A few weeks ago, the world rejoiced to the news that two COVID-19 vaccine trials produced extremely encouraging results.
Pharmaceutical giant Pfizer Inc (NYSE: PFE) and BioNtech (NASDAQ: BNTX) announced that their trial COVID-19 vaccine was 95% effective. In its phase III trial, out of the 170 confirmed cases of COVID-19 among the trial participants, 162 were from the placebo group, while only 8 were in the vaccine group.
Hot on the heels of Pfizer and BioNtech’s announcement, Moderna (NASDAQ: MRNA), a young front-runner in the development of mRNA-based vaccines, announced that its own investigational COVID-19 vaccine had promising interim results. Out of 95 participants of the trial who got COVID-19, only 5 were from the vaccinated group, suggesting a 94.5% efficacy rate.
Stock markets have reacted sharply to the news. Moderna’s current share price is nearly 60% higher from the day before its vaccine announcement on 16 November 2020, while BioNtech’s share price is up by 24% since its joint announcement with Pfizer on 9 November.
Year-to-date, Moderna and BioNtech’s share prices are up by 621% and 237%, respectively.
US$200 billion opportunity
With the hype surrounding these two companies, I wanted to find out if it was too late to get in on their shares. To do so, I came up with a simple calculation to see how much the two companies could potentially earn from their vaccines.
We are currently being told that for best efficacy, two doses of the vaccines are required. There are 7 billion people in the world and to achieve herd immunity, 70% of the population (5 billion people) needs to be vaccinated.
Based on these figures, the world will need about 10 billion doses.
The US government has placed an initial order of 100 million doses for US$1.95 billion with Pfizer and BioNTech, with the option to purchase 500 million additional doses. That works out to US$20 per dose. Moderna has said that it will charge between US$25 and US$37 per dose.
Moderna’s market cap vs its potential profits
We can now answer the question of whether the rally in Moderna and BioNTech’s share prices are justified.
Let’s take a base case scenario that the two front runners will manage to corner 50% of the market opportunity.
If Moderna can supply 25% of the global need for COVID-19 vaccines, it will need to supply 2.5 billion doses. We can also assume that these vaccine doses will be sold over a few years. Moderna CEO Stephane Bancel said that they are on track to produce between 500 million to 1 billion doses in 2021.
For the sake of simplicity, let’s assume that Moderna will sell 500 million doses a year for five years. Based on US$25 per dose, that translates to US$12.5 billion in revenue each year.
Pharmaceutical companies can command extremely high margins, especially for a novel product that is first to the market. Given this, Moderna can possibly earn a gross margin as high as 60%, and a net margin of 40%. This will mean that Moderna could earn an annual net profit of US$5 billion based on my projected revenue figure.
Moderna currently sports a market cap of US$56 billion. Given these assumptions, it trades at around 11 times its potential annual earnings.
How About BioNTech?
BioNtech currently has a market cap of US$27.5 billion. Pfizer has agreed to pay BioNTech US$185 million in a mix of cash and Pfizer shares, and an additional US$563 million for future milestone payments.
In addition, BioNTech stands to earn 50% of the profit brought in from the sale of the vaccines.
Pfizer and BioNTech sold their first batch of vaccine doses to the US government at US$20 per dose. If they can sell a similar number of doses as Moderna and achieve similar margins, BioNTech’s share of the profit will be around US$2 billion.
Based on this scenario, BioNTech trades at 14 times this potential annual earnings.
If the above scenarios materialise, BioNTech and Moderna stand to gain a huge windfall. On top of that, their current valuations, at less than 15 times future earnings each, do not seem too demanding.
… there are risks.
First of all, not every government may be willing to pay for the vaccines to immunise their country. Governments from first world countries such as the US, UK, Malaysia, and Singapore have shown a willingness to pay for the vaccines for their citizens but other countries may not be so willing or even have the means to do so. If fewer governments bite, my estimate of a market opportunity of 10 billion doses over five years may have been overstated.
Another thing to consider is the threat of new vaccines. Competition could erode margins and lead to a lower market share than I modelled for. Pharmaceutical giants AstraZeneca and Johnson and Johnson, have pledged not to make a profit from their vaccines as long as the world is still in a pandemic. This could force companies like Moderna to lower their prices if vaccines from these companies gain approval in the coming months.
We should also not overlook the fact that the vaccines may be effective enough that patients do not need a booster every few years. In this scenario, it could be possible that after the initial demand for vaccines, and once global herd immunity is achieved, subsequent demand for vaccines will subside and earnings will dry up.
This is a legitimate concern as both BioNTech and Moderna have no other product currently in the market.
But there are some potential tailwinds on the cards. Both Moderna and BioNTech have a healthy pipeline of drugs in development besides their COVID-19 vaccines.
The success of their COVID-19 vaccines also validates the potential of mRNA technology in other use-cases. Experts claim that mRNA-based vaccines could potentially be targeted at numerous diseases that we previously had no vaccines for. Both companies specialise in mRNA technology and could stand to benefit from this breakthrough. Moderna, for example, is working on another mRNA vaccine for CMV, which is already in phase II clinical trial.
Besides vaccines, both companies are also researching drugs that use similar mRNA technologies to treat cancer. Moderna currently has a total pipeline of 20 other drugs while BioNTech boasts a pipeline of 28. If another blockbuster drug reaches the market, they could unlock a different source of profits.
So is it too late to buy now?
Investing in young Biotech companies is risky but can be rewarding. The successful commercialisation of a single drug, as in the case of both Moderna and BioNTech, can lead to a multi-year windfall for the company and, as shown, a large appreciation in its share price.
However, there are also risks to pre-product companies.
Many may start off with a promising novel technology only to stumble at the final hurdle.
In Moderna and BioNTech’s case, they seemed to have successfully navigated the final hurdle to commercialisation by posting excellent phase III results for their COVID-19 vaccines. The market opportunity for them is huge and they are set to bring in copious amounts of cash in the not so far future.
But are investors on the sidelines too late now? With the spike in both the share prices of Moderna and BioNTech, and considering the possibility of competition, it seems that the market has already priced in a substantial amount of the future earnings from both companies’ COVID-19 vaccine.
I believe investors who are still considering investing in these two companies should not focus on the COVID-19 vaccine as this has already been priced into the stock. Instead, investors should explore the pipeline of drugs and how Moderna and BioNTech plan to invest their windfall. This will be a greater determinant of the long-term returns of the company’s shares.
Note: An earlier version of this article was published at The Good Investors, a personal blog run by our friends.
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Disclosure: Jeremy Chia does not own shares in any of the companies mentioned.