December 7, 2022

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Biden’s Comments Don’t Darken Outlook For Moderna & BioNTech

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Investment Thesis

“The Pandemic Is Over” US President Joe Biden told the broadcaster on CBS’s 60 Minutes program which aired on Sunday, the 18th of September, and come market open on Monday September 19th, the share prices of the two most important COVID vaccine developers, Moderna (NASDAQ:MRNA) and BioNTech (NASDAQ:BNTX), declined by respectively, 10% and 14%.

Not that stock price volatility is uncommon to these 2 companies, which IPO’d within 1 year of one another in December 2018 (Moderna) and October 2019 (BioNTech), raising respectively $604m and $150m, whose messenger-RNA vaccines were approved in the same month – December 2020 – with similar levels of efficacy – >95% – and who earned, respectively, $18.5bn and $21.6bn of revenues in 2021.

As I stated in my last note for Seeking Alpha comparing the 2 companies in late July, both of these 2 companies have rewarded early investors beyond their wildest dreams – both companies share prices are up by >800% since IPO – whilst at their peak trading prices – around August to October 2021 – both stock prices were up >2,500% since IPO.

Moderna and BioNTech’s share prices move pretty much in lockstep, rising and falling based on likely demand for COVID vaccines. Neither company perhaps expected to find a use case for their messenger-RNA approach so quickly after listing – both were committed to years of R&D as they tried to discover where there breakthrough technology would have the greatest effect – but both responded to the COVID crisis by rapidly developing the vaccines we know today as SpikeVax (Moderna) and Comirnaty – developed by BioNTech in partnership with Pfizer (PFE), with the 2 companies sharing revenues and development costs equally.

Investors currently holding Moderna or BioNTech stock – either at prices <$20 in late 2019 / early 2020, or at peak prices of >$380, or in a range between $120 and $150 where both stocks have traded since early 2022 – are probably wondering what happens next, and whether their best option is to hold stock, sell stock, or buy more stock.

As I concluded in my last note, Moderna, whose market cap currently stands at $51bn – down from its all-time high of nearly $200bn – compared to BioNTech’s $32bn – has further to fall, but also has the more advanced pipeline, with 3 non-COVID vaccines in Phase 3, pivotal clinical trials. BioNTech has not advanced any pipeline products beyond the Phase 2 clinical trial stage.

It is not just about non-COVID assets, however, but also the dynamics of a private COVID vaccination market, the potential of MRNA technology in fields such as oncology and autoimmune, and how each company plans to deploy their vast cash resources. In this note I will provide a brief overview as to what I perceive as each company’s strengths, weaknesses, opportunities and threats, beginning with Q2’22 performance and FY22 Guidance.

Moderna & BioNTech – 2022 Performance to Date and Guidance

Moderna reported revenues of $4.7bn in Q2’22, and net income of $2.2bn. In 1H22, the company earned revenues of $10.82bn, and net income of $5.85bn.

In BioNTech’s case, the company reported Q2’22 revenues of $3.2bn, and net income of $1.67bn, and across 1H22, revenues of $9.53bn, and net income of $5.37bn.

To summarize, Moderna beat BioNTech on revenues generated in Q2’22, whilst BioNTech generated the better margin, and across the year to date, there is little to choose between the 2 companies. Both are phenomenally profitable and their full-year guidance indicates they will continue to be so.

BioNTech says it will earn $13 – $17bn in FY22, whilst Moderna says it will earn $21bn. Neither company has provided EPS guidance, but if we take the net margin achieved in H1’22 as our guide – 54% in Moderna’s case, and 56% in BioNTech’s, and take each company’s guidance, using the midpoint $15bn in BioNTech’s case, we get a FY22 EPS figure of $29 for Moderna, and $35 for BioNTech, which translates as a price to earnings (“PE”) ratio of 4.5x for Moderna, and 3.8x for BioNTech.

Based on this analysis BioNTech is marginally the better buy, thanks to its lower PE, although both companies look like screaming buys at these ratios – none of the top 250 largest companies on the stock market has a lower PE ratio. The issue is that neither Moderna nor BioNTech will be able to generate the same volume of revenues next year. The US government, and governments around the world, have indicated that they will cease buying COVID shots from vaccine developers after 2022.

COVID Vaccination – The Public Market Becomes A Private Market

The White House COVID response coordinator Ashish Jha has indicated that the US government will stop buying COVID vaccines from this fall, which likely means the deal struck with Moderna in Q2’22 for 70m doses, with an option to buy 230m more doses, will be the last deal struck between the US government and Moderna. Likewise the deal struck between the US government and Pfizer /BioNTech for 105m doses, with the option to buy 195m more.

The EU agreed a deal to buy up to 1.8bn doses of Comirnaty in May 2021, delivery of which will stretch into 2023, so it seems unlikely that Europe will negotiate any further contracts for doses of either SpikeVax or Comirnaty.

Both Moderna and BioNTech have been able to develop new vaccines targeting the Omicron strain of COVID-19 – in fact, Moderna now has 9 different COVID-19 vaccines in various stages of development – and both have successfully won approvals to treat children and adolescents, but it has long been understood that the Omicron strain is less deadly than earlier strains, World Health Organization (“WHO”) data suggests that cases and deaths are falling to their lowest levels since mid-2020, and government funds are not inexhaustible.

It is therefore time to consider the private market for COVID vaccinations, which both Moderna and BioNtech have been reluctant to do – it is telling that neither company is willing to discuss 2023 guidance.

In a nutshell, the private market for COVID vaccinations will be nowhere near as large as the public market was in 2021 and 2022. Moderna itself has put together various scenarios, including prices per shot of $64, $82, or $100 in a private market, versus the ~$16 it has been charging in the public market, 50% coverage of US adults achieved by the private flu market, and 82m high risk population in the US.

Charging $100 per dose and supplying half of the US adult population – let’s estimate 150m people – would result in a $15bn market, and we could even double that figure to include Europe and the rest of the world – a $30bn market in total. That may be too optimistic a figure, based on price and volume, and Moderna’s share of that market is likely to be no more than 40%, given the presence of Comirnaty and several other approved vaccines, such as those supplied by Novavax (NVAX), AstraZeneca (AZN), Valneva (VALN) and those still unapproved but making their way to market.

The CDC has estimated that vaccine suppliers provide 180 – 200m flu vaccine doses to the US market per annum, which is an estimated $10bn per annum market. The recency and severity of the pandemic may persuade more people to pay higher prices for a COVID vaccine, although there may equally be a backlash against COVID vaccination.

In summary, it is difficult to establish the size of a private COVID market, but my guess would be that it will be capped at ~$20bn, and Moderna or BioNtech would be extremely fortunate to capture a 30% share of the market. An optimist may feel that both can earn ~$7bn per annum on average between 2023 and 2030.

Intriguingly, the likes of large Pharmaceuticals Vertex (VRTX) – ~$7bn of revenues in FY22, and Regeneron (REGN) – $8.5bn of revenues in 2020 (I exclude 2021 since the Pharma’s earnings were higher due to one-off COVID antibody revenues of nearly $6bn) – maintain market cap valuations respectively of $73.5bn and $77bn, which implies that investors should not write off Moderna or BioNTech stock due to falling sales of their COVID vaccines.

Even forward sales of ~$5bn per annum might support current or even higher valuations for the vaccine developers, and we cannot discount the possibility that a new and more deadly strain of COVID may prompt another round of mass vaccinations.

Pipelines & Product Launches

The right strategy for investors is probably to assume that uncertainty around the dynamics of the private COVID market adds to the risk of holding either Moderna or BioNTech stock, and that therefore the optimal strategy is to look beyond COVID vaccines at the rest of each company’s pipeline.

As I stated earlier, it is Moderna that is more likely to commercialize a new product first. In fact, the company could commercialize an RSV, CMV, and Flu vaccine all within the next couple of years. Moderna has suggested that its CMV vaccine could generate $2 – $5bn of revenues per annum, whilst the RSV vaccine market could be worth as much as $3bn, and flu up to $10bn, but the level of competition in flu especially – where Pharma giants such as Sanofi (SNY) and GSK (GSK) control the markets – will prove tough for Moderna, which does not have a first mover advantage in these markets, or a demonstrably more effective vaccine, and the same may well be true of its CMV vaccine over time, as a host of others companies – including BioNTech – are eyeing this market.

A realistic revenue target for these 3 new vaccines may be ~$5bn per annum, plus a realistic target for a private COVID vaccine market of $5bn per annum equals double digit billion revenue. That’s enough to suggest Moderna’s stock price is not in terminal decline, and could even have 50% upside potential, although once we account for risk of study failures and competition, we ought to discount that upside by 50% itself.

BioNTech is a more challenging sell in the near term. The company wants to initiate in-human trials of a shingles, HSV2, tuberculosis and malaria vaccine before the end of 2022 or in early 2023, but there is no guarantee they will succeed, and there are 3 phases of these clinical trials to be negotiated before commercialization even becomes a possibility.

BioNTech wants to become an oncology giant, and there is no question that the company has an interesting and diverse portfolio, with several assets already advanced into Phase 2 studies. Even the most ardent Fans of MRNA technology however would struggle to point to stand-out successes in the data delivered so far, and once again, oncology markets are controlled by Big Pharma globally, who are in possession of, or capable of acquiring the best and most effective therapies, from immune checkpoint inhibitors, to cell therapies, to small molecules, to precision oncology / CRISPR / RNAi / bispecifics / protein degradation etc. etc.

As such, it would not be a huge surprise if, in 3 years’ time, BioNTech has not yet commercialized a second product. That does not make it a bad company, it merely emphasizes the fact that BioNTech was not designed to be a commercial-facing company in the short to medium term, it just happened to have the right technology and the right partner – Pfizer – to develop a COVID vaccine.

Use of Cash

One thing that differentiates Moderna and BioNTech from most other single product companies is their vast reserves of cash. As of Q222, Moderna has reported a cash position of $19.3bn, and BioNTech of ~$9.3bn.

Both companies could therefore engage in an M&A spree, buying up the most promising biotechs on the market – once again, Moderna would have the edge as it has the greater spending power – but I suspect neither will pursue such a strategy. It is worth emphasizing once again that neither of these companies were set up to be commercially successful in the short term, and that both place great faith in their own technology.

Prioritizing revenue generation over R&D was not originally in either management’s playbook, although arguably, it is more a part of Moderna CEO Stephane Bancel’s make-up than BioNTech co-founders Uğur Şahin and Özlem Türeci. Moderna has prioritised and will commercialise new products across the next 1-3 years, but it is doubtful if BioNTech will. Again, if I were investing in either company with a 3-5 year investment horizon, I would be buying Moderna for that reason. The fact that Moderna is allocating billions of dollars to buying back stock is another factor in favor of the company.

Conclusion – After The Storm, The Calm – Don’t Expect Dramatic Share Price Movement From Either Of These MRNA Giants

Moderna for Show, BioNTech for A Pro? It’s tempting to frame these 2 MRNA giants as such, given that Moderna is the company agitating for several approvals in the short term, whilst BioNTech prioritizes the challenge of developing drugs in oncology over the longer term.

That would be unfair on both companies however. BioNTech is attempting to develop vaccines that can compete in markets such as shingles, malaria, and tuberculosis, and Moderna continues to work on its 7 different “Therapeutic Modalities”, with KRAS targeting cancer vaccines, VEGF targeting cardiovascular therapies, cystic fibrosis and even NASH candidates, playing the long game.

Neither of these 2 companies could ever have expected to have played such a prominent role in the fight against a deadly pandemic so soon after listing as public companies, but they did so successfully, which explains the incredible gains made by their stock.

Both will benefit from their astonishing revenue generation and profitability in 2021 and 2022, but both will also struggle to earn even 50% of what they generated revenues-wise in 2021 and 2022, in 2023. Both have substantial cash reserves, but only Moderna has near-term approval shots in new, albeit tougher vaccine markets.

I therefore make Moderna the better buy at the present time, but what is the upside opportunity? Frankly, I expect Moderna stock to perform over the next 6-9 months as it has done over the previous 6-9 months, and that is, trade in a range between $120 – $180. As I have stated in prior posts, the days of extreme volatility are most likely over for Moderna, just as the pandemic is “over”, barring an entirely unexpected, and unwanted series of negative developments.

I would expect BioNTech, given its lower market cap valuation, to more or less remain where it is currently valuation-wise, also, as the company has a substantial R&D budget, and will continue to benefit from sales of Comirnaty for several years yet, but lacks near-term revenue generating opportunities.

To summarize, I don’t think either Moderna or BioNTech is a bad buy at current price, provided you are not planning to trade extreme volatility. Each company’s valuation will be defined – or refined – by how the private market for COVID vaccination plays out, and in Moderna’s case, by its 3 late stage vaccine opportunities in RSV, Flu, and CMV.

3 approvals and a solid outlook for SpikeVax in 2023 could push the share price beyond $180 and towards $200, but it may not last, and that would be an optimal exit point for investors unwilling to wait 3-5 years for the rest of the pipeline to mature in my opinion.