Moderna: $30 Billion Market Capitalization Is Rich

Jul. 29, 2020 6:01 PM ETModerna, Inc. (MRNA)80 Comments8 Likes
William Meyers profile picture
William Meyers
6.5K Followers

Summary

  • Moderna is the leader in mRNA therapies.
  • Moderna is priced as if it has several major FDA approvals.
  • Moderna has a lot to prove to justify its stock price.

Moderna (NASDAQ:MRNA) in recent months has become one of the best-known biotechnology companies. It is testing a potential vaccine that might bring the coronavirus pandemic to an end. But when I wrote about it in Moderna: mRNA Therapy Potential Worth Accumulating in March 2019, it was obscure except to biotech specialists. Back then it was priced at $19.26 per share. It closed on Tuesday, July 28 at $81.49. It hit a fifty-two week high of $95.21 on July 17. This was not a natural development of the Moderna pipeline of clinical-stage therapies. A Black Swan event for the global economy, the COVID-19 pandemic, has been the opposite for Moderna, as it has for some other vaccine companies. I believe Moderna needs to hit several critical milestones to justify its current stock price. Missing even one might send the stock price plunging. I will begin by looking at some key elements of the pipeline not involving coronavirus vaccine. Then I will give my thoughts on Moderna's coronavirus vaccine and an overall evaluation.

Note that Moderna has scheduled its Q2 2020 results release and conference call for August 5. Since it has no commercial products, I expect no major surprises. I will be watching for updates on the pipeline. Any revenue from the federal government for vaccine development is nice, but it will not necessarily generate revenues in the long run. It is only commercially approved product revenue projections that should influence the long-term valuation for the company.

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Mainly a Phase 2, not Phase 3 Company

Nothing in the Moderna pipeline, except the new COVID-19 vaccine, is in Phase 3 clinical trials. Zero, nada, zip. Let me explain what that means in case any readers are not experienced pharmaceutical investors, but have brokers pushing Moderna at them. New drugs for the U.S. market must be approved by the FDA. Preclinical testing, in vitro and in animals, data must be submitted to the FDA before starting Phase 1 clinical trials in humans. Once a likelihood of safety and possible efficacy is established, the FDA can give permission for a Phase 2 trial, which usually involves more subjects, meaning more ability to see if a drug is really safe and effective. Even then, a successful large-scale Phase 3 trial is almost always needed to get FDA approval. Each of these Phases typically takes 1 to 3 years. Which is why allowing any COVID-19 vaccine, from any company, into Phase 3 trials so quickly is, well, let us call it irregular. So, I would classify Moderna as a clinical-stage company, and the stage is arguable Phase 2, noting that while the coronavirus vaccine has started Phase 3, we have not seen the full Phase 2 results yet.

Investors can assign any value they like to a company with no product sales and a long way to go before permission for product sales is granted. Typically, analysts and investors look at the data to determine the likelihood of success or failure. We are often wrong, though by expressing our outlook as a percentage, we can say things like "it failed, it must be that 5% chance of failure deducible from my saying there was a 95% chance of success."

Moderna has 3 drugs in Phase 2 studies: AZD8601; mRNA-4157; and mRNA-1647. Two are partnered with larger pharmaceutical companies, while one remains wholly owned by Moderna.

AZD8601 for myocardial ischemia

AstraZeneca (AZN) licensed AZD8601 from Moderna. It is being tested in a Phase 2 trial for myocardial ischemia, also called coronary heart disease, in patients having artery bypass surgery. At last report this was a 2a study, being conducted at just one site, and with no timeline reported for data delivery. On the plus side, this is a huge indication, affecting over 100 million people worldwide and resulting in about 9 million deaths per year. AZD8601 is designed to create a local surge of VEGF-A expression, which could lead to more blood vessels and improved blood supply. It could help with regeneration after a heart attack. So, if it is eventually approved, and it competes well in the marketplace, it could become a multi-billion dollar source of annual revenue for AstraZeneca and hundreds of millions of dollars in royalties for Moderna. It should be noted that while AstraZeneca is a partner for AZD8601, it has a rival COVID-19 vaccine under development.

mRNA-4157 for cancer

Merck (MRK) is partnered with Moderna for its mRNA-4157 personalized cancer vaccine. The ongoing Phase 2 study assesses whether post-operative adjuvant therapy with mRNA-4157, in combination with Merck's Keytruda, improves recurrence-free survival in adjuvant cutaneous melanoma compared to Keytruda alone. The process involves sampling a patient's melanoma to determine what mutations produce antigens or epitopes that could be attacked by an activated immune system. Then a vaccine is created that encodes for each of those mutations, loaded into a single mRNA molecule. In the Phase 1 trial 20 epitopes were generated for each patient's vaccine. In the Phase 2 trial 34 epitopes are used. Given that the patients are not getting the exact same medicine, it will be interesting to see how many vaccine variants are necessary to produce results that the FDA might approve. Melanoma is common, so if it works this could be a big money generator. The method might also be extended to other types of cancer. On the other hand, a similar strategy might be pursued by simply injecting the antigens, or by injecting DNA plasmids that code for the antigens. No timeline has been announced for possible Phase 2 results.

mRNA-1647 for CMV

CMV (Cytomegalovirus) can cause serious disease in fetuses and newborn infants, as well as in immune compromised adults. mRNA-1647 is in a Phase 2 trial described as a dose-finding study in healthy adults. But the target population, ultimately, is women expecting pregnancy. Moderna currently retains global rights. The Phase 1 study reported positive interim results in Q3 2019. Phase 2 study enrollment was near completion in May 2020, with interim data expected in Q3 2020, so it could be quite soon. Moderna says 25,000 newborns are infected in U.S. each year, and CMV has proven difficult to vaccinate against. 6 RNA sequences are included in 1647.

Manufacturing and planning are underway for the pivotal Phase 3 study, designed to evaluate the efficacy of mRNA-1647 against primary CMV infection in women of childbearing age. It is expected to start in 2021. Moderna estimates annual peak sales would be $2 to $5 billion if the vaccine is approved and adopted globally.

Valuing the Phase 2 pipeline

Since the Phase 2 and earlier phase pipeline had not advanced significantly since Moderna's stock price got the coronavirus spurt, pragmatically it can be valued at the December 2020 market capitalization or stock price. That would be about $20 per share or $7 billion. If the Phase 2 CMV vaccine data is positive, I would nudge that up, perhaps by a third. I would also increase my estimate of the likelihood of success for the COVID-19 vaccine. But if CMV results were to be negative, I would drop my valuation by about one-third, along with my estimate of success for COVID-19.

Coronavirus Vaccine mRNA-1273

The vaccine for COVID-19, mRNA-1273, recently started a Phase 3 trial after accelerating through earlier trials. On the one hand that is amazing, since the virus was only sequenced in January of this year. On the other hand, it is certainly possible that the usual safeguards to ensure a vaccine is both safe and effective may be lost in the rush to judgement. It is also possible that the Phase 3 trial will fail despite apparently positive pre-clinical and Phase 2 results. While I hope the vaccine works, to value the stock the risks should be laid out clearly. I wish the risks could be quantified, but the lack of trial data and knowledge about COVID-19 make a qualitative judgment more responsible.

The first note to make is that many companies have COVID-19 vaccine candidates in some stage of testing. Though most are preclinical, 5 are in Phase 3, two are in Phase 2, and 18 are in Phase 1. Several are on timelines for potential approval in the same ballpark as mRNA-1273, which is arguably the front-runner. Presumably the bar, at least in the U.S. set by the FDA, will be the same for any vaccine candidate. That means all the early vaccines might be approved, or none. If more than one is approved, while at first the market should be able to absorb all the available supply, later there will be a fight for market share. Keep in mind Moderna has no commercial distribution system at present.

The vaccine success rate in general is not that high. There are viral diseases that have been around for decades for which no good vaccine has been found, notably AIDS/HIV. The immune system is complicated in any individual, it varies across individuals, and viruses would not cause diseases if they did not have some tricks to evade the immune system. It is worth looking at the latest Moderna mRNA-1273 presentation.

Finally, there is pricing. Pfizer (PFE) has said it will price its vaccine at about $40 per course. Moderna is reported to be asking for $50 to $60 per person. And Pfizer took no government money for vaccine development, but Moderna did. It is possible political considerations could cause Moderna to moderate its price, and its profits. After all, Moderna has a long path ahead with mRNA therapies, making enemies at this point is not a wise strategy. But at $50 per person, if 100 million people get the vaccine, that is a cool $5 billion. It is probably non-recurring revenue, but perhaps the virus will become an annual issue, like the flu.

Despite all that, I would like to give Moderna some market capitalization based on some possibility it will get successful Phase 3 results, FDA approval, and some level of sales at some level of profitability. But $10 billion in market capitalization would be generous. GlaxoSmithKline (GSK) has been selling lots of vaccines over many decades, and has a COVID-19 candidate, and its market cap today is just over $100 billion. Look at Hepatitis C cures, which produced a profit bolus a few years back, but have much less sales now. That is what a massive vaccination campaign would look like. The other Moderna therapies could sell well through their entire patent life, so I would give them higher long-term values (they also will be priced much higher, but treat smaller numbers of patients).

Valuing Moderna

Given all that, how should Moderna be valued? You can find all sorts of arguments for a wide range of values among analysts and investors. My simple valuation scheme is the December 2019 market capitalization plus $10 billion for the potential COVID-19 vaccine. Which come to $17 billion, or $46 per share. Keep in mind that the COVID-19 vaccine value will drop to zero in all but the best-case scenario. I would be taking a risk buying Moderna at the calculated share value. Also note a $17 billion market cap is very high for a company without a successful commercial drug or even some good Phase 3 data.

Cash and Burn

A couple more data items are needed to complete the picture. Moderna Q1 2020 results indicated it had a cash balance of $1.72 billion, after a $550 million share offering and $106 million cash used in operations. Moderna has since been granted, or promised, $955 million by the U.S. government to produce its COVID-19 vaccine. Burning cash for research and development is what clinical-stage biotechnology companies do, so that will continue until there is at least one high-revenue therapy on the market.

Conclusion

I valued Moderna at $46 per share, or a market capitalization of $17 billion. Admittedly that is more of a qualitative guess than a quantitative analysis. There are many possible forks in the road ahead, one for each trial outcome. Although no mRNA therapy has ever been approved by the FDA, early clinical results are promising, so I believe mRNA could become a major therapy type in this decade. The main question confronting investors is whether to buy at the present price, essentially betting that most clinical trials will be successful. Or whether to wait and see outcomes, hoping for a dip. If you bought Moderna in 2019 or earlier (especially at the 52-week low of $11.54), congratulations. If you are willing to buy at the current price, you are more of an optimist about this sort of thing than I am. But even at the current price, even if momentum players find a reason to drop the ball, I think Moderna will seem cheap in retrospect to those who can hold for 5 years or more.

This article was written by

William Meyers profile picture
6.5K Followers
I provided stock and bond research and analysis to a small cap specialist investor, Lloyd Miller, from 2002 until his death in January 2018. For my own account I invest mainly in technology and biotechnology stocks. My technology and investment web site is openicon.com, where readers can view the notes I take to make decisions and to write articles for Seeking Alpha.
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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.

Additional disclosure: I own stock in a COVID-19 vaccine rival, Inovio (INO) and companies with therapies, like Gilead (GILD)

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