The U.S. Food and Drug Administration granted Emergency Use Authorization (EUA) to Pfizer's and BioNTech's coronavirus vaccine BNT162b2 a little over a week ago. Moderna won EUA for its COVID-19 vaccine mRNA-1273 this past week after a positive recommendation from an FDA advisory panel. All three drugmakers stand to make a lot of money from supply agreements that they've already signed.
Bernstein analyst Ronny Gal predicts that the market for COVID-19 vaccines will approach $40 billion in 2021. But will companies continue to split a market that big in subsequent years? It all hinges on one unanswered question.
The duration determinant
The enormously important unanswered question about COVID-19 vaccines is: How long will they provide protection against infection by the novel coronavirus. Why doesn't anyone know the answer to this question yet? There hasn't been enough time to study the various vaccines in development.
The briefing documents provided to the FDA advisory committee for both BNT162b2 and mRNA-1273 stated: "As the interim and final analyses have a limited length of follow-up, it is not possible to assess sustained efficacy over a period longer than two months." All we know for sure at this point is that the vaccines provide protection for at least two months.
Pfizer/BioNTech and Moderna will continue monitoring participants in their phase 3 studies to get a better feel for the duration of immunity their vaccines provide. Even the experts can only speculate what the actual period of protection might be. Dr. Anthony Fauci, director of the National Institute of Allergy and Infectious Diseases and a familiar face to most Americans, recently stated in an interview with CNBC that immunity might last for "a year or two, or three, or maybe even less than a year."
Research indicates that individuals who become infected with SARS-CoV-2 can be immune for five months or even longer afterward. Infections with the common cold caused by other coronaviruses don't provide long immunity. But it's quite possible that vaccines could give a longer duration of immunity from SARS-CoV-2 than natural infection.
Valuations up in the air
Ronny Gal assumed a duration of three years in his forecasts about the COVID-19 vaccine market size over the next five years. After the big boom in 2021, his model projects an annual coronavirus market of around $6 billion after next year.
This raises concerns in particular about Moderna's valuation. The biotech stock has skyrocketed in recent months and now has a market cap close to $60 billion. Even if mRNA-1273 manages to capture 50% of the overall market, it would mean only $3 billion per year for the vaccine if Gal's assumption is correct. That's not nearly enough to justify Moderna's lofty share price on its own.
BioNTech is pretty much in the same boat as Moderna. Although its market cap of around $25 billion is much lower than Moderna's, the German biotech must split the revenue from BNT162b2 with Pfizer.
Pfizer is the only member of the group for which valuation isn't a concern at all. Its shares currently trade at only 13 times expected earnings.
Dealing with uncertainty
Investors always have to deal with uncertainty. Perhaps the best approach is to err on the cautious side. I think that's what Ronny Gal is doing with his projections about the coronavirus vaccine market.
Taking a cautious approach doesn't mean that stocks like Moderna and BioNTech are completely off the table. Remember that both companies have other pipeline candidates that are promising. Moderna has even said that it plans to invest money it makes from mRNA-1273 into dramatically expanding its pipeline.
My view is that there is a pretty good case to be made that Pfizer, BioNTech, and Moderna could deliver solid gains in 2021 and beyond even if the duration of immunity is around three years. However, I also suspect that it could be much shorter than that. If that's what further testing ultimately shows, the money is really going to roll in for all three companies.