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Pfizer has increased its vaccine production capacity to four billion doses this year, up by a third from 2021. Moderna has upped its production by 50 per cent to 1.2 billion doses from 800 million.Reuters

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When global vaccination rates against COVID-19 were on the rise a year ago, investors wondered what the coming months would hold for vaccine makers. Would demand ease or would new variants mean an ever-increasing demand for boosters?

The answer began to emerge in March when the Delta variant arrived, followed in late fall by Omicron. Managing the pandemic would be continuing, with steady demand for treatments and tests. That realization made it a good year for vaccine makers.

Investors in Pfizer Inc. PFE-N and BioNTech SE BNTX-Q have seen the shares of those companies increase by 44 per cent and 43 per cent respectively in the past 12 months, although both have sold off this year. AstraZeneca PLC AZN-Q, which was the first dose for many Canadians, has backed off from its November high, but is still up 19 per cent in the past 12 months. Moderna Inc. MRNA-Q, which depends mostly on vaccines for its overall revenue, has tumbled. The shares sit two-thirds below their US$500 peak and are down 15 per cent as investors revisit the company’s lofty multiple.

So, what might lie ahead?

“When we look at 2022, it should be another good year [for the vaccine makers],” says Tarik Aeta, vice-president and portfolio manager at TD Asset Management Inc. (TDAM) in Toronto. “But don’t expect the share prices to perform extremely strongly.”

Mr. Aeta sees a continuing demand for boosters and viral treatments. He researches global health care equities at TDAM and manages TD Global Healthcare Leaders Index ETF TDOC-T. It’s broadly diversified with 144 companies, including vaccine makers and testing companies, and has $24-million in assets under management (AUM).

Sam Masucci, chief executive officer of ETF Managers Group LLC (ETFMG) in Summit, N.J., which launched a vaccine and testing exchange-traded fund (ETF) last year, says there’s more to come.

I can’t tell you whether testing, treatments or both are the way for investors to go,” says Mr. Masucci, whose company introduced ETFMG Treatments Testing and Advancements ETF GERM-A. It has US$40-million in AUM and is focused narrowly on drug testing and treatment companies. Most of the 85 holdings are small or mid-sized firms, though Moderna and BioNTech are among the top 10.

Mr. Aeta notes that Pfizer has increased its vaccine production capacity to four billion doses this year, up by one-third from 2021. Moderna has upped its production by 50 per cent to 1.2 billion from 800 million.

New and promising weapons for fighting the pandemic are also under development. Pfizer’s antiviral COVID-19 pill has been approved in Canada. It reduces the risk of hospitalization for those who are unvaccinated or have an underlying health condition. The pills are more expensive than boosters and more profitable, Mr. Aeta says.

The Pfizer pill has proven 89 per cent effective in preventing hospitalization, far higher than the version marketed by Merck & Co. As a result, Pfizer has increased production capacity to 120 million doses in 2022 from 15 million, he adds.

“I would expect Pfizer will dominate most of that market as we go through the year,” he says.

Mr. Aeta says he believes share prices ran away with themselves last year in part because of expectations for future vaccine demand. Another reason was the expectation that other drugs in company pipelines would come to market quickly as lockdown restrictions eased. Share prices were giving credit for products still in early development. The sell-off reflects a re-evaluation of that outlook.

Investors have also eyed the testing companies that make molecular and rapid antigen tests. Abbott Laboratories ABT-N and ThermoFisher Scientific Inc. TMO-N, both multinational companies in this field, also had good years.

The tests are required for air travel and are being used in schools, workplaces, and by individuals at home. U.S. President Joe Biden has ordered 500 million kits to be delivered to every home in the U.S. that wants them.

Mr. Masucci of ETFMG says that vaccine makers have a lot of potential, but gives the edge to testing services, citing the Biden administration’s test-kit order as an indication of the potential.

“I think the repeat opportunity on the testing side is infinitely greater,” he says. “I’m not a scientist but I think testing is going to evolve significantly.”

One example of a development is multipanel tests, which can detect several respiratory infections from a single test. Here, Mr. Aeta expects the cost of tests to fall as more companies get into the field, the public-health emergency eases, and supply catches up with demand.

So, where should investors go?

One area of rebound may be medical device companies. The pandemic has had a big impact on delaying elective surgeries. Those surgeries are still needed, along with supplies and devices from knee and hip replacements to pacemakers and heart valves.

“These companies have been battered for the past two years and are being very conservative in their guidance,” Mr. Aeta says. “Expectations are low, but they have the potential to perform well.”

Adam Mayers is a contributing editor to the Internet Wealth Builder investment newsletter.

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