How Do Hedge Funds Feel About the Covid Vaccines?
Healthcare specialists didn't bet large on vaccine contenders, according to 13Fs. Why? Company fundamentals behind the vaccine didn't warrant conviction.
As we enter the last few weeks of 2020, COVID-19 continues to stress healthcare systems across the world. The good news is multiple vaccines are claiming expectation-shattering effectiveness. This week, the UK became the first Western country to start a public inoculation campaign. Yesterday, Canada followed suit. And the FDA meets today to discuss emergency use authorization for Pfizer’s vaccine in the US.
As such, we thought this would be a good opportunity to check in on our subset of healthcare specialist hedge funds, a subset of our Novus Hedge Fund Universe (hereafter “HFU”) as a way to gauge hedge fund sentiment towards vaccine chasers based on their latest 13-F fillings.
Follow along with our on-platform companion dashboard.
Runners on your mark
For the purpose of this exercise, we’ll focus on 15 healthcare companies that began vaccine development as early as January 2020. (We started with a larger list, and narrowed it to those who showed up in manager filings and are traded on US exchanges.)
See the full list below, including the three leaders in the race—Pfizer (NYSE:PFE) and it’s partner BioNTech (NASDAQ:BNTX), Moderna (NASDAQ:MRNA) and Astrazeneca (LON:AZN), who have all declared impressive results in their phase 3 vaccine trials and have subsequently applied for emergency authorization.
Novus Health Care Index and Vaccine Candidates
As we’ve previously covered, the Novus Healthcare Index aggregates “best ideas” across our universe of healthcare specialists in order to isolate alpha in the space. As a reminder, the underlying signal that the index leverages is Conviction—a security is considered a conviction bet if the position size meets a proprietary threshold.
Taking a look at the performance in 2020 against several healthcare benchmarks proxied by ETFs, we see that our index of healthcare specialists struggled to keep up with the benchmarks for the majority of the year, but is currently beating both benchmarks thanks to an impressive ~36% percent increase between August and November.
A logical hypothesis here might be that our healthcare specialist managers were betting on vaccine winners. Given that the index assigns weights based on aggregate position sizes, the portfolio performance could potentially be driven by a handful of securities in the absence of a ceiling or threshold. Moderna’s stock price, for instance, has risen nearly a hundred percent in the 3-month period between August and December.
But it's not that simple. If we look at the position names in the portfolio, we observe the notable absence of Moderna, Pfizer, Astrazeneca, and our entire 15-company list of vaccine contenders. Absence from the Novus Health Care Index indicates that there aren’t enough healthcare specialist managers holding these names at a level that expresses conviction, according to the latest 13F filings. However, this does not rule out the possibility that a smaller number of managers in the space have some kind of exposure to these names.
Let's find out.
Healthcare hedge funds reveal their preferences
Leveraging the Novus platform’s ability to create a custom portfolio group on the fly, we can test this thesis by creating a table with rows as positions (with a filter applied on the tickers of interest), columns as managers, and then applying a heatmap to see each manager’s exposure to each name. We'll also extend the time window to a one-year lookback.
Explore the results for yourself on this accompanying dashboard.
We can see that of the 63 managers we track for the creation of our index, around half have exposure to at least one of the 15 companies. The average is four companies, with no managers having exposure to all.
Tekla Capital Management and Sectoral Asset Management are the only funds with exposure to 10+ names. These two, along with Sabby Management, also have exposure to Moderna, Pfizer and Astrazeneca. Tekla Capital also holds Pfizer’s German partner BioNTech.
Sabby Management’s numbers merit a closer look given their total exposure to Moderna and Astrazeneca is actually negative, a result of the position sizes of put options on the short side outweighing the aggregate of call options and common stock holdings on the long side.
As we observed in the previous section, not many healthcare specialists hold a significant enough position in any of our list of vaccine candidates to merit a high-conviction rating. Healthcare Value Capital is an exception, given that they hold sizable positions in Astrazeneca, Gilead Sciences, and Glaxosmithkline. The highest degree of “short sentiment” (to be taken with a grain of salt given that our only datapoint are put options) comes from Sabby Management’s position on Moderna, while on the long side we have Krensavage Asset Management’s 14.5% bet on Regeneron Pharmaceuticals.
Broader market sentiment
Our next question is how these holdings compare to the broader market. We can create a grid similar to the one above, but instead listing our healthcare index funds (benchmarks) as our columns.
We can see that 12 of our 15 vaccine contenders are present in these particular index funds. Amgen, Moderna, and Regeneron Pharmaceuticals are present in all of the market benchmarks. The broader takeaway, however, is that the lack of exposure to these names that we’re seeing among the hedge fund universe is seemingly in contrast to the market as proxied by these index funds.
Is this an example of "buy the rumors, sell the facts," or are there deeper underlying reasons that hedge funds have largely avoided vaccine contenders?
What are the hedge funds looking for then?
There could be several reasons for the discrepancy. We’ve seen previously that the sector tends to yield alpha in mid-cap biotech names. While most of our vaccine contenders do qualify as biotech, 10 out of the 15 are either mega-cap or large-cap names.
Digging into the financials, we also see that these names may not check all the boxes that many fundamental investors rely on in their stock picking process. Starting off with the trailing Price to Earnings ratio (P/E), we can see in Figure 8 that almost half of these companies have a value of "N/A," indicating a negative P/E ratio and negative earnings.
A negative P/E ratio is not necessarily uncommon for biotechnology and pharmaceutical companies, as three of our healthcare benchmarks from Figure 9 prove.
Another useful metric to look at when evaluating healthcare companies from a fundamental lens is the cashflow coverage ratio. Healthcare companies often wait substantial periods of time to obtain financial reimbursement from insurance companies or government agencies. As a result, cashflow becomes an important metric.
Referring back to Figure 8 we can see that with the exception of Regeneron Pharmaceuticals (as of November 30), none of our candidates have a ratio above 1.
Reasoning in the race
While the act of developing vaccines is a testament to the monumental strides made in science and technology in the healthcare space, the fiscal realities for companies engaged in this effort are quite complex. There are many obstacles likely to emerge in the months ahead, ranging from approval to deployment. These will undoubtedly influence investor outlook towards these names, especially when taking into account the impact that this effort has likely taken on the company’s finances. We expect hedge funds to continue to cut out the noise and focus on what they know and what they see, whilst the world eagerly awaits the vaccines that will bring an end to this pandemic.