It seems as if nearly everyone is talking about Moderna (NASDAQ:MRNA). The biotech's rapid progress in advancing its COVID-19 vaccine into clinical studies has been impressive. So has its stock performance: Moderna's shares have more than tripled in value so far this year.
After such a massive gain, some investors might be leery of scooping up shares of Moderna now. But is it really too late to buy the biotech stock? I don't think so.
Crunching the numbers
Moderna's market cap now stands at around $23 billion, a staggering level for a company with no approved product for sale. You're not going to find a commonly used valuation metric that will tell you the stock is a good pick. However, those valuation metrics should be thrown out the window with a biotech like Moderna anyway.
Instead, we need to evaluate the company's potential. In particular, we should look at the prospects for Moderna's messenger RNA (mRNA) COVID-19 vaccine candidate. Some view Moderna as the leader in the race to develop a COVID-19 vaccine. I wouldn't go that far, but the biotech is indisputably one of the leaders.
Let's assume that Moderna's COVID-19 vaccine proves to be successful and wins regulatory approvals in the U.S. and other major markets. If the company was able to price its coronavirus vaccine similarly to flu vaccines currently on the market, its list price would probably be in the ballpark of at least $40. If we also assume at least 2 billion doses of the vaccine would be given per year, Moderna could be looking at annual revenue of $80 billion.
That kind of revenue projection makes Moderna's current market cap look downright cheap. However, those assumptions are also likely too rosy. Johnson & Johnson has hinted that it could sell its COVID-19 vaccine for $10 per dose if approved. And there's a pretty good chance that multiple vaccines will be successful, fragmenting the market.
It's better to be more conservative in our number crunching. Still, though, if we use J&J's $10 price tag and 1 billion doses per year in our calculations (which seems attainable considering the global population is close to 8 billion), that would still total $10 billion in potential annual revenue for Moderna for its COVID-19 vaccine.
The average price-to-sales ratio for biotech stocks in the first quarter of 2020 was 5.9. If we apply that ratio to Moderna's potential sales of $10 billion, the stock could realistically be worth almost $60 billion -- nearly three times the size of its current market cap.
A huge assumption
Of course, we're making a huge assumption that nothing will go wrong for Moderna's COVID-19 vaccine program. The vaccine is currently in phase 2 testing. Based on historical data compiled by biopharmaceutical industry trade group BIO, the odds that a vaccine in phase 2 clinical studies will eventually be approved by the FDA are less than 1-in-4.
Keep in mind, though, that Moderna has already received clearance from the FDA to begin a phase 3 clinical trial of its COVID-19 vaccine in July. A significant safety issue or disappointingly low efficacy results in the company's phase 2 study could derail its plans to begin late-stage testing next month. But, for now, it's full steam ahead. Advancing to phase 3 is a major step: The chances of winning FDA approval jump to nearly 3-in-4 for vaccines in late-stage clinical studies.
There's also another huge implication of our assumption that Moderna's COVID-19 will be successful. mRNA therapies are unproven right now. If Moderna demonstrates that its mRNA vaccine for immunizing against the novel coronavirus is safe and effective, it's likely that investors' valuation of the biotech's 14 other mRNA candidates in clinical testing will increase significantly.
Better late than never?
Moderna's COVID-19 vaccine candidate could still stumble. But every day that goes by without any serious problems in clinical testing improves the chances that it won't.
Sure, expectations of tremendous sales growth are baked into Moderna's share price. However, I don't think the biotech's current valuation fully reflects the real potential for its COVID-19 vaccine -- even if several other vaccines are successful. As long as there are no showstoppers with its coronavirus vaccine, my take is that it's by no means too late to buy Moderna stock.