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Barron’s Weekend Summary:Nike has a China problem—one that could come to the fore when it releases its earnings this coming Thursday
* Cover Story :
- The old battle lines between national currencies are being redrawn by an onslaught of crypto insurgents. These privately issued currencies are fragmenting monetary systems, banking, and payments. The landscape calls to mind the “wildcat” money era of the mid-1800s, when a scrum of banks supplied their own notes—prompting the Federal Reserve to establish a national currency. Commerce doesn’t run as efficiently without a “no questions asked” currency, and governments risk losing control over fiscal and monetary policies if multiple currencies vie for economic activity.
* Tech Trader :
Despite rather ho-hum changes to the new iPhone13, Apple’s (AAPL) outlook is a little brighter than skeptics on the Street would have you believe.No question, iPhone updates were incremental, mostly under-the-hood tweaks. The notch at the top of the screen is smaller, and the new A15 bionic processor at the core of the phone is faster than the iPhone 12’s A14 chip. There’s longer battery life, improved cameras, and higher memory capacity at comparable price points.
* The Trader :
- Nike has a China problem—one that could come to the fore when it releases its earnings this coming Thursday. Investors should take caution heading into the call. Yes, we’ve heard this before. Last quarter, in fact. Back then, worries about China sales—both because of Covid-19 and boycotts following Nike’s (NKE) statement that it doesn’t use forced labor from Uighurs—were supposed to keep a lid on profits. Instead, the company handily beat forecasts thanks to strong sales everywhere but China. That, combined with a rosy view of its growth through 2025, helped Nike stock surge 16% on June 25, the next trading day.
- The predictions of impending doom from Wall Street’s talking heads continued this past week. The reasons for a pullback are many: The stock market has rallied for too long and has gone up too smoothly, the Federal Reserve is about to remove the bond buying that has helped prop markets up, taxes are ready to rise, economic data are slowing. None of it really left a mark. But then the S&P 500 dropped 0.6%, to 4432.99, over the week, while the Dow Jones Industrial Average fell 0.1%, to 34,584.88, and the Nasdaq Composite slumped 0.5%, to 15,043.97. For the S&P 500, it was the first close since June 18 below its 50-day moving average—a technical measure of the previous 50 days’ closes that often ends up acting as support or resistance and that currently sits at 4436.35. For traders, it was very frightening.
- Business is booming for many. The problem is sales and earnings guidance are getting cut anyway. Labor shortages are hitting profit margins. Parts shortages are hitting product deliveries. And rising prices are cooling off demand. The most recent example comes from boats. MasterCraft Boat Holdings (MCFT) is enjoying strong demand, but it can’t make enough product. The company cut its sales guidance for its fiscal 2022 first quarter Friday due to a “temporary delay in the shipment of a key component from a single engine parts supplier.” Sales will rise about 30% instead of roughly 35%, it says. Not bad, but profit margins will now be about 11% for the quarter instead of about 14%.
* Interview :
Barron’s interviews Daniel Yergin, who has written some of the most influential books on energy, while advising companies and governments on policy and markets. He is now vice chairman at IHS Markit. His latest book, The New Map: Energy, Climate, and the Clash of Nations, looks at how the politics of oil have changed in the past two decades, with the boom in U.S. shale and the rise of China. Yergin, 74, recently sat down with Barron’s to discuss the new dynamics of energy markets.
* Features :
- The next generation of Covid-19 antivirals is on the way, and a pill to treat—or even prevent—Covid-19 could be available by the end of the year. Merck (MRK), Pfizer (PFE), and the biotech Atea Pharmaceuticals (AVIR) each expect late-stage data on an oral Covid-19 antiviral in the coming months. If the data are positive, the drugs provide a major opportunity for the companies—one that investors should not ignore.The antivirals may not be effective enough to stop a Covid-19 infection in its tracks. Still, if they show even moderate efficacy, they will play a major role as the global fight against the virus shifts to a long-term grind against an endemic threat. A prescription Covid-19 antiviral that could be taken at home as a pill would be in great demand around the world.
- The market’s mind has been intensely one-tracked since its early-pandemic nadir. In the background, beyond the skyline of stocks pushed higher and higher by the Federal Reserve’s very visible hand, a storm is brewing.
The question is whether it matters.
This time of year is usually fraught for the stock market, and this year it has been especially so. The S&P 500 is already down more than its historical September average. In the context of year-to-date performance, though, September’s decline has barely been a blip, and the U.S. stock market looks unshakable. The flood of liquidity from the Fed and U.S. Treasury has left a lot of people with more money than they know what to do with, and thus U.S. stocks have had nowhere to go but up
* Europe :
- Few Big Pharma companies have proved able to catch the early wave of Covid-19 vaccines and ride it to success. But Sanofi is trying hard to show that there is a life after failure—or, as the company would prefer to put it, setback. Rivals Pfizer (PFE) and AstraZeneca (AZN) showed the potential of cross-cooperation with smaller, nimbler partners—with Germany’s BioNTech for the former, and Oxford University for the latter—in developing and producing vaccines against a new virus in record time.
On the other hand, for Sanofi and partner GlaxoSmithKline (GSK), two of the world’s 10 largest pharma giants, it looked more like a process of hits and misses. A series of setbacks meant the vaccine had to be delayed, putting pressure on the French company’s stock. It also irked the rest of the European Union, which a year ago had ordered 300 million doses of the yet-to-be approved vaccine.
* Emerging Markets :
China Evergrande Group has debt due next week that it can’t pay, and investors should pay attention.The woes of the property giant—the world’s most indebted developer—aren’t just China’s problem, and could spill over into global financial markets.China has already warned banks that Evergrande won’t be able to pay debt obligations due Sept. 20, according to reports, which would bring the group one critical step closer to failure. And the Chinese central bank has just moved to avoid a liquidity crisis, injecting 90 billion yuan ($14 billion) into the country’s banking system Friday, according to Bloomberg.
* Commodities :
-Big diversified mining companies BHP Group , Rio Tinto , Anglo American, Glencore , and Vale are in the best shape ever. Their shares, however, trade cheaply amid worries that the good times in industrial commodities are ending. For investors willing to accept some risk, the Big Five miners offer a rich opportunity. The five have price/earnings ratios in the single digits—some of the lowest of any major industry group in the global stock markets. And their dividends are generally ample. Rio Tinto’s trailing 12-month yield is 14%.
* Streetwise :
Game theory, used to model competitive outcomes, has been the subject of 12 Nobel Prizes in economics. But my grasp of Nash equilibrium and Pareto optimality isn’t strong, I confess, so the framework I use for the debt-ceiling standoff is a Buddy Hackett duck joke. A hunter from the big city shoots a duck, which falls on a farm, as the late comedian explained to Johnny Carson on The Tonight Show more than 30 years ago. He climbs a fence to retrieve it, but a farmer appears and says, “It’s my property, it’s my duck.” The two men argue, until the farmer proposes a peculiar local custom for settling disputes: “We take turns kicking each other in the groin.”
Weekend Papers Summary
NEW YORK TIMES
-The Pentagon’s public apology and admission of having made a “tragic mistake” in killing an Afghan aid worker and seven children from his extended family in a drone strike was broadcast Saturday on Afghan television.
-The souped-up, remote-controlled machine gun that Israel used to kill Iran’s top nuclear scientist, Mohsn Fakhrizadeh, now joins the combat drone in the arsenal of high-tech weapons for remote targeted killing. But unlike a drone, the robotic machine gun draws no attention in the sky, where a drone could be shot down, and can be situated anywhere, qualities likely to reshape the worlds of security and espionage.
-An FDA panel recommended against blanket access to Pfizer boosters for those 16 and older, but urged offering them to those 65 and older and “at high risk,” a term that offers the White House some room to expand access.
-The United States and Australia went to extraordinary lengths to keep Paris in the dark as they secretly negotiated a plan to build nuclear submarines, scuttling France’s largest defense contract and so enraging President Emmanuel Macron that on Friday he ordered the withdrawal of France’s ambassadors to both nations.
-Calling American and Australian behavior “unacceptable between allies and partners,” France announced on Friday that it was recalling its ambassadors to both countries in protest over President Biden’s decision to provide nuclear-powered submarines to Australia. It was the first time in the history of the long alliance between France and the United States, dating back to 1778, that a French ambassador has been recalled to Paris in this way for consultations.-William J. Walker has testified about how his requests for approval to deploy the National Guard on Jan. 6 went unanswered. Now it falls to him, as the new House sergeant-at-arms, to prevent another rampage.
-In 2020, Lani Malmberg co-founded the nonprofit Goatapelli Foundation to train people in how to use goats to prevent wildfires. She said that of the 200 or so participants, only a few had launched their own businesses.
-Robert A. Durst, the enigmatic real estate scion who evaded criminal suspicion for half his life only to become a national sensation after damaging admissions were aired in a 2015 documentary on HBO, was convicted on Friday in the execution-style murder of a close confidante more than 20 years ago.
-Thousands of Haitians who had heard of an easy way into the United States have amassed at the US-Mexico border. In what appeared to be an endless procession across the shallow waters of the Rio Grande, they carried mattresses, fruit, diapers and blankets, provisions to tide them over while they awaited their turn to plead for entry into America.
-Former Algerian president, Abdelaziz Bouteflika, who was forced out of office in 2019, has died. He led Algeria for 20 years, longer than any of his predecessors.
-On a recent visit to Panjshir, NY Times reporters noted that few civilians were about and signs of heavy fighting were scarce. What remained were opposing narratives and claims of massacres, ethnic cleansing and false charges.
FINANCIAL TIMES
-France has recalled its ambassadors from Washington and Canberra for consultations, in a diplomatic protest against a new security pact under which Australia will buy nuclear-powered submarines from the US and cancel its existing contract with Paris.
-Australia has been thrust into the limelight after signing a trilateral defense partnership with the US and the UK that is set to provide its navy with nuclear-propelled submarines.-UK business and energy secretary Kwasi Kwarteng is making emergency calls to some of Britain’s biggest energy groups to stave off a crisis in the sector, as fears grow that record high gas and power prices could send a “tsunami” of suppliers to the wall.
-Thousands of younger Taliban fighters are often at odds with the overtures made by their older counterparts and leaders who have pledged a more moderate regime with amnesty for former opponents and limited rights for women.
-Argentina’s Peronist president Alberto Fernández reshuffled his cabinet on Friday night in a move which increased the power of radical vice-president Cristina Fernández de Kirchner and paved the way for higher public spending.
-Scientific advisers to the US Food and Drug Administration have voted overwhelmingly against Pfizer’s application to offer a third shot of its Covid-19 vaccine to everyone over 16, dealing a serious blow to the Biden administration’s plans for a widespread booster programme.
-With Congress returning fully to work next week, the Biden presidency is entering a crunch period. The verdict on modern presidents, even those who get re-elected, often hinges around legislative achievements in their first 18 months. For all the noise and recriminations over the summer around the chaotic withdrawal from Afghanistan and the spread of the Delta variant, the next few weeks of negotiations over the president’s spending plans are a defining moment.
-Munich police have investigated an €80,000 payment from a bank account in Dubai to the landlord of Jan Marsalek’s fiancée in Munich, which could prove a rare link to the fugitive former Wirecard executive.
-Ashtead, the British group best known for supplying diggers, generators and lighting to construction sites, is plotting a breakthrough in the Hollywood film business.
-Authorities in New Jersey and Texas are pursuing actions against cryptocurrency group Celsius Network for allegedly offering unregistered securities, as regulators crack down on issuers of digital asset lending products.
-The heightened political tensions in Haiti come as the Caribbean nation of 11m people struggles with the aftermath of a severe earthquake last month, worsening poverty, a failing economy and widespread gang violence. Instead of tackling these challenges or solving Moïse’s murder, business people have said the government was consumed by a vicious power struggle.
-The US military said a drone strike it launched in Afghanistan on August 29 killed 10 civilians, including up to seven children, reversing its initial claim that it had hit an “imminent Isis-K threat” to Kabul airport.
NEW YORK POST
-Elon Musk’s SpaceX on Friday shared more images from inside its Crew Dragon capsule that’s already brought its four civilian passengers around the Earth more than 15 times, according to the mission, dubbed “Inspiration4.”
-Astrophysicists at the University of Leeds in the UK have discovered an abundance of life-giving organic molecules in space, previously thought to occur only under rare cosmic circumstances.
-AT&T Inc’s HBO Max streaming service has halved its subscription fees in a limited-period offer to lure back millions of subscribers it lost after dropping out of Amazon.com Inc’s Prime video channels.
-The Teamsters Union has launched campaigns to organize employees in at least nine Canadian facilities of Amazon, according to Reuters interviews with union officials.
How Beijing’s Debt Clampdown Shook the Foundation of a Real-Estate Colossus
China Evergrande’s looming collapse and its ripple effect on the economy will pose a test for the government’s campaign to keep housing affordable for the masses
In a risky race against time that ran for two decades, China Evergrande Group turned billions of dollars in borrowed money into the dream of homeownership for millions of Chinese citizens.
It launched project after project in every Chinese province, selling apartments years before they were completed and scratching together enough cash to stay just ahead of massive interest bills.
The party has ended. Years of aggressive borrowing have collided with Beijing’s crackdown on debt, leaving the giant developer on the brink of collapse. Construction of Evergrande’s projects in many cities has stopped. The company has faced a litany of complaints and protests from suppliers, small investors and home buyers who sank their savings into properties the company promised to deliver.
Cash is so short that this summer, the developer said it began paying bills to contractors and suppliers with unfinished apartments instead of actual money. A paint supplier based in the southeastern province of Fujian said Evergrande recently paid off the equivalent of $34 million in bills with three unfinished properties, which the supplier is trying to sell. At a construction firm in Wuhan, more than 200 employees have been forced to take pay cuts because some of Evergrande’s bills are past due, a manager at the firm told The Wall Street Journal.
Former and current employees say layoffs are adding up, and free meals that Evergrande used to provide for staffers at its headquarters have been canceled. In central China’s Hubei province, Evergrande has asked the local government to take over homeowners’ funds held in escrow accounts so they can’t be seized in legal disputes with creditors, according to people familiar with the matter.
Evergrande didn’t respond to the Journal’s requests for comment. The company said on Sept. 14 that its apartment sales have slowed markedly since June, its asset-disposal plans haven’t materialized, and it has hired financial advisers—a move that brings it closer to a potential debt restructuring.
The looming collapse is a microcosm of China’s overheated housing market, in which prices have been climbing for years. Evergrande’s problems—and their ripple effects on the economy and social stability—are the biggest test of Beijing’s rejuvenated campaign to end debt-fueled speculation and stop home prices from surging while the government tries to lower inequality and keep housing affordable for the masses.
Karen Li, a 37-year-old in the southern Chinese metropolis of Shenzhen where Evergrande is headquartered, said she paid the full purchase price of 1.4 million yuan, the equivalent of about $216,800, three years ago for a roughly 400-square-foot apartment in one of its high-rise developments. Ms. Li, who works in retail sales and has yet to take ownership of what would be her first home, said she was notified last month that construction has been delayed.
“I thought it was reliable because it was a major corporation,” she said, adding that the property giant’s worsening cash crunch has thrown the project’s completion date into doubt. “For each ordinary family, this is a disaster.”
Evergrande said on Sept. 13 that it was facing unprecedented difficulties, and was doing everything possible to restore normal operations and to protect customers.
Market participants increasingly believe that Beijing will let Evergrande fail and inflict losses on its shareholders and bondholders, but find a way to protect the many people who have paid for unfinished apartments.
Research firm Capital Economics estimates that Evergrande has presold more than 1.4 million apartments valued at $200 billion that it has yet to finish, and said one outcome could be a managed restructuring in which other developers take over the company’s unfinished projects.
The company had $89 billion in outstanding debt at the end of June, about 42% of which comes due in less than a year, according to its most recent financial results. Evergrande’s total debt burden is the biggest for any publicly traded real-estate management or development company in the world, data from S&P Global Market Intelligence shows.
“It would send the wrong message if [authorities] were to step in at this stage to prevent a default,” said Julian Evans-Pritchard, senior China economist at Capital Economics. “It seems very unlikely that they would help a private firm…that’s in a sector that they’re trying to rein in,” he added.
The 25-year-old conglomerate was the epitome of China’s housing boom and corporate debt binge. It opened for business right when the country started to introduce private homeownership, and built homes that were mostly targeted at individuals with modest incomes. Many people queued up for hours for the chance to buy an Evergrande apartment, often making full cash payments upfront for homes that took years to complete.
The company’s founder, chairman and biggest shareholder, Xu Jiayin, grew up in an impoverished village in central Henan province. He studied hard, went to college, and later worked at a state-owned steel company. He set up Evergrande, whose Chinese name means “constant” and “big,” in the southern city of Guangzhou when he was 37 years old, and became known professionally as Hui Ka Yan, the Cantonese phonetic spelling of his Chinese name.
Former employees and others who previously worked with Mr. Hui described him as a workaholic with high expectations and a propensity to take risks and make bold bets. He was also well-connected with wealthy individuals in Hong Kong’s business community who were active buyers of Evergrande’s stock and debt.
When the company was going public in Hong Kong in 2009, it told potential investors that “rapid property development” was one of its key business strategies that helped maximize its investment returns.
Evergrande bought hundreds of land parcels and sold more apartments than any other developer, and reported record sales year after year as home prices soared.
“Development is the absolute principle,” Mr. Hui said during a 2017 speech to employees, citing the late paramount leader Deng Xiaoping. That, coupled with the idea that “cash is king,” had ensured the company’s steady and rapid development, he added. By the end of 2018, Evergrande was building projects with a floor space of more than 33,000 acres across China, triple the amount just four years earlier.
The company borrowed liberally from banks and global investors, paying interest rates on junk-rated U.S. dollar debt that often ran into double-digit percentages. It expanded into theme parks, healthcare services, mineral-water production and electric-vehicle manufacturing. It enlisted Hong Kong actor Jackie Chan at one point to help promote its bottled water, and bought a professional soccer club in its home province.
The developer also financed construction with the help of short-term IOUs, known as commercial bills, that it issued to contractors and building-materials suppliers.
As it piled on debt, Evergrande paid out billions in dividends to stockholders, with most of that cash going to Mr. Hui as its largest shareholder. The payouts, plus the value of his shares, helped him become one of China’s richest men. He has received more than 34 billion yuan, the equivalent of $5.3 billion, in dividends since October 2018. In 2019, he declared that the company would start producing electric vehicles and aimed to become the world’s largest player in the fast-growing industry.
Problems started to emerge for Evergrande last year during the coronavirus pandemic, which caused lockdowns in China that damped property sales for months.
Evergrande had regularly offered price discounts on its apartments, and launched more aggressive promotions—in some cases up to 30% off advertised prices—to keep cash coming in the door.
It also encouraged its own employees to buy its apartments. In a campaign branded as “wealth creation” for its workers, Evergrande created a lucky draw where winners were picked to buy apartments with a 50% discount.
The company managed to chalk up yet another record year of sales, reporting the equivalent of $112 billion in contracted sales for 2020, up 20% from the previous year.
Trouble was brewing elsewhere. Last fall, Evergrande’s shares and bonds tumbled in value after documents circulated online that warned of a looming cash crunch at the real-estate giant. The documents appeared to show Evergrande’s communications with the local government warning about potential risks if it was unable to complete the planned listing of a flagship subsidiary.
The company had some years earlier sold stakes in its flagship property-development unit to various strategic investors, and promised them the unit would go public in Shanghai by early 2021, or it would repay them up to the equivalent of $19 billion.
Evergrande decried the documents as fake, and subsequently said most of those investors had agreed not to force it to cough up the funds.
Its troubles weren’t over. China’s authorities last year laid down what came to be known as the “three red lines” for real-estate developers—specific leverage ratios to avoid—all of which Evergrande had breached. The rules prevented the company from taking on new debts.
This past June, worries about Evergrande’s finances resurfaced, sending its bond and stock prices tumbling again. Internet users shared posts describing deep discounts to apartment prices offered by Evergrande. The company said it wasn’t offering widespread exceptional discounts.
On July 1, Mr. Hui made a public appearance at the Chinese Communist Party’s centenary celebrations in Beijing. His presence at the country’s most important event of the year was supposed to signal goodwill with top Chinese leaders and assuage concerns about his company, some political observers said.
Evergrande posted photographs of the 62-year-old chairman smiling in a navy jacket at Tiananmen Square on its website, extolling his more than 35 years as a party member. He was quoted saying he would continue to manage his business well and dedicate himself to public welfare.
The stock and bond selloffs deepened over the summer. Evergrande’s liquidity problems worsened, forcing it to start paying some of its suppliers and contractors with flats it hadn’t sold. In mid-August, financial regulators summoned Evergrande’s top executives and told them to fix the company’s problems without disrupting the financial and property markets.
The company is trying to offload other assets to raise cash, and is in talks to sell part of its electric-vehicle business, whose market value has declined by more than $80 billion from a recent peak.
Stephen Sum, who runs a real-estate agency focusing on China’s Greater Bay Area, said Evergrande’s troubles have hurt the wider property sector. “It’s like the game of Monopoly,” he said of the developer’s survival strategy. In the real-estate board game, players that are short on cash have to sell their properties to avoid becoming bankrupt.
Business at Mr. Sum’s Hong Kong-based firm—which markets homes from many developers—has fallen by half since bad news about Evergrande dominated headlines. He said the news has made people more wary about buying properties in general.
China’s Property Problems Go Beyond Evergrande. Real Estate Stocks Take a Beating.
Remember that guy who ran for mayor of New York City by shouting, “The rent is too damn high?” Chinese authorities have taken his lament to heart, setting “reference prices” for secondary apartment sales in half a dozen expensive cities. That signals a problem that goes well beyond the spectacular crackup of overleveraged developer China Evergrande Group .
Beijing’s tinkering with China’s valuable internet platforms may concern global investors more. But housing is China’s perennial challenge as it seeks to balance capitalist dynamism with socialist ideals and a Communist power monopoly.
Real estate construction and investment has been both driver and outlet for the country’s burgeoning wealth, accounting for some 20% of gross domestic product.
Signs of overheating are real enough. Chinese household debt has ballooned to 62% from 39% of GDP since 2015, largely through residential mortgages, reports Larry Hu, head of China economics at Macquarie Group . Prices in Shenzhen, the tech hub that is China’s answer to San Francisco, have jumped by half in the past three years, pricing ordinary families out. “Surging house prices are the biggest contributor to wealth inequality in China,” Hu says.
Tapping on the brakes through tighter mortgage requirements didn’t really work in the face of pent-up postpandemic demand. Neither did President Xi Jinping’s imprecation that “housing is for living in, not for speculation.”
So the government moved to laying down how much it thinks preowned apartments should cost—in Shenzhen, its neighboring southern boomtown of Guangdong, and elsewhere. Its figures are up to 50% below market prices, realtors report. It’s not a crime, yet, to sell or buy higher than the reference price. It will guide mortgage lenders’ appraisals, though.
China has less draconian means to restrain housing costs. The most obvious solution is to build more. But authorities are also worried about developers’ debts. They instituted the “three red lines” on builders’ leverage a year ago, which China Evergrande (ticker: 3333. Hong Kong) scrambled unsuccessfully to comply with.
Introducing residential property tax is another option. That would limit the attraction of buying and warehousing investment properties. Fear of a property owners’ backlash has stayed the state’s hand so far, though, says Tracy Chen, a portfolio manager for global credit at Brandywine Global.
So Xi and his comrades are trying reference pricing, which is predictably spawning ingenious workarounds on the street. Brokers in Shenzhen are posting prices in fruit code—1 million yuan ($155,000) per banana—or adding “premiums” for furnishings to square reference with reality, Nikkei Asia reports.
The good news is that other big Chinese developers took on less debt than Evergrande, and are moving toward red line compliance without undue stress. “I don’t think the lines will be disruptive to construction going forward,” Chen says.
Tightening can’t go on forever either. Local governments depend on land sales for revenue (in the absence of property tax), and untold millions depend on construction to feed their families. Hu expects a shift back toward housing stimulus sometime next year.
Meanwhile Chinese property stocks are taking a beating. The Global X MSCI China Real Estate exchange-traded fund (CHIR) has fallen 30% over the past three months, to prices well below half of book value on average. Investors may want to wait before bottom-fishing, though. Turbulence for the sector is just starting.
In the earliest days of the Covid-19 pandemic, when an effective vaccine seemed too much to hope for, investors and drug developers looked to antivirals to blunt the impact of the disease.
They didn’t have much luck. To date, the only antiviral authorized by the U.S. Food and Drug Administration to treat Covid-19 is Gilead Sciences ’ (ticker: GILD) Veklury, also known as remdesivir. It is expected to earn $3 billion in revenue for Gilead this year, despite its effectiveness being debatable, and it being administered as an inconvenient intravenous infusion.
Today, the next generation of Covid-19 antivirals is on the way, and a pill to treat—or even prevent—Covid-19 could be available by the end of the year. Merck (MRK), Pfizer (PFE), and the biotech Atea Pharmaceuticals (AVIR) each expect late-stage data on an oral Covid-19 antiviral in the coming months. If the data are positive, the drugs provide a major opportunity for the companies—one that investors should not ignore.
The antivirals may not be effective enough to stop a Covid-19 infection in its tracks.
Still, if they show even moderate efficacy, they will play a major role as the global fight against the virus shifts to a long-term grind against an endemic threat. A prescription Covid-19 antiviral that could be taken at home as a pill would be in great demand around the world.
Analysts at Jefferies have said that an effective, convenient treatment for Covid-19 could be a $10 billion-a-year drug. That treatment will compete with monoclonal antibody therapies for Covid-19 from Regeneron Pharmaceuticals (REGN), GlaxoSmithKline (GSK), and others, which work well but, like Veklury, are generally administered as an intravenous infusion, making them challenging for widespread use.
The U.S. government has already signaled an interest in stockpiling oral antivirals, signing a $1.2 billion contract with Merck that will go into effect if its drug receives emergency-use authorization from the FDA.
Some analysts are more skeptical of the role the pills will play.
In a recent note, Jefferies analyst Michael Yee wrote that he expected antivirals to be only incrementally effective. Still, he says there will be a need for them “for the foreseeable future.”
Given the potential size of the market, positive data or an emergency-use authorization for any of the three oral antivirals could give the shares of its maker a tremendous boost.
For Atea, a biotechnology company developing a range of oral antivirals, the effect on the share price could be the most significant of them all. Its Covid-19 antiviral, AT-527, is being studied in a number of trials, including a Phase 3 trial in nonhospitalized patients expected to produce data later this year. The company has teamed up with Roche Holding (RHHBY), which will have the rights to sell the drug outside of the U.S. SVB Leerink analyst Roanna Ruiz recently set a $60 price target on Atea shares, more than double their recent price of around $26.
The drug, AT-527, targets an enzyme called RNA polymerase, part of the coronavirus’ replication mechanism. The drug uses a sort of two-pronged attack, which could make it effective across a range of Covid-19 variants.
“Our drug, to our knowledge, is the only drug that has a dual mechanism,” Atea’s CEO, Jean-Pierre Sommadossi, told Barron’s. The world will need a range of therapeutics to treat Covid-19, he adds. “It’s a major unmet need,” says Sommadossi. “And it’s going to be a significant and large market on a global scale.”
Merck, which is developing an antiviral called molnupiravir in collaboration with the private firm Ridgeback Biotherapeutics, could be the first with Phase 3 data on its Covid-19 antiviral.
This past week, Merck CEO Robert Davis said at Morgan Stanley’s industry conference that FDA authorization could come by the end of the year.
In a recent note, SVB Leerink’s Daina Graybosch wrote that molnupiravir could be worth $3 a share to Merck, which recently traded around $71. Like AT-527, molnupiravir interferes with the replication of the virus that causes Covid-19.
“It would be very challenging to mutate around,” says Merck’s vice president of infectious diseases discovery, Daria Hazuda, of molnupiravir. What’s more, she says the drug has been shown in preclinical tests to be active against other coronaviruses beyond Covid.
“It would have the potential not only to be an important contributor to this pandemic, but also future zoonotic transmissions [those transmitted from animals] of other coronaviruses,” Hazuda says.
As for Pfizer, its experimental Covid-19 antiviral, known as PF-07321332, is also in studies that could produce data later this year. Pfizer’s drug is what’s known as a protease inhibitor, similar to antivirals used against HIV, among other diseases.
Pfizer’s Chief Financial Officer Frank D’Amelio said at the Morgan Stanley conference that Pfizer could submit the drug for FDA authorization in the fourth quarter of this year. “We think this could be another really nice tool in the arsenal relative to our fight against this virus and this pandemic,” D’Amelio said.
In the earliest days of the Covid-19 pandemic, when an effective vaccine seemed too much to hope for, investors and drug developers looked to antivirals to blunt the impact of the disease.
They didn’t have much luck. To date, the only antiviral authorized by the U.S. Food and Drug Administration to treat Covid-19 is Gilead Sciences ’ (ticker: GILD) Veklury, also known as remdesivir. It is expected to earn $3 billion in revenue for Gilead this year, despite its effectiveness being debatable, and it being administered as an inconvenient intravenous infusion.
Today, the next generation of Covid-19 antivirals is on the way, and a pill to treat—or even prevent—Covid-19 could be available by the end of the year. Merck (MRK), Pfizer (PFE), and the biotech Atea Pharmaceuticals (AVIR) each expect late-stage data on an oral Covid-19 antiviral in the coming months. If the data are positive, the drugs provide a major opportunity for the companies—one that investors should not ignore.
The antivirals may not be effective enough to stop a Covid-19 infection in its tracks.
Still, if they show even moderate efficacy, they will play a major role as the global fight against the virus shifts to a long-term grind against an endemic threat. A prescription Covid-19 antiviral that could be taken at home as a pill would be in great demand around the world.
Analysts at Jefferies have said that an effective, convenient treatment for Covid-19 could be a $10 billion-a-year drug. That treatment will compete with monoclonal antibody therapies for Covid-19 from Regeneron Pharmaceuticals (REGN), GlaxoSmithKline (GSK), and others, which work well but, like Veklury, are generally administered as an intravenous infusion, making them challenging for widespread use.
The U.S. government has already signaled an interest in stockpiling oral antivirals, signing a $1.2 billion contract with Merck that will go into effect if its drug receives emergency-use authorization from the FDA.
Some analysts are more skeptical of the role the pills will play.
In a recent note, Jefferies analyst Michael Yee wrote that he expected antivirals to be only incrementally effective. Still, he says there will be a need for them “for the foreseeable future.”
Given the potential size of the market, positive data or an emergency-use authorization for any of the three oral antivirals could give the shares of its maker a tremendous boost.
For Atea, a biotechnology company developing a range of oral antivirals, the effect on the share price could be the most significant of them all. Its Covid-19 antiviral, AT-527, is being studied in a number of trials, including a Phase 3 trial in nonhospitalized patients expected to produce data later this year. The company has teamed up with Roche Holding (RHHBY), which will have the rights to sell the drug outside of the U.S. SVB Leerink analyst Roanna Ruiz recently set a $60 price target on Atea shares, more than double their recent price of around $26.
The drug, AT-527, targets an enzyme called RNA polymerase, part of the coronavirus’ replication mechanism. The drug uses a sort of two-pronged attack, which could make it effective across a range of Covid-19 variants.
“Our drug, to our knowledge, is the only drug that has a dual mechanism,” Atea’s CEO, Jean-Pierre Sommadossi, told Barron’s. The world will need a range of therapeutics to treat Covid-19, he adds. “It’s a major unmet need,” says Sommadossi. “And it’s going to be a significant and large market on a global scale.”
Merck, which is developing an antiviral called molnupiravir in collaboration with the private firm Ridgeback Biotherapeutics, could be the first with Phase 3 data on its Covid-19 antiviral.
This past week, Merck CEO Robert Davis said at Morgan Stanley’s industry conference that FDA authorization could come by the end of the year.
In a recent note, SVB Leerink’s Daina Graybosch wrote that molnupiravir could be worth $3 a share to Merck, which recently traded around $71. Like AT-527, molnupiravir interferes with the replication of the virus that causes Covid-19.
“It would be very challenging to mutate around,” says Merck’s vice president of infectious diseases discovery, Daria Hazuda, of molnupiravir. What’s more, she says the drug has been shown in preclinical tests to be active against other coronaviruses beyond Covid.
“It would have the potential not only to be an important contributor to this pandemic, but also future zoonotic transmissions [those transmitted from animals] of other coronaviruses,” Hazuda says.
As for Pfizer, its experimental Covid-19 antiviral, known as PF-07321332, is also in studies that could produce data later this year. Pfizer’s drug is what’s known as a protease inhibitor, similar to antivirals used against HIV, among other diseases.
Pfizer’s Chief Financial Officer Frank D’Amelio said at the Morgan Stanley conference that Pfizer could submit the drug for FDA authorization in the fourth quarter of this year. “We think this could be another really nice tool in the arsenal relative to our fight against this virus and this pandemic,” D’Amelio said.
Sanofi Is Finally Catching Up. How a Covid Vaccine Could Lift the Stock.
Few Big Pharma companies have proved able to catch the early wave of Covid-19 vaccines and ride it to success. But Sanofi is trying hard to show that there is a life after failure—or, as the company would prefer to put it, setback.
Rivals Pfizer (ticker: PFE) and AstraZeneca (AZN) showed the potential of cross-cooperation with smaller, nimbler partners—with Germany’s BioNTech for the former, and Oxford University for the latter—in developing and producing vaccines against a new virus in record time.
On the other hand, for Sanofi and partner GlaxoSmithKline (GSK), two of the world’s 10 largest pharma giants, it looked more like a process of hits and misses. A series of setbacks meant the vaccine had to be delayed, putting pressure on the French company’s stock. It also irked the rest of the European Union, which a year ago had ordered 300 million doses of the yet-to-be approved vaccine.
The jab is now in its Phase 3 trial, and Sanofi spokesman Nicolas Kressmann says the company has a good chance of producing its results “before the end of the last quarter at the earliest,” which means that if everything goes according to plan, regulators the world over will then approve it for distribution within days.
Sanofi has already started manufacturing its jab, Kressmann adds, so the group will finally be able to honor its commitments, including the EU contract shortly after regulators’ green light.
Sanofi’s shares (SAN.France) are down 13% since mid-February of 2020, before the pandemic started in earnest. GSK’s has fallen in similar proportion. Sanofi’s American depositary receipts (SNY) are down 5% in the same period.
Meanwhile Pfizer’s stock is up more than 30% and AstraZeneca has risen 6%, even though, in the latter case, it produces the jab at virtually no profit, and has been hit by doubts raised by some governments or drug regulators about its secondary effects.
Sanofi trades at 18 times earnings, slightly under Pfizer’s 19 but way below AstraZeneca’s 38. A poll of 26 analysts by French broker Boursorama shows that 13 have a Buy recommendation at a median price a little under 105 euros ($124). That’s 28% over the current price.
Sanofi beat forecasts in the second quarter on the back of its vaccines unit and eczema treatment Dupixent. It reported sales of €8.74 billion in the period, up 12.4% from the same quarter of 2020 at constant exchange rates, and net income of €1.7 billion, up 16.8%.
Under Chief Executive Officer Paul Hudson, Sanofi has been on an acquisition spree of late, thus following a common growth model in the pharma industry.
Last week it bought Kadmon (KDMN), a maker of transplant drugs, for $1.9 billion. Kadmon’s pipeline also includes drug candidates for immune and fibrotic diseases as well as immuno-oncology therapies.
A month earlier, Sanofi acquired its U.S. partner, biotech Translate Bio, for $3.8 billion. Both transactions were in cash, at comfortable premiums, of 79% and 56%, respectively, over the targets’ share prices. Translate Bio specializes in messenger RNA treatments, a technology used by Pfizer and Moderna for their successful Covid-19 vaccines. Kressman notes that Sanofi had explored mRNA with the U.S. biotech since 2018, in the treatment of infectious diseases, and that it will now develop its own coronavirus vaccine based on the technology.
Coming after Sanofi’s decision to create a 400-person “excellence center” on mRNA in Cambridge, Mass., and Lyon, France, Sanofi’s acquisition “actually makes a lot of sense, particularly in the context of recent setbacks for mRNA peers,” wrote Deutsche Bank analyst Emmanuel Papadakis.
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