I tend to disregard most financial academics, with their efficient market hypothesis nonsense. That said, and because he’s not in that crowd, I really enjoy following Robert Shiller’s work. After a few years in financial markets, I noticed that stories and fads, acronyms, phrases and sentiment come into and out of popularity on a regular basis. The Greenspan put, Asian contagion, risk on risk off, whatever it takes and there is no alternative are just a few examples. This also applies to companies known as glamour stocks. Shiller explains all this in his book, "Narrative Economics: How Stories Go Viral and Drive Major Economic Events."
For the last two years, the narrative in the U.K. pharmaceuticals sector was that AstraZeneca (AZN, Financial) was a hit and GlaxoSmithKline (GSK, Financial) (LSE:GSK, Financial) was a miss. Indeed, today, AstraZeneca is the U.K.’s largest stock by market capitalization, taking up a 6.7% weighting of the FTSE 100. GlaxoSmithKline hasn’t done too badly – now 3.9% of the FTSE 100, but it has certainly underperformed it’s Anglo-Swedish rival.
The reason: the Oxford-AstraZeneca vaccine. It doesn’t help for Astra to be associated with Europe’s top university. You don't need to be a fund manager with a doctoral degree in a biotech-related field to own AstraZeneca. It is just a fund manager favorite because, simply, it’s a clear Covid-19 “do your bit” contribution.
Meanwhile, Glaxo’s failure to find a Covid vaccine put more pressure on CEO Emma Walmsley’s turnaround story. It didn’t matter that this might have been the fault of French partner Sanofi (SNY, Financial). The narrative on Glaxo was second place is the first loser. Elliott Management is even demanding that Walmsley reapply for her job.
This was really bad luck for Glaxo. Excluding Covid-19 vaccines, there is an interesting special situation at the company. Walmsley has been trying to bring growth and simplification to this big pharma name, and on some accounts was succeeding. Investors should welcome increased research and development spending and the spinoff of the consumer health business.
A change in the narrative
Is the narrative about the change for Glaxo? The new buzz word in markets is… yes, you guessed it: Omicron. So Glaxo’s announcement that sotrovimab retains its activity versus the Omicron variant could be a key catalyst.
Sotrovimab is a Covid antibody treatment, sold under the Xevudy brand that Glaxo has jointly developed with Vir Biotechnology (VIR, Financial). This may be a huge deal for the company. Early signs are showing that it works against the Omicron variant. Rivals Regeneron (REGN, Financial) and Eli Lilly (LLY, Financial) have so far been unsuccessful in their treatments.
Clearly, we have to be cautious here. The Glaxo-Vir research has not yet been peer-reviewed, and lab tests are still to be completed. But the U.K.'s health regulator, the Medicines and Healthcare Products Regulatory Agency, has approved Xevudy’s use for high-risk Covid-19 patients, with the U.K. government contracting to purchase 100,000 doses already. In a clinical trial, one dose was found to reduce the risk of hospitalization and death by 79% in high-risk adults.
Ironically, sotrovimab was one of a dozen drugs that Walmsley highlighted back in June as a potential blockbuster, with annual revenue of $1 billion. But nobody cared, as the narrative was still for AstraZeneca.
This is a big boost for under-pressure Walmsley. It gives her some more credibility, given her own background is consumer goods, not pharmaceuticals or biotechnology. It also makes Chief Scientific Officer Hal Barron look good too.
In April last year, Walmsley sanctioned a Glaxo investment of $250 million in Nasdaq-listed Vir at $37.73 a share — with another $120 million investment in February this year, along with $225 million for exclusive collaboration rights. Those investments are well in the money now.
In a recent press release, Vir CEO George Scangos said:
"Sotrovimab was deliberately designed with a mutating virus in mind. By targeting a highly conserved region of the spike protein that is less likely to mutate, we hoped to address both the current SARS-CoV-2 virus and future variants that we expected would be inevitable. This hypothesis has borne out again and again - with its ongoing ability to maintain activity against all tested variants of concern and interest to date, including key mutations found in Omicron, as demonstrated by preclinical data. We have every expectation that this positive trend will continue and are working rapidly to confirm its activity against the full combination sequence of Omicron."
Glaxo is only entitled to a third of the profits from the drug, but, in a way, that doesn't matter in the current environment. The narrative on Walmsley and Glaxo might be finally changing.
