Views From the Floor

A Dose of Realism: The AstraZeneca/Oxford Vaccine

The announcement of another workable coronavirus vaccine by AstraZeneca/Oxford University provides yet more encouragement that the world may get to grips with the pandemic in 2021.

The AstraZeneca/Oxford vaccine is very different to those developed by Pfizer/BioNTech and Moderna. The latter two use messenger ribonucleic acid (‘mRNA’) to deliver the vaccine. In contrast, the AstraZeneca/Oxford vaccine uses viral vector technology and can be stored at temperatures between 2-8 degrees Celsius. This gives it a distribution advantage when compared to the other vaccines, which need to be stored at -80 and -20 degrees Celsius, respectively – although the Moderna vaccine can be stored for a month at normal refrigerator temperatures, though not long term.

However, there are multiple concerns raised with the AstraZeneca/Oxford vaccine which were not present with the other two.

First, it has developed a two-dose strategy, with two variations – one which delivered two high-dosage injections a month apart, and then low-dosage injection followed by a high-dosage injection, again with a month’s interval. The former showed an efficacy of 62% but the latter, an accidental strategy based on a dosage calculation error, showed an efficacy of 90%. This is concerning because the vaccine is not particularly successful in delivering on its initial objectives, with the original strategy delivering the lower efficacy. Based on the smaller numbers in the accidental low dosage/high dosage trial (2,741 participants), we estimate the lower bound of a 95% confidence interval would give an efficacy of 76%, which is less encouraging, albeit that trial design differences make direct comparability to other trials difficult. It also not intuitive that a low/high dosage would be more effective than a high/high dosage – whilst this pattern has been observed in other vaccines, it is not common. Antibody creation against the viral vector used for delivering the first dose could explain why the second high dose has lower therapeutic benefit in the high/high dose regimen.

In fact, the Russian vaccine uses two different vectors for its two injections and has an efficacy of more than 90%. But if this is the explanation, then it puts into doubt the possibility of repeat dosing. Furthermore, it could well be a manufacturing quirk which has delivered the differing results: the two different trials used different manufacturing batches from different suppliers, which may had had an unknown effect on the dosages. Other complicating factors include the lower age of the participants in the low/high dosage trial compared to the high/high trial and the availability of polymerise chain reaction (‘PCR’) testing as per the protocol in UK – which may not be the case in Brazil.

We would also highlight that this confusion poses problems in terms of filing for FDA approval or an emergency use authorisation. The FDA’s threshold for approval requires more than the roughly 2,700 patients in the low/high group. AstraZeneca/Oxford can attempt to adjust the protocols of their high/high trials, but there are clear barriers to get the vaccine authorised in both the US and the European Union – especially since the efficacy bar has been raised by Pfizer/BioNTech and Moderna. The recent announcement of an additional global trial for the low/high dose regimen confirms our suspicions that US approval specifically may follow a complicated path. Furthermore, the vaccine’s relatively limited safety disclosures remain a concern, especially given that the trials were halted in September after a patient fell ill.

The aim is to produce 3 billion doses in 2021, and the vaccine’s use of a 2-dose strategy with a low dosage then high dosage regimen may actually stretch that capacity further than the expected 1.5 billion patients it would normally be expected to cover. It is intended to be sold at cost, which along with the high production levels and easier storage requirements, may give the AstraZeneca/Oxford vaccine a much greater role to play in the developing world – which so far has struggled to order many doses of the other vaccines.

In our view, whilst it does pose some theoretical advantages – sold at cost, with no cold storage limitations, and therefore with a major role to play outside the developed world – a worst-case scenario would produce a vaccine which is only 62% effective. If we assume that polling data is reliable, and only 50-75% of the UK is willing to take vaccine, it is hard to see how the AstraZeneca/Oxford vaccine will end the pandemic by itself. Fortunately though, it might not have to.

The Two Stages of Value

Given how grossly out of favour Value has been as a style over the last few years, but in particular this year, we wanted to briefly articulate how we, as Value managers, see the opportunity in the market right now. We are describing this as ‘Two Stages of Value’.

What do we mean by this?

We have always had a slightly differing view of Value to the wider market. Our process looks to identify companies that are not simply mispriced by the market, but are attractive, in our view, relative to the value and earnings power of their assets when taking into account all the liabilities within the enterprise value. Thus, we have as clear a definition of Value traps as we do of Value opportunities. The Value opportunities themselves are – in the vast majority of cases – not a dyed in the wool example of traditional ‘value’ (banks, oil companies, miners, etc) but instead idiosyncratic examples of where we believe the market has mispriced an individual company. Periods of heightened uncertainty, increased volatility and a market myopically focused on one thing (sound familiar?) often create greater opportunities for finding these mispricings. We don’t believe 2020 has been any different.

This is best highlighted with live examples. Take an auto parts supplier for instance. Trading has bounced strongly off the bottom and exit rates look good into the fourth quarter. The stock is trading free cashflow yield in the teens, with a historic price-to-earnings (‘PE’) ratio of less than 7x. It is also proving itself to be a winner in the transition to electric cars with rising content values and big platform wins across original equipment manufacturers (‘OEMs’). We believe there is potential for strong positive operating momentum if a 2-year destock comes to an end in 2021. Another example would be a development company that is trading at a sizable discount to its tangible asset value, despite having one of the largest logistics development pipelines in the UK (an incredibly hot market right now). It is also a fast-growing housebuilder with a large landbank during this strongest market for house price inflation we have seen in years. A defence technology and training company recently delivered record order book, record sales, accelerating growth, with a substantial cash pile and has upgraded estimates twice in the last two months, yet the shares trade at an undemanding forward PE ratio. A specialist insurer has 20 years of growth at a high return on capital, it is a market leader in the structurally growing cyber space and is growing ahead of expectations in the strongest market for pricing that management has seen in a decade. Yet, the shares languish near multi-year lows after larger than expected Covid-19 losses (now likely bounded) and an active hurricane season. We believe capital concerns are overdone but even with a further equity raise (which we do not see as likely), the shares will be trading at a greater than 50% discount to their 5-year average despite the future looking as bright as it has done since before the financial crisis.

We are particularly excited, and hopefully the examples above go some way to showing why. We do not need ‘Value’ in the traditional sense to work; inflation, stable/rising interest rates, momentum and tech floundering, reversal of secular stagnation, more fiscal policy. Although we continually live in hope and if any of those were to occur, it would be a tailwind to performance. That would be a ‘Second Stage of Value’ that we dare to dream about but crucially do not need right now.

Instead, we just need some of the auto-parts supplier’s customers to continue to restock as they are and for it to rerate as it proves an electric vehicle winner. We need the development company to continue to deliver on building out the most attractive logistics development pipeline in the UK, keep building houses at the rate it is doing, and close even half of the valuation gap to currently listed UK peers in each of those segments. We need the defence technology and training company to grow its revenue from its record order book and for margins to naturally recover on mix. Or the specialist insurer to hold growth where it is now, prove (as they have done many times before) that they are conservatively reserved and enjoy the hard market in pricing that should drop through to profits in years to come. These are just four examples – we could give forty more.

We believe the volatility this year, a little bit like the huge volatility post the Brexit referendum result, has created inefficiencies in the market and substantial Value anomalies. We are hopeful the demonstration of strong trading will reverse these mispricing out in the coming months. It is this ‘First Stage of Value’ that we are wholly focused on now, we don’t have to believe in anything else to get excited.

With contributions from: James Terrar (Man GLG, Analyst) and Jack Barrat (Man GLG, Portfolio Manager).