Happy and Healthy New Year

Full circle

January 2009, my brother-in-law is staying with us in Florida, medically obliged to lay flat on a bed for several weeks. An 18-month bear has deflated equities 40%, the economy is spiraling down with no bottom in sight. The media are all doom and gloom.

I have little to do except wondering if the equity values I was seeing were only mirages, value traps I sure did not want to fall into. Normally capable to read cycles reasonably well and buy good companies when their equities are in the bargain basement, regardless of the environment, in early 2009 I felt unable to commit much of my cash with such really unusual economic and financial uncertainties. This was not an economic problem, it was a banking and financial crisis.

I needed more certainty on valuations. I needed to really convince myself, objectively that conditions would stabilize.

Befuddled friends were calling, asking, almost begging me for help.

I had always wanted to write, like my dad, and I was curious of this new tool to reach people, blogging.

I launched “News-To-Use”, helping people, first of all myself, weeding out noise, focussing on the most meaningful news and stats and reporting and analysing them objectively. Writing and publishing requires being thorough, rigorous, logical and objective, in rather short supply in 2009.

On March 2, 2009 I posted S&P 500 Valuation Analysis: Near Bottom, introducing the old Rule of 20 designed by Jim Moltz in the 1980s.

On March 3rd, 2009, I posted S&P 500 P/E Ratio at Troughs: A Detailed Analysis of the Past 80 Years with the following conclusion: “Trough valuation analysis shows trough S&P 500 Index levels at 720 using 2009 estimates (which are lower than trailing), with a low probability downside risk to between 516 and 602.”

I then demonstrated that

Using historical absolute PE lows to assess the potential downside to the S&P 500 Index is simplistic and based on superficial, non-rigorous analysis. PE multiples are crude discount factors that need to account for, among many factors, interest rates and/or inflation rates over the forecast periods. The absolute historical lows used by the bears, while strictly accurate, were attained in high inflation periods, not comparable to the present.

Using the Rule of 20 to assess PE multiples takes into account the inflation environment and is thus a better tool to value equities in general.

Using this method, and assuming inflation rates in the 0-2% range, trough PE multiples should be 12-14 times trailing earnings. [Versus the 6-10x range that bears were forecasting].

One reader wrote on March 9: “You bloody fool!”

The bleeding stopped on March 6 at 666 on the S&P 500 Index, at a PE of 12.7x trailing EPS and 14.5 on the Rule of 20 scale.

Here we are, 14 years later, with a PE of 21.9 and a Rule of 20 PE of 27.5, ironically debating how to deal with rising inflation, temporary or not.

Amid this debate, here’s what we know:

• Since 1957, 65 years covering all kinds of economic, financial, geopolitical and social environments, the Rule of 20 PE (actual PE + inflation) has consistently ranged between 15 and 25, with only 2 major exceptions, the late 1990s and now. This time is different? A new paradigm? At your own risk.
• The Rule of 20 uses only trailing, objective data, no subjective forecast.
• The Rule of 20 PE always eventually returns to its 20 mean. At current EPS and inflation levels, that would be 3100, 34% below current levels. Exaggerated? The 2000-2002 bear was -45% from a R20 PE of 27.3 to 20.0 in March 2003. This is not a forecast, only an objective, time-tested measure of risk. Equities can remain overvalued for some time, but not forever. The only forecast is that the R20 PE will, eventually, return to 20.0.
• A return of inflation to the Fed’s 2.0% goal would not entirely erase risk since the R20 PE, at 24.0, would still be 20% overvalued.
• It would thus also need a 20% increase in profits to return to the historical 20.0 mean (also median) where valuation upside (20 to 25 = +25%) equals the valuation downside (20 to 15 = -25%). Thus the neutral, “fair” valuation at a R20 PE of 20.0

What we don’t know:

• When will inflation peak and what are the odds of a return to 2.0% in the next 12 months?
• Can that occur without a meaningful economic slowdown?
• Can we reasonably expect profits to rise 20% if inflation declines so rapidly?

The big inflation debate:

David Rosenberg is firmly in the transitory camp, with “transitory” now loosely defines as an up to 3-year process (!). In support, he calls on the San Fran Fed’s work on inflation sensitivity to Covid-19:

(…) the COVID-sensitive sectors are seeing huge inflation of 5.3% YoY — the trend here was 1.4% before the pandemic. The COVID-insensitive sectors are seeing inflation at 2.5% YoY, which may be up from the trough but is still a touch below the 2.6% pace before the pandemic first hit in early 2020.

The San Fran Fed:

COVID-sensitive components include those categories where either prices or quantities moved in a statistically significant manner at the onset of the pandemic, between February and April 2020. COVID-insensitive components include all other core PCE categories.

Rosenberg’s and others’ point is that Covid-insensitive categories are not seeing much inflation (2.6%), therefore whatever price pressures there are, they are mainly due to temporary demand/supply issues/snags and the eventual return to normality will surely bring inflation on Covid-sensitive categories down to the same moderate range.

However, the chart above shows that inflation on Covid-insensitive categories dropped sharply in early 2020 along with all other categories and kept on dropping throughout 2020, contrary to Covid-sensitive categories. In 2021 however, both broad categories flared up: “sensitives” from 2.0% to 5.3% and the “insensitives” from 1.0% to 2.6%.

The devil is in the details and there are details that Rosenberg and others don’t bother to mention but that shed a different light on the analysis:

• The San Fran Fed analysis covers 124 items, 2/3rd being categorized “sensitive” and 1/3rd “insensitive”.
• The “sensitives” include the usual suspects such as cars and trucks, furniture, apparel and footwear, and many other goods but also services such as domestic, medical or education services, hotels and airfare.
• Among the “insensitives”, rental costs carry the larger weights but we also find insurance, garbage collection, health and life insurance, cable subscriptions and financial services fees among others. Most are services which costs are generally adjusted only once a year, often at the beginning of the year. In addition, we know that the official rent measures always significantly lag real world trends as the BLS explains:

Because rents change rather infrequently, the CPI program collects rent data from each sampled unit every six months. (Price collection is monthly or bimonthly for most other CPI items.) Collecting rent data less frequently allows a much larger sample. The CPI divides each area’s rent sample into six sub-samples called panels. The rents for panel 1 are collected in January and July; panel 2, in February and August, etc.

The slower rise in “insensitives” inflation so far is thus no evidence of a muted underlying overall inflation rate. The next 3-6 months will be more telling although several stats are not encouraging.

The next chart plots MoM CPI-Services (blue) and CPI-Shelter (red). Between 2017 and 2019, monthly services inflation hovered around 0.2%. During the first Covid year, services inflation slowed to the 0.1% range but since February 2021 (remember the once yearly price adjustments) it has sharply accelerated and now ranges between 0.4% and 0.5% monthly or 5-6% annualized.

Services account for 61% of the U.S. CPI with rent measures aggregating 31%, half of CPI-Services. Unlike most goods prices, services prices are adjusted infrequently and are highly sensitive to wages. The next chart shows the relationship between YoY inflation on services, shelter and wages:

Anybody modulating an investment strategy or a monetary policy based on the current subdued inflation on Covid-insensitives would be a bloody fool.

In effect, we have gone full circle. In 2009, investors needed to be convinced that unusually low inflation rates would prevent PE ratios from falling to previous lows reached in high inflation periods. Now, investors either dismiss current high inflation rates as temporary or as inconsequential for equity valuations.

Recent trends and history are not on their side.

I am not forecasting inflation here, only assessing each camp’s analysis and debating the odds. So far, I find that the transitory camp’s arguments are weak, tilted toward hope or wishful thinking rather than thorough objective analysis.

Two of the best macro-analysts I know are Jean-Guy Desjardins, CEO and co-CIO at Fiera Capital (friend and former partner) and Henry McVey, head of Global Macro
& Asset Allocation at KKR. Both have, like many others, significantly raised their inflation forecast for 2022 but both continue to view inflation ease in the second half of the year and in 2023. However, they both expect inflation to rest at a level above the Fed’s 2.0% goal.

Here’s how McVey articulates KKR’s views

Goods and services inflation pressures are converging upward in the near term, building to what we think could be a crescendo by June. As such, we see headline CPI running at five percent in 2022, far above the consensus of 3.6%, and up further from 4.7% in 2021. Drilling down into this change, we would highlight several ‘sticky’ inflation points including: 1) Shelter inflation, which drives about 40% of core CPI, is likely headed considerably higher in coming months; 2) Vehicle price inflation continues to be aggravated by the semiconductor shortage; 3) Inflation pressures are broadening as 24 of the 26 sub-components of CPI are now above the Fed’s two percent threshold; and 4) Workers are quitting their jobs—usually for new ones with higher pay—at an outsized rate that would normally be associated with unemployment of just one to two percent.

(…) we think that a tightening job market and a low inventory situation support our belief that there will be upward pressure on prices during this cycle. Hence, our view remains that this cycle’s reflationary nature will be its defining feature.

KKR sees core CPI peak at 6.4% in Q1’22, average 5.0% in Q2 and quickly decline to 2.6% in Q4 when Goods inflation turns negative YoY, mitigating the 3.7% growth in Core Services prices. Investor sentiment and the Fed’s resolve (!) will be severely tested during the first half. As to the expected disinflation in the second half, time will tell how wages behave if inflation on essentials (food, energy and housing) remain elevated.

Note that KKR’s estimate of Core CPI for 2022, now 4.5%, was 2.75% last October. Price dynamics are fooling even the best as companies, large and small, are seeing enough demand to easily pass on their cost increases. The unusual nature of this inflation cycle is that it is both demand-pulled and cost-pushed, feeding each other amid an economy flushed with liquidity. Can the spiral stop naturally as just about everybody believe? It certainly did not start naturally.

TECHNICALS WATCH

Large caps remain in an uptrend per the S&P 500 13/34–Week EMA Trend:

My favorite technical analysis firm keeps warning about concentration, poor breadth and weak small caps. The Russell 2000 corrected 12.4% between November 8 high and Dec. 20. It is now bouncing against its declining 200-day moving average. Whether or not you care about small caps, they are a large share of equity markets. Apathic investor demand cannot be positive.

NDR’s Volume Demand vs. Volume Supply chart illustrates the worrisome demand/supply trends:

(Ned Davis Research via CMG Wealth)

Micro-micro caps are in big demand however:

A Booming Startup Market Prompts an Investment Rush Early-stage venture capitalists are now investing millions of dollars in companies before they even have a coherent business plan, while a growing number of VCs are saying that we are likely in a bubble.

(…) Investors in 2021 pumped $93 billion into so-called seed-stage and early-stage startups in the U.S. through Dec. 15, a record. That amount compares with $52 billion for all of 2020 and $30 billion in 2016, according to PitchBook Data Inc.

With more money coming in—and the number of new venture-funded startups relatively flat—valuations have surged. The median valuation for the seed- and early-stage companies funded in 2021 was $26 million, up from $16 million in 2020 and $13 million in 2016, according to PitchBook. (…)

The combined valuations of private startups globally has swelled into the trillions of dollars—becoming an enormous investment category. (…)

Sam Altman, former president of startup incubator Y Combinator—which has backed hits like DoorDash and Airbnb Inc. —predicted in a December tweet that venture capital returns this decade “are going to be much worse than those from the 2010s.”

To compete, many venture capitalists say they have spent less time on background checks and other research before investing. (…)

Multiple rounds of funding at a buzzy company can come just weeks apart today, particularly in areas investors deem hot, like cryptocurrency or corporate credit cards. In more sedate times, venture capitalists often encourage companies to raise every nine to 18 months. (…)

Monthly Child-Tax-Credit Payments Cease, Ending Cushion for Family Budgets More than 30 million households started getting the child-tax payment in July, with parents using the money on essentials like groceries and stashing it as emergency savings. Unless Congress acts, that stream of cash is drying up.

SUPPLY MANAGEMENT

• OPEC+ expected to stick with planned Feb output increase, sources say Predicting a mild and short-lived impact on demand from the Omicron coronavirus variant, three sources from the group of oil producers told Reuters on Monday.

Current plans would see it raise its February production target by 400,000 barrels per day (bpd) as it has done each month since mid-2021.

In a technical report seen by Reuters on Sunday, the group downplayed the impact on the oil market from the Omicron variant. (…)

While the group has been raising its targets, its production increases have not kept pace as some members struggle with capacity constraints.

OPEC+ oil producers missed their production targets by 650,000 bpd in November and 730,000 bpd in October, the International Energy Agency (IEA) said last month. (…)

• Evergrande shares suspended after report it was told to destroy buildings Chinese media outlet says authorities demanded indebted property company demolish residential complex
• Tesla dodges supply woes to deliver record number of vehicles Wall Street forecasts another leap in sales as two new plants set to increase production

Sinovac COVID-19 shot with Pfizer booster less effective against Omicron – study

The Sinovac (SVA.O) two-dose regimen along with the Pfizer (PFE.N) shot produced an antibody response similar to a two-dose mRNA vaccine, according to the study. Antibody levels against Omicron were 6.3-fold lower when compared with the ancestral variant and 2.7-fold lower when compared with Delta.

Akiko Iwasaki, one of the authors of the study, said on Twitter that CoronaVac recipients may need two additional booster doses to achieve protective levels needed against Omicron.

The two-dose Sinovac vaccine alone did not show any detectable neutralization against Omicron, according to the study that analysed plasma samples from 101 participants in the Dominican Republic.

A study from Hong Kong last week said that even three doses of the Sinovac vaccine did not produce enough antibody response against Omicron and that it had to be boosted by a Pfizer-BioNTech shot to achieve “protective levels.”

Biden assures Ukraine’s leader of ‘decisive’ US response to Russian invasion Call with Volodymyr Zelensky comes as tensions rise with Moscow over border deployments

• Finland insists on its right to join Nato in defiance of Russia
• China and Russia Military Cooperation Raises Prospect of New Challenge to U.S. Power

Happy and Healthy New Year

When It Comes to Inflation, I’m Still on Team Transitory Fed Chair Powell may have retired the term, but bottlenecks and shortages should be over soon.

By Alan S. Blinder, a professor of economics and public affairs at Princeton, served as vice chairman of the Federal Reserve, 1994-96.

(…) The old aphorism that inflation arises from “too much money chasing too few goods” is close, but “too much demand chasing too little supply” is spot on. (…)

There won’t be large fiscal expansion in March 2022, regardless of what happens to President Biden’s Build Back Better plan. And the Fed is now taking its foot off the monetary accelerator. (…)

In short, there is an inflationary price to pay when you catapult rapidly out of a pandemic-induced recession, and we are paying that price now. But it still looks transitory to me—though that doesn’t mean it will be over in a month or two. It won’t, which is presumably why Federal Reserve Chairman Jerome Powell recently stopped using the word.

Several factors point to lower inflation rates ahead.

• First, the price of crude oil, which more than doubled between November 2020 and October 2021, has begun to fall.
• Second, normal consumption patterns will re-emerge as pandemic fears subside. Consumers will start buying more restaurant meals, hotel rooms and movie tickets—and fewer things that are shipped in boxes. Omicron may delay the return to normalcy, but it will happen.
• Third, capitalism is on our side. Shortages raise prices, but high prices create opportunities for profit, which attract capitalists to alleviate the shortages. They don’t do this out of altruism, but out of self-interest.

(…) Bottleneck inflation may be gone in a few months, or it may take another year or so. You can call another year of high inflation “transitory” or “terrible.” But it isn’t likely to be permanent, which is why I’m still on Team Transitory. (…)

Mr. Blinder’s first argument in favor of an eventual decline in inflation is that “the price of crude oil has begun to fall”. Period! Let’s all hope he is right but let’s admit that this is a rather concise analysis on what constitutes his first argument.

My first counter argument is that “the fall” is not all that obvious, so far:

My second counter uses his own “spot on” reason for the recent jump in inflation: “too much demand chasing too little supply”. Oil supply needs continued investment in production which has been materially slowing since 2017:

His second argument simply says that demand will shift away from goods towards services which will ease pressures on goods prices. But inflation on services is already between 4% and 5% annualized and the official measure of inflation on the heavy-weight shelter is still relatively subdued at 3.8% YoY in November but is dangerously accelerating (+6.2% a.r. in the last 2 months). Real world data suggest actual rent inflation is much higher. Inflation on services is far more important, sticky and damaging than inflation on goods.

Yet, Mr. Blinder spends precious little time discussing the basic factors impacting services prices, particularly wages.

Finally, the notion that capitalism will save us all is ________ (fill yourself). He is right that “They don’t do this out of altruism, but out of self-interest”. Look what profit margins did during the pandemic:

BTW:

• IKEA to Raise Prices as Global Supply Costs Keep Rising The Swedish furniture giant said the largest cost increases relate to transportation and purchasing prices, and are particularly affecting North America and Europe.

Ingka Holding BV, the biggest owner and operator of IKEA stores, said it planned to raise prices across the group by around 9% on average, with variations depending on country and range, amid a global squeeze on supply chains and higher associated costs.

“IKEA continues to face significant transport and raw-material constraints driving up costs, with no anticipated break in the foreseeable future,” Ingka said Thursday, adding that it expected disruptions to continue well into 2022.

The Swedish company said the largest cost increases relate to transportation and purchasing prices, and are particularly affecting North America and Europe.

“For the first time since higher costs have begun to affect the global economy, we have to pass parts of those increased costs onto our customers,” said Tolga Öncü, retail operations manager at Ingka’s core IKEA Retail division. He said the company needed to take the pricing action now to safeguard its competitiveness and resilience. (…)

• Raises From Coast to Coast in 2022 56 Cities, Counties, and States Will Raise Minimum Wage Rates on January 1—Many Reaching or Exceeding $15— With Another 26 Jurisdictions to Lift Pay Later in 2022
• Oil Posts Longest Streak of Consecutive Gains Since February

David Rosenberg yesterday:

The inflation hawks seem to be ignorant of history and how inflation tends to spike in the context of a pandemic supply-shock of this magnitude — go back and see how inflation soared in 1918, 1919 and 1920, to only then plunge in the next decade. Three years up and then ten years down certainly does fit the bill as being “transitory” — the real problem today is the radical shortening in investor time horizons where “long-term” today is basically “lunch tomorrow.” The real bull market is in impatience and tempestuousness and, generally speaking, an economic and strategist community that seems bereft of any historical perspective (I mean, come on — all they ever drum up is the 1970s when we had a dozen oil price shocks spread out over an entire decade).

David included charts showing how inflation did actually transit down as he explains. But he never pointed out that there were recessions in 1920-21, 1923-24, 1926-27, 1929-33 etc..

US prepared to respond ‘decisively’ if Russia invades Ukraine, Biden warns Putin Presidents speak for almost an hour in latest diplomatic effort to defuse tensions

Here come the antivirals

By Katelyn Jetliners, epidemiologist

As epidemiologists, “primary prevention” is our main goal—reduce morbidity and mortality by preventing large populations from getting disease altogether. Vaccines are our best (but not only) tool to prevent severe disease from SARS-CoV-2. But even if someone gets the vaccine, there is still a small chance they could end up in the hospital. (This is especially true for those over 65 years or with comorbidities). Some immunocompromised vaccinated people are also not protected. And of course millions are not vaccinated. So, if someone gets severe disease, how can we help them?

One viable option is antiviral drugs. This is a class of prescription medications that can fight a virus once someone is infected. There are many mechanisms through which antivirals can potentially help. As depicted in the figure below, once the virus enters the human body, it searches for a host cell. Then the virus’s life cycle begins: 1) entry into our cells; 2) replication within our cells; 3) assembly; and 4) escape to go infect other cells. Scientists try to create antivirals to disrupt any one of these steps.

Jones et al. Viral and host heterogeneity and their effects on the viral life cycle. Nat Rev Microbiol 19, 272–282 (2021)

For example, oseltamivir (Tamiflu), the antiviral for the influenza, disrupts the last stage: it stops the virus from dissolving its way out so it can’t go infect others. This helps people recover from the flu 1 or 2 days earlier. But, antivirals are really difficult for scientists to make for a myriad of reasons (see my previous post here). This is why it’s taken so long to get an evidence-based antiviral, compared to, for example, vaccines, of which we now have 19 authorized and 9 approved worldwide.

Thankfully, the science for SARS-CoV-2 antivirals is finally coming through. In the past week, the FDA has authorized two for use in the United States. And this is a big deal.

Here’s what they are, what they do specifically, and pros/cons of each.

Paxlovid

This antiviral was created by Pfizer and is the most promising option so far. This treatment combines three pills that must be taken twice a day for five days. Two of the three pills are Paxlovid and the other pill is Ritonavir—a low dose HIV drug that will help the Paxlovid drug remain active in the body longer.

Paxlovid’s main mechanism is to slow down viral replication. (Stage 2 in the figure above). It does this by inhibiting one of the virus’s tools—called an enzyme—that it uses to replicate itself.

After Pfizer developed this drug, it went through randomized control trials just like vaccines do. Pfizer’s Phase III randomized clinical trial (called EPIC-HR) had 2,246 participants with a confirmed COVID19 infection that were randomized to get a five-day course of Paxlovid or a five-day course of a placebo. For this trial, all participants had to be “high risk:” unvaccinated with at least one high risk characteristic, like over the age of 65 or a comorbidity. The participants were followed for 28 days after entering the trial to see if they were hospitalized or died from COVID19. What did scientists find?

• There was an 88% reduction in hospitalization and death among the Paxlovid group compared to placebo. Which is really high! Specifically,

  • Paxlovid group: 5 of 697 (0.7%) participants were hospitalized. None died.

  • Placebo group: 44 of 682 (6.5%) were hospitalized. Nine died.

• Importantly, efficacy was similar whether the treatment was given within three or five days of symptom onset: 89% efficacy in the first three days and 88% efficacy in the first five days.

  • This was a huge win, because antivirals only work if given early. In the “real world,” this is difficult because it means the patient needs to realize their symptoms (which takes a few days), get tested (which is really hard right now), go to the doctor to get a prescription, and then start treatment. All of this needs to happen within a small window. The bigger that window, the better.

After receiving the full results, the FDA quickly authorized Paxlovid. They did this without convening their external scientific committee board for a review of the evidence. To me, this is a sign that the results were solid and/or an indication of the dire need for a highly effective antiviral in the wake of Omicron.

It was also very reassuring to see an independent study (i.e. science not conducted by Pfizer) come out this week confirming Pfizer’s results. The scientific group also found that this drug works against Omicron. We hypothesized that it would, because Omicron’s mutations don’t target the process mentioned above, but this is great news nonetheless. The figure below shows the effectiveness of the pill series (called Nirmatrelvir; orange lines) did not change in light of various variants of concern.

Pfizer also has two other concurrent studies using this drug:

1. EPIC-SR: This clinical trial evaluates the efficacy of Paxlovid among 662 people that were not considered high risk. Preliminary data showed that 2 of 333 (0.6%) patients who received Paxlovid were hospitalized compared to 8 of 329 (2.4%) who received the placebo. Unfortunately, the 0.6% isn’t statistically different than 2.4%, which means the drug isn’t too much help for non-high risk groups. But only 45% of the data is in thus far; we will see if the scale tips as more data comes in.

2. Concurrently, Pfizer is evaluating if, and by how much, Paxlovid blocks transmission in households. We should expect results in the first half of 2022.

And while this is all great news, the big concern is supply. Pfizer only manufactured enough pills for 65,000 people this month. When divided by 50 states, the availability gets smaller and smaller. For example, in DC—the place hardest hit with Omicron right now—there is only enough supply for 120 people. Antivirals are difficult to manufacture, so supply will ramp up slowly. Pfizer said they will have enough for 300,000 Americans by the end of February and, eventually, 120 million courses in 2022. The antiviral’s promise is also dependent on affordability and the assumption that individuals can get it in a timely manner (symptoms, test, doctor’s appointment, prescription), which is becoming more and more difficult across the country right now. There’s no doubt this antiviral will help down the road, but the promise for right now is limited.

Molnupiravir

The second antiviral drug that was authorized this week was created by Merck and and Ridgeback Biotherapeutics. It, too, is a pill series: four capsules twice a day for five days early in infection.

Molnupiravir works differently from Paxlovid, in that it does not directly slow down the replication or copying process. Instead, the drug interferes and inserts numerous mutations when the virus is replicating. As a result, the copied virus is weaker and the immune system is able to clear it much more quickly.

(FDA Molnupiravir Background Package Here)

Merck’s clinical trial (called the MOVe-OUT study) had 1,433 participants with confirmed COVID19 infection that were randomized to receive a drug or placebo series between May and October 2021. After the placebo or series, the participants were followed for 29 days to see if they were hospitalized or died. This cohort of participants will also continue to be followed until their late-follow up visit at 7 months. What did Merck find? Well, this data story is fascinating:

• When Merck originally submitted their FDA application they announced promising interim results: 50% reduction in hospitalization and death.

  • Molnupiravir group: 7.3% (28 out of 385 people) were hospitalized. No deaths were reported.

  • Placebo group: 14.1% (53 out of 377 people) were either hospitalized or died. Eight deaths were reported.

• Importantly this analysis was only among 762 participants from May to July 2021. Once Merck analyzed data from the second half of the study in August and early October (646 additional people), they only found only a 3% reduction in hospitalization and death. This was a shocking difference. (I’m giving them the benefit of the doubt that this was truly a weird data phenomenon, rather than purposeful and deceitful).

• So, pooled together (50% efficacy from first half and 3% efficacy from second half), Molnupiravir had an overall 30% reduction in hospitalization and death compared to the placebo. Results are shown below, from Merck’s presentation to the FDA.

Merck Presentation at FDA Here

On November 30, 2021, the FDA’s external scientific advisory board met to discuss Merck’s authorization application. There were two streams of significant reservations during the discussion:

1. Modest efficacy: There was disappointment voiced around Molnupiravir’s modest effectiveness. The advisory board also had a lot of questions for Merck about the drastic effectiveness difference (50% to 3%). Merck didn’t have an answer for them.

2. Possible dangers: There was also a lot of interesting discussion about theoretical dangers. The drug works by causing of a lot of mutations in the virus (making it weaker and allowing the immune system to clear it). However, there is a risk that the virus mutates a lot but isn’t cleared. Thus, there is the theoretical danger that the drug could drive viral evolution. There is also the opportunity for the drug to change a person’s DNA. While no data has supported this, data has found this happens with pregnant rats. Some voting members voiced theoretical concerns that the drug could lead to cancer-causing mutations down the road.

This interesting discussion resulted in the external scientific committee narrowly voting to authorize this medication in a 13-10 vote. It took the FDA an abnormally long time to then take the advisory board’s vote to authorization. I was actually very surprised that the FDA ended up authorizing; I didn’t think this would happen.

Bottom line: While it may take a few months for supply, an antiviral like Paxlovid will be a game changer. I’m incredibly excited to see the science’s progression, as we can use all the help we can get in this pandemic.