established testing checkpoints. Until that threshold is reached, Pfizer cannot extrapolate the effectiveness of the vaccine versus the placebo. And only then, assuming a high rate of effectiveness, can Pfizer file an Emergency Use Authorization (EUA) application with the FDA.
Based on the current state of the Phase 3 trials and assuming no further halts in Pfizer’s testing program, it is possible that the first vaccines can be made available to the public in late December or January 2021. When interviewed by JAMA editor Howard Bauchner, Anthony Fauci, the Director of the National Institute of Allergy and Infectious Diseases said, “Could be January, could be later.”
Anna Durbin, a vaccine researcher at Johns Hopkins Bloomberg School of Public Health was quoted on 10/29/2020 in StatNews written by Helen Branswell: “We may see efficacy in one or more trials by the end of 2020, but that doesn’t mean we’re going to have a vaccine available at the end of 2020. I think what people can take from this is that the process is not being rushed…. That’s a good thing.” She concluded, “And certainly, I think the other message that has to be heard loud and clear is that even when an [emergency use authorization] is issued, we’re not going to have enough vaccine for everybody [immediately].”
What this means for markets: Looking into 2021
The fact that there are four late state Phase 3 testing programs underway for the COVID-19 vaccine is itself remarkable. While it is unclear as to when the first vaccination will take place, it is reasonable to assume that in Q1/2021 we will see several of these companies distributing vaccines in the United States and elsewhere in significant amounts. That is because the companies are producing the vaccines in large quantities assuming that they will work, knowing that they may have to destroy the treatments if they do not.
According to an article in Reason (7/17/2020), “AstraZeneca announced in June that it planned to manufacture 2 billion doses of its vaccine, with 300 million slated for delivery to the United States and the United Kingdom by the end of this year. Moderna plans to deliver about 500 million doses per year, and potentially up to 1 billion annual doses starting in 2021.” Pfizer is aiming to produce approximately 1.3 billion doses by the end of 2021. In the near-term, Pfizer has committed to providing 100 million doses (for 50 million individuals) by March in the United States and is aiming to have 40 million of those doses available by year-end. Johnson & Johnson is aiming to produce one billion doses in 2021.
Given these facts, we believe that markets will receive a “double booster shot” in Q12021, with large scale distribution of one or more effective vaccines underway and the passage of a fiscal stimulus bill by the US Congress. And if this is the case, it is likely that the pandemic will officially end in the second half of 2021, although vaccine delivery and therefore infection rates will tumble in an accelerating fashion. Dr. Lipsitch noted that most of the US could be vaccinated by the end of 2021, effectively creating herd immunity at an earlier point in the year.
COVID-19 is NOT an “unstoppable trend”. Its effects will distort the world economy in both 2020 and 2021. Yet the scientific data we see and historical precedent suggests we are closer to an end than a beginning. Experts in epidemiology see a possible 70% efficacy rate for early vaccines as the center point for their expectations. Combined with therapeutic treatments, this could create a sharp “normalization” in most of the world economy in the second half 2021.
Financial markets are always looking forward. This means they will react before world economic activity broadens and strengthens sharply. However, equities markets are not generally long-term leading indicators. Investors discount evidence of what is most probable within six months. Thus, the very near-term remains subject to downside risks and continued volatility in equities markets on pending US political developments, a lack of fiscal action for a period of 1-3 months, and the absence of healthcare solutions to COVID. However, this period of uncertainty may rapidly change. The election outcome and the first news of an efficacious vaccine, which could come in four to six weeks, may mark the market’s re-pricing as the New Economic Cycle begins to unfold.
 “COVID-defensive” includes information technology, health care, communications services, consumer staples, utilities and e-commerce sectors. The COVID-cyclicals entire sub-group include industrials, financials, consumer discretionary excluding e-commerce, real estate, energy, and materials sectors. Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance. For illustrative purposes only. Past performance is no guarantee of future results. Real results may vary. All forecasts are expressions of opinion and are subject to change without notice and are not intended to be guarantees of future events.
 Evercore/ISI Resarch Publication: Pfizer COVID Vaccine Phase 3 Interim, October 23, 2020
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