- With the big pharma setting ambitious goals, COVID-19 vaccine development is getting more competitive.
- Despite modest returns and low probability of success, Moderna has joined the fray with a relatively unproven technology.
- Following a record-breaking stage of initial testing, riskier late-stage trials await the company, threatening its peak valuation.
- With our relative valuation based on a modest NTM EV/Sales multiple suggesting a significant overvaluation, we are looking forward to a better entry point in Moderna.
The stakes have never been higher for Moderna, Inc. (NASDAQ:MRNA) as it battles a myriad of competitors in the race for a successful COVID-19 vaccine. The long and arduous process of vaccine development and testing has slim monetary gains and a low chance of success. Despite a record-breaking phase in initial testing, the company’s novel and largely unproven technology has already been trumped by the competition in late-stage trials and the financially powerful biopharma companies have announced far more ambitious timelines for their vaccine launch.
As competitors advance proven technologies in their trials, Moderna’s attempt at COVID-19 could risk the validity of its entire vaccine platform. However, thanks to a chain of catalysts throughout the year, its valuation has reached a peak leaving no room for error. With a modest NTM EV/Sales multiple to reflect the heightened risk, our relative valuation with the consensus revenue forecast for 2020 reveals a sizable overvaluation in Moderna, justifying a pause in further accumulation of the stock.
Source: Moderna - Vaccines Day Presentation
The Rapid Development
While the wider stock market crumbled in the pandemic-driven downturn, the vaccine developers posted robust gains as the investors scrambled to pick the most potent winners in the coronavirus vaccine battle. Funded by CEPI (the Coalition for Epidemic Preparedness Innovations), and leveraging its expertise in MERS vaccine (Middle East Respiratory Syndrome) development, Moderna in February kicked off the development of mRNA-1273, its candidate against COVID-19. The virus causing MERS belongs to the same family of coronaviruses that lead to SARS (Severe Acute Respiratory Syndrome) and SARS-CoV-2 (the novel coronavirus).
Source: Moderna - Vaccines Day Presentation
Becoming the first to start the human trials against COVID-19, Moderna initiated Phase I dosing in March, only two months after the initial design of the vaccine. Driven by a chain of catalysts in its development, the stock rallied ~145.0% YTD (year-to-date) when the NASDAQ Biotechnology Index only eked out ~1.0% of gain. For a clinical stage biotech that managed only ~5.2% of gain since its IPO in late 2018, it is a remarkable turnaround as the regulators and government agencies attempt to figure out the promising therapeutic interventions.
Though Remdesivir, the antiviral treatment from Gilead Sciences, Inc. (GILD), has already been approved by the FDA on an emergency basis, only a safe and effective vaccine will be capable of disease prevention. The vaccine development, subsequent testing and commercialization, however, is an arduous and lengthy process taking more than ten years on average with only a 6% chance of market entry, according a 2013 study published by PLOS ONE. Even after extensive research for nearly four decades, science is yet to discover vaccines for life-threatening disease such as AIDS. As the pandemic sweeps across the globe leaving a trail of devastating impact on human lives and the economies, the returns of finding a permanent cure has far outweighed the risks of failure. Per the latest data from the World Health Organization, eight vaccine candidates are undergoing clinical trials currently with ninety-four in the pre-clinical phase. Given their multiple approaches, a deeper dive into their pros and cons could reveal the potential winners.
Picking the Winners
The majority of candidates are protein-based even though none is yet to reach the clinical stage. According to Nature, these vaccines might need multiple doses and adjuvants to elicit an adequate immune response. Historically, the animal trials for protein-based vaccines such as the one for SARS have shown favorable results. Meanwhile, the vector-based vaccines, the second most popular approach, have made significant progress with CanSino Biologics Inc. (OTCPK:CASBF) becoming the first to advance a COVID-19 vaccine to the Phase II trials. Another candidate, ChAdOx1 nCoV-19, developed by the University of Oxford became the first European contender for human trials, and AstraZeneca PLC (AZN), its partner for global development and distribution, expects the vaccine could be available for limited use as early as the end of this year. The global pharmaceutical giant Johnson & Johnson (JNJ), building upon its expertise in Ebola vaccine development, follows a similar approach for its candidate targeting early next year for its emergency use.
Unproven Technology Battles Big Pharma
Meanwhile, Moderna, Inovio Pharmaceuticals, Inc. (INV), and BioNTech SE (BNTX)/Pfizer Inc. (PFE) are advancing nucleic acid vaccines. Safe and easy to develop, this vaccine type can be speedily scaled up for production, but yet to be proven clinically. Despite slow human applications owing to difficulty in moving the DNA molecule into the cellular interior, Inovio’s technology based on DNA plasmids has been used in veterinary care and a Phase I trial is currently underway for its candidate. Meanwhile, Pfizer working with BioNTech has already initiated a Phase I trial for its mRNA vaccine in Europe expecting the emergency use later this year.
Moderna’s candidate contains the mRNA that codes for the Spike protein expressed on the coronavirus particle helping it cause the host cell infection. The company has already filed an IND (Investigational New Drug) application for the Phase II trial, planning its initiation in the second quarter of 2020 (Q2 2020) leading to a possible Phase III trial in the fall of 2020 subject to regulatory approval. Having passed the development stage fairly easily, Moderna now has entered the riskier testing phase where its unproven technology will be up against the already-proven mechanisms of vector-based and DNA vaccines backed by the deep-pocketed big pharma.
Gearing up for large scale late stage trials, the leading contenders are concurrently expanding their vaccine manufacturing capacity, prompting Moderna to secure the supplies. Recently, BARDA (Biomedical Advanced Research and Development Authority), its largest grant provider over the past three years, awarded ~$483M for the advanced development and large-scale manufacturing of mRNA-1273. A few weeks later, an agreement was signed with Lonza Group Ltd. (OTCPK:LZAGY) to source up to 1B of vaccine doses per year. Even though the production could reach a hundred million per month with the support of its own manufacturing facility in Norwood, MA, the capacity increase has already been matched by Pfizer and JNJ which plan to ramp up the production up to hundreds of millions and ~1B of vaccines, respectively.
Revenue Slide to Reverse
Despite the risks taken, Moderna is only a clinical-stage biopharmaceutical company with none of its candidates having reached the Phase III clinical trials yet. Generating revenue through strategic alliances with government and private collaborators, the company has witnessed two years of back-to-back revenue contractions. With BARDA agreement committing more than eight times of its 2019 revenue, the trend could reverse this year. Therefore, the consensus revenue estimate of $85.8M with ~42.5% of YoY (year-over-year) growth is justifiable for 2020, in our view.
However, the vaccines, despite their low probability of success, are hardly money-makers. The chief scientific officer of J&J has already estimated that its COVID-19 vaccine could cost as little as “ten dollars or ten euros a dose” depending on the production output. Even if mRNA-1273 makes market entry, the tight competition and government pressure could, therefore, weaken Moderna’s pricing power, eroding its profitability.
Risks don’t justify the Peak Valuation
As I pointed out in my previous article on Moderna, the coronavirus vaccine development can be a double-edged sword for the company. As much as any success could validate its entire mRNA vaccine platform, the pitfalls could jeopardize its technical soundness, risking the company’s peak valuation, which, at ~211.3x of NTM (next twelve months) EV/Sales currently, leaves hardly any room error.
The multiple is more than double its average over the past six months and several times higher than that of peers, BioNTech and Inovio. When compared to CanSino, the company with the leading candidate in the race, Moderna commands a premium of ~53.0%. With a valuation unmatched by the novelty in its vaccine development strategy, we believe Moderna’s soaring multiple needs to be revised down. Assuming an NTM EV/Sales multiple of ~133.0x - ~140.0x, the consensus revenue estimate for 2020 suggests the company is overvalued by ~32.7% - ~29.5%, hardly a compelling ‘Buying’ opportunity despite a few indications to the contrary.
Considering Moderna's insider trades over the last six months, the selling has exceeded the purchasing by ~13.9x. However, for the last three months, it has declined to ~4.5x from ~15.7x in the first-three-month period, suggesting an improving level of confidence by the insiders over the company’s prospects.
Keeping All Eggs in a Single Basket
Meanwhile, Moderna’s broader candidate portfolio diversifies its product risk even though the reliance on a single vaccine platform impacts its future collaborations should any of the programs encounter setbacks. Moderna’s CMV (Cytomegalovirus) vaccine currently undergoing a Phase II trial is a potential blockbuster therapy with a peak sales opportunity of ~$2B - ~$5B. With no approved vaccine, the CMV infection is the commonest cause of birth defect in the U.S. Estimating $200M - $250M for its Phase III trial set for 2021, Moderna, with sole worldwide rights for the vaccine, could seek collaborations to ensure its unhindered clinical development as the COVID-19 vaccine testing strains the cash flows. While positive interim data of the latter could expedite funding for Moderna’s other promising candidates such as the CMV vaccine, any failures could dry up funding from new collaborations, impacting the top-line growth.
The search for a COVID-19 vaccine has become a zero-sum game as the big pharma with their proven technical know-how and financial prowess set ambitious timelines for its market entry. Despite the low monetary gains and uncertainty in success, Moderna has joined the fray with its largely unproven technology. Even though its share price shot up as initial testing progressed at record speed, the risks in late stage trials and intense competition no longer justify the peak valuation. With a modest NTM EV/Sales multiple and 2020 consensus revenue estimate suggesting a sizable overvaluation, Moderna deserves a better entry point in our view.
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