Moderna IPO: Very Expensive

|
About: Moderna, Inc. (MRNA), Includes: ALNY, AZN, MRK, RGLS, SRPT, VRTX
by: Bilbao Asset Management
Summary

Moderna uses messenger RNA or mRNA to design new medicines.

With strategic collaborations with organizations like AstraZeneca or Merck & Co. and a pipeline of 21 programs, Moderna has both financial support and many potential candidates.

As the amount of programs is large, the market opportunity seems very large too. Moderna seems to be targeting a market opportunity of over $200 billion in annual worldwide sales.

Cash and investments comprise of 82% of the total amount of assets.

The Board of Directors is expected to be independent, which minority shareholders should appreciate.

Moderna (NASDAQ:MRNA) seems too expensive with an enterprise value of $7.461 billion. Other competitors report enterprise value of $7.61-$10 billion with a more advanced stage of development. Competitors at an early stage of development, like Moderna, trade with an enterprise value of $1.28 billion. Moderna’s enterprise value should not go that low since the company has a large amount of product candidates. However, as of today, they are all at Phase 1 or Phase 2 of development, so $7.461 billion is too elevated.

Source: Prospectus

Source: Prospectus

Business

Founded in 2010, Moderna uses messenger RNA or mRNA to design new medicines. With strategic collaborations with organizations like AstraZeneca (AZN) , Merck & Co. (MRK), Vertex Pharmaceuticals (VRTX) or the Bill & Melinda Gates Foundation and a pipeline of 21 programs, Moderna has both financial support and many potential candidates.

Moderna targets very different diseases including infectious diseases, oncology, cardiovascular diseases, and rare genetic diseases. The images below provide further details on different programs of Moderna.

Source: Prospectus

Source: Prospectus

Please note that most programs are still at Phase 1 and 2 of development, which investors may not appreciate. In addition, Moderna did not provide a lot of information on when these programs could be finished.

The Platform Created By Moderna

Molecules of mRNA transport instructions stored in DNA to produce proteins’ required cells. The following lines provides a more detailed explanation about family of these molecules:

Source: Wikipedia

The company’s models use mRNA to instruct a patient’s own cells to produce proteins that could prevent, treat, or cure disease. The image below provides further explanation on the way mRNA stores and transmits information:

Source: Prospectus

The company’s platform is designed to deliver mRNA molecules to specific tissues. The company’s mRNA molecules can in certain instances be delivered by direct injection to a tissue in a simple saline formulation.

In order to enable delivery of large quantities of mRNA, Moderna has developed LNP technologies. These technologies are quite relevant as the the human body contains significant RNA degrading enzymes that rapidly degrade any extracellular mRNA and prevent broader distribution. The image below provides information about developed LNP technologies:

Source: Prospectus

Market Opportunity And Expected Milestones

As the amount of programs is large, the market opportunity seems very large too. As shown in the lines below, Moderna seems to be targeting a market opportunity of over $200 billion in annual worldwide sales.

“Over the last 40 years, the biotechnology industry has created a new category of drugs based on recombinant protein technology. These drugs rely on secreted proteins, including antibodies and protein replacements, to treat a wide range of diseases. Today this category of drugs accounts for over $200 billion in annual worldwide sales.” Source: Prospectus

Let’s recap some of the different markets, which Moderna is targeting, and the stage of development. Firstly, Prophylactic vaccines to prevent infectious diseases mean a commercial opportunity of $35 billion in annual worldwide sales. However, the company still seems at an early stage of development:

Source: Prospectus

The results of some of these trials are expected in 2019, thus investors should be alert. For instance, according to the website of the government, the results for the Phase 1 trial to evaluate safety of mRNA 1325 Zika Vaccine are expected in February 2019. If the data is beneficial, the stock price should jump. The image below provides further details:

Source: Clinicaltrials

Regarding the company’s cancer vaccines, Moderna could be helping 1.6 million people, who learn that they have cancer, each year in the United States. The company is at Phase 1 of development in this case. In addition, as of November 15, 2018, the number of patients treated is still low. Only 13 patients have been treated as shown in the image below:

Source: Prospectus

According to site Clinicaltrials, the company expects to finish its Phase 1 in June 2021. Certain investors will not want to wait such a long time until the company delivers data. It is not ideal:

Source: ClinnicalGov - Cancer

The image below shows information regarding the Phase 1 trial for Intratumoral Immuno-oncology. As of October 22, 2018, 26 patients had been dosed with mRNA molecules.

Source: Prospectus

The company expects to release data in July 2019. If the data is beneficial, the stock price could increase. So, investors should be ready around this date. The image below provides further details on this matter:

Source: ClinnicalGov - mRNA 2416 for Intratumoral Injection

Regarding the company’s program for tissue regeneration, the company focused on ischemic heart failure, which was responsible for 8.9 million deaths globally in 2015. Moderna is running a Phase 2 clinical program, in which 33 participants are expected to be treated. As shown in the image below, the company expects to release results in July 2020.

Source: Prospectus

Source: ClinnicalGov - AZD8601 Study

Sound Financial Situation And No Convertible Securities

With a massive amount of cash and investments, analysts should appreciate the company’s financial situation. As of September 30, 2018, the cash in hand equals $167 million, and investments are equal to $1.055 billion. This means that cash and investments comprise of 82% of the total amount of assets. The image below provides further details on this matter:

Source: Prospectus

The liabilities of Moderna should not worry investors. With an asset/liability ratio of 3.6x and $412 million in total liabilities, the amount of cash and investments is more than the company’s obligations. In addition, it is also beneficial that Moderna shows no financial debt and the largest amount of liabilities is deferred revenue, equal to $302 million. The image below provides the list of liabilities:

Source: Prospectus

The contractual obligations reported in the prospectus don’t seem worrying either. As of December 31, 2017, they were equal to $299 million with leases valued at $231 million. The image below provides more details on this matter:

Source: Prospectus

After the IPO, the equity structure is expected to be very simple, which investors should appreciate. The company expects to convert preferred stock, so shareholders should not worry about stock dilution from these convertible securities. The image below provides the equity shown in the prospectus:

Source: Prospectus

89% y/y Revenue Growth

Undoubtedly, the most appealing feature of the company is the revenue growth. In 2017, the company released revenue growth of 89% y/y amounting to $205 million. Moderna makes the largest part of its revenue, 85%, thanks to collaborations with large pharma corporations like AstraZeneca (AZN), or Merck (MRK). The image below provides more details on the collaboration revenue. Note that it increased by 75% y/y in 2017:

Source: Prospectus

As shown in the image below, Moderna also reported grant revenue of $28.8 million in 2017, 323% more than that in 2016. On the bottom line, the company is not reporting positive income. The amount of research and development expenses, equal to $410 million in 2017, explains why the company is not profitable at the net income level. Moderna reported losses of -$255 million in 2017 or EPS of -$4.18.

Source: Prospectus

The CFO was equal to -$331 million in 2017 and -$239 million in the nine months ended September 30, 2018. Using cash and investments worth $1.222 billion and adding the IPO proceeds, total cash expected after the IPO should be $1.704 billion. If the company burns $331 million each year, Moderna should run out of cash in five to six years. The cash in hand should be monitored very closely. Keep in mind that if Moderna runs out of cash, it will sell further equity, which could lead to share price depreciations. The image below provides further details on the CFO:

Source: Prospectus

Use of Proceeds

Moderna expects to use the the proceeds from the IPO to finance drug discovery as well as to develop the company’s mRNA technology platform. The lines below provide further details on this matter:

Source: Prospectus

Investors should appreciate that the proceeds will not serve to pay previous shareholders or any other purposes. Most investors look for IPOs like that of Moderna, in which the proceeds are used for R&D or business development.

Shareholders

The assessment of shareholders reveals that there is no director with more than a 50% stake. As a result, the Board of Directors is expected to be independent, which minority shareholders should appreciate.

It is also beneficial that Astrazeneca is among the shareholders with 7.9% stake. Directors own 33.3% stake, so in the future, revising their trades will be relevant. If they sell shares, the market should not appreciate it and the share price could go down. The image below provides further details on this matter:

Source: Prospectus

Capitalization, Competitors And Valuation

Moderna expects to have $1.704 billion in cash and cash equivalents after the IPO. Investors will appreciate that all convertible preferred stock will be converted after the IPO. It means that shareholders should not fear the stock dilution risk derived from these convertible securities. The expected capitalization is shown in the image below:

Source: Prospectus

With 324.411 million shares outstanding at $23.00 per share, the expected market capitalization should be equal to $7.461 billion. Deducting cash of $1.704 billion, the enterprise value is expected to be equal to $5.75 billion.

The following image provide information about the competitors of Moderna:

Source: Owler

Arrowhead Pharmaceuticals (ARWR) has 93 employees and trades with a market capitalization of $1.28 billion and an enterprise value of $1.13 billion. Moderna seems to have many more candidates and has more than seven times the amount of employees of ARWR. The image below was taken from the website of Arrowhead. Note that the product candidates of ARWR are at phase 1 and 2 of development, like that of Moderna.

Source: ArrowHeadPharma’s Website

Regulus Therapeutics (RGLS) is very small and most of its candidates are at preclinical development. With this in mind, it does not make sense to compare Moderna with this competitor.

Sarepta Therapeutics, Inc. (SRPT), with 255 employees, has an enterprise value of $10 billion and has a pipeline that seems a bit more advanced than that of Moderna. As shown below, the company has several candidates at Phase 3 of development.

Source: SRPT’s Website

Alnylam Pharmaceuticals, Inc. (ALNY), with 749 employees, has an enterprise value of $7.61 billion. Like SRPT, ALNY has several candidates at Phase 2 and Phase 3 of development.

With these figures in mind, Moderna seems very expensive with an enterprise value of $7.461 billion. ALNY, with a similar amount of employees and a pipeline that seems more advanced than that of Moderna, has an enterprise value of $7.61 billion. Additionally, SRPT has an enterprise value of $10 billion with several candidates at Phase 3 of development. Monderna’s enterprise value should be larger than that of ARWR, $1.28 billion, given that the company has larger amount of product candidates. However, $7.461 billion seems too much as the company’s stage of development is not advanced.

Conclusion

With a massive amount of cash and many product candidates, Moderna seems a promising name to follow closely. With that, the company seems very expensive with an enterprise value of $7.461 billion. Other competitors report enterprise value of $7.61-$10 billion with a more advanced stage of development. ARWR at an early stage of development, like Moderna, has an enterprise value of $1.28 billion. Moderna’s enterprise value should not go that low as the company reports a large amount of product candidates. However, $7.461 billion is too elevated.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.