The biotech industry is a favorite among investors looking for companies with strong growth potential. It's a risky environment, with dozens of tiny biotech hopefuls flaming out every year as their prospects fail to keep up with their cash-burn rates. For the winners, though, the rewards can be truly astonishing.
Moderna (MRNA 3.27%) is one of the most obvious examples of what can happen when biotechs find themselves with cutting-edge treatments at the ideal time. It might be hard for some growth investors to stomach, but by this time next year -- or even sooner -- Moderna will have a lot of attributes usually associated with value stocks. As a result, investors might find themselves having to shift paradigms in order to assess the vaccine-maker's prospects beyond the immediate future.
Where Moderna's been
It's easy to forget just how far Moderna has come so quickly. When it filed its S-1 registration in late 2018 prior to coming public, the transformative mRNA-based medicine specialist had only a single clinical program in phase 2 trials. Yet even then, some investors saw just how broad-based the applications of Moderna's technology could be, given the flexibility in designing treatments using mRNA coding.
Yet there wasn't unanimous acclaim for Moderna's business model. Some believed that mRNA would simply be the latest disappointment in a long series of promising treatment options that never met their full potential. Others pointed to rising competition both from fellow upstarts, as well as massive biopharmaceutical companies.
When Moderna went public at $23 per share in December 2018, the $7.5 billion valuation was about 37 times its total revenue from collaborations and grants the previous year. Operating expenses were double to triple its revenue rate, creating a cash burn that's quite familiar to biotech investors.
How COVID-19 changed everything
Based on Moderna's pipeline, investors couldn't have anticipated substantial revenue growth quickly. That all changed with COVID-19, as the global pandemic accelerated typical regulatory review and made it possible for vaccines to gain emergency use authorization at a breakneck pace. Starting with a clinical trial in April 2020, Moderna's mRNA-1273 vaccine presented promising data that led to huge orders from the U.S. and other governments around the world.
The impact on Moderna's finances was staggering. Sales went from $8 million in the first quarter of 2020 to $571 million in the fourth quarter. 2021 has been even more important for Moderna, with quarterly sales more than tripling to $1.94 billion in the first quarter. Moderna not only turned profitable but became hugely profitable, posting net income of $1.22 billion for the quarter.
Investors have even higher hopes for the coming quarters. Those following the stock anticipate revenue of $4.4 billion in the second quarter and $5.6 billion in the third quarter, setting the stage for full-year sales of around $18.5 billion. Net income could also double sequentially in the second quarter, with projections of anywhere from $17 to $32 per share in earnings for the year.
When hyper-growth turns into value
The bull argument for Moderna encapsulates that favorable future. Using backward-looking numbers, Moderna's market capitalization of around $75 billion is still 25 to 30 times trailing sales over the past 12 months. But looking ahead, if the biotech is successful in sustaining its present trajectory, net income would equate to an earnings multiple of between six and 12 at current prices.
The bear argument is that even such an attractive valuation wouldn't necessarily mean guaranteed success for Moderna shareholders. Companies in the biopharma space routinely sport ridiculously low earnings multiples when key treatments are about to lose patent protection. The situation with a disease that health experts hope will fade away is somewhat similar, and if Moderna isn't able to replace vaccine sales with other products, the stock could turn into a value trap.
Look ahead to 2022
Moderna's near-term success is nearly assured. What's interesting, though, is what will happen to Moderna in 2022.
To be a long-term winner, the biotech specialist has to take what it's gained from its mRNA COVID-19 vaccine and parlay it into greater success with long-term potential. If it can do that, then Moderna could truly be a value stock in waiting.