2023-10-27 09:11:19 ET
Summary
- Moderna, the world leader in mRNA vaccines, has seen its revenues collapse due to waning Covid severity and global immunity. Its stock price is close to a three-year low.
- However, the company pipeline is rich and has new treatments (Merck-Moderna Keytruda combination, CMV, RVS, and Flu) in phase 3 with significant revenue expectations within four years.
- High expenses will be required to fund this future growth but the large cash and equivalent position seems sufficient to cope with the situation.
- My DCF model takes into account low-end projections (relative to the management expectations), but I still see significant upside potential.
- I do believe patient investors should start to accumulate, from a medium-term perspective. To me, it’s a BUY.
My thesis
Moderna (MRNA) stock price has been on a downward trend since the end of 2021 when the Omicron variant appeared, limiting the need for vaccination due to lower severity and greater ability to spread which generated a broader immunity. However, the mRNA purpose should not end with applications restrained to the respiratory disease field: Moderna is working on several new vaccines. The purpose of this article is to discuss Moderna's pipeline potential, and its cost structure, implement a balance sheet analysis (as the cash burn will be elevated in the near term), and try to assess a company valuation. I do believe investors should project themselves beyond Covid and start a position in the stock.
Investment Overview
The company is engaged in several programs within respiratory disease therapies, a total market it estimates to reach $30bn by the end of the decade. Covid treatment is expected to be the larger part associated with a $15bn TAM shared between Moderna, BioNtech (BNTX), and Novavax (NVAX). It seems to me a bit optimistic, as if we add up the market leader's 2023 guidances (before probable cuts), we arrive at a current market size of $13bn. As of today, Moderna still keeps its 2023 revenues (nearly entirely Covid-related sales) in a range between $6bn to $8bn. Even if I do believe it is likely the firm will hit the bottom of this range, it would be excessive to assume for coming years that Covid-related revenues will continue to collapse from this level. Indeed, as BioNtech shows in its recent investment presentation: Covid remains more dangerous than Flu while the number of doses administered in the US is currently lower than what we witness for the Flu.
Moderna is engaged in two other respiratory treatments: the Flu and the RSV both currently tested in phase 3. Other developments combining Covid, Flu and RSV are planned and would have great value (all treatments in one shot) but are however only progressing in phase 2. Moderna estimates the current Flu market to be close to $6bn but notices that greater efficiency should help to grow the addressable market to $9bn by the end of the decade (mRNA and traditional vaccines together). Sanofi (SNY) is the market leader, with close to $3bn of Flu vaccine sales. Concerning the respiratory syncytial virus (RSV), the firm anticipates a commercial launch of the RSV in 2024 in major developed economies. Moderna is not alone in that field and will be competing with GSK (GSK) and Pfizer (PFE). RSV vaccine efficiency was 82% effective which lies just between its two competitors.
Then, the CMV is a latent virus (dormant within a cell) and can have adverse consequences for women when giving birth: the infection can be passed to babies and have severe health effects. According to the US CDC , one baby over 200 has been affected by the CMV and one over five of them is expected to suffer severe consequences.
In its September R&D presentation , Moderna said it expects its respiratory business to generate between $8bn and $15bn of revenues by 2027. In addition, the firm sees between $10bn and $15bn from other treatments, 5-year post commercialization: latent (including CMV), oncology (including the mRNA-4157 Keytruda program, described just after), and rare diseases.
Another promising pipeline development is related to the mRNA-4157 program, structured as a joint venture between Merck (MRK) and Moderna (50% / 50%). The mRNA is used in combination with Merck's Keytruda oncology treatment and helps to significantly reduce the risk of death of patients affected by melanoma skin cancers. In such cases, the risk of recurrence or death is reduced by 44%. Based on phase two, the combination therapy was endorsed by a breakthrough designation from the US FDA agency in February 2023. Since then, the program has been engaged in phase 3 in July this year. Both companies have been very positive about the prospect of this medicine and have already started financing CAPEX-related investments. Keytruda drug is a blockbuster for Merck, with sales outpacing $20bn and projected to reach $30bn by 2028 by some analysts . 2028 is also the year Merck is expected to lose its patent which brings a strong incentive to reach results with the Moderna-JV to extend revenue generation on this drug.
Moderna is investing in many other developments that must have some value, but their stages of development (9 in preclinical, 22 programs in phase 1 and seven in phase 2), are still too early to estimate their potential. All current pipeline development can be seen here below.
What valuation can we expect?
Let's start with revenue generation. First, concerning FY2023, I used the bottom of the $6bn-8bn revenue guidance target as the US vaccination campaign seems to miss expectations.
Then, I did model a Covid revenue stream at a constant floor of $4bn per year. MRNA Flu and RSV franchises are modeled to reach $2bn in sales each. In total, all these respiratory disease therapies could generate $8bn by 2028: the minimum of what Moderna expects ($8bn-$15bn, by 2027). Within Latent vaccines, I forecast the CMV to reach $2bn of annual sales, but only by 2028. Concerning the Merck joint-venture, I do expect the Keytruda/mRNA combination to reach 30% of the future $30bn 2028 market (the rest, dominated by future generics, less efficient but cheaper), which, on a pro-rata basis (50%), should translate into $5bn of annual revenues. Note that I set zero value to the rest of the pipeline to stay conservative.
Finally, as the end period (revenue reference to the terminal value), I obtain a $15bn/year revenue stream: which is the low-end of the $15bn-30bn range from Moderna forecast.
Concerning gross margins, OPEX and CAPEX forecasts: I used Moderna estimates expressed during Q2 results . In FY2023: $3.5bn to $4bn cost of sales, $4.5bn as R&D, $1.5bn as SG&A and finally $1bn as CAPEX. Going forward, it made gross margin converging toward 85% (as indicated by the management: thanks to process internalization and optimization).
Then, after 2024, I modeled an increase of R&D and SG&A expenses at $7bn/year to support the pipeline development and a growing commercial force. Important investments have already been incurred to build new vaccine factories so I expect CAPEX to be lower in coming years. Given all these inputs, the cash-flow generation is expected to be negative until 2027 and then to increase significantly.
Given this model, a terminal growth rate of +2%, and a WACC of 11% (to take into account pipeline predictability risks), I obtain a share price of $138/share implying a 70% upside potential given the market price of $80/share.
To give more perspective, I implemented a sensitivity analysis, varying terminal revenue and gross margins:
own estimates
I do believe a $15bn target revenue is credible and could be conservative as it doesn't take into account any other revenues from the rest of the pipeline, only current phase 3 developments.
Balance sheet analysis
I expect the firm to consume a cumulative of $14bn of cash (from December 2022 to December 2026, fiscal years), as during this period, revenue generation will not have ramped up enough while R&D expenses are expected to remain intense. However, the elevated cash and equivalent level should be sufficient to cope with such liquidity needs.
Technical analysis
The stock broke recently new low levels as a consequence of Pfizer (partner of BioNtech) and then Lonza (Moderna supplier) warnings on Covid-related activities. Of course, a downward revision of Moderna guidance seems likely, and the large technical gap ($100-$65/share) looks scary. However, at $80/share, a large part of the drop seems to be already behind and the next technical support seems to be nearby. Still, to rebound, the stock will need catalysts, which could come from some milestone advancements during next year: for instance, the RVS commercialization, other phase1/2->phase3 advancements, or even some positive updates about the Merck-JV developments. At such a level, the EV/sales is close to 3X (using my estimates for FY2024 sales, at bottom levels).
Seeking Alpha, own modifications
Risks
The elevated risk level comes from the fundamental assumption that the effectiveness of mRNA technology and success with Covid will ultimately translate into the Moderna pipeline of other treatments. Fortunately, phase 2 results on several treatments have been promising enabling four of them (Flu, RSV, CMV and the Merck-JV) to migrate toward phase 3, lowering the probability of failures. Another important risk could come from the competition. For instance, BioNtech is also active in attempting to sell mRNA flu shots, in direct competition with Moderna. Also, other big pharma companies are investing in the DNA field.
Conclusion
Moderna has already managed to innovate in a big way in an emerging field of sciences: mRNA therapeutics, and execute well in a challenging environment without the assistance of a large partner (in comparison: BioNtech was helped by Pfizer), thanks to its impressive CEO Stéphane Bancel. Today, however, the firm is facing challenges, as Covid-related treatments normalize downward, while in the meantime, R&D expenses are elevated to fund an ambitious pipeline. Fortunately, Moderna managed to generate an important level of cash which will act as a sufficient buffer to fill the gap. My DCF model only takes into account phase 3 programs and already indicates significant upside potential.
While I acknowledge the long-term horizon (three years to see a large revenue pickup) and ongoing cash burn can put some investors on the sideline, I believe the current stock price is attractive for those who can afford to wait. Catalysts will be in part related to the commercialization of the phase 3 treatments (RSV expected in 2024), while other news flow such as new partnerships with big pharmaceutical companies (inspired by the promising development of the Merck-JV) could also affect positively the stock. I do believe patient investors should consider investing, from a medium-term perspective. To me, it's a BUY.
For further details see:
Moderna: Looking Beyond Covid, The Pipeline Is Promising