Though it's rarely a relevant factor for healthcare investors, it's a no-brainer that certain raw materials are necessary to manufacture medicines, just as they are with nearly everything else. And for something like a coronavirus vaccine intended for worldwide distribution, bottlenecks in the capacity to produce raw materials like lipids can be a massive problem. So, a company that solves the bottleneck has the potential to make a tidy pile of cash.
And that's exactly why, in late May, the German pharma giant Merck Kommanditgesellschaft auf Aktien (MRK -1.48%) -- not to be confused with the American pharma giant Merck & Co. -- announced that its new synthetic lipid product is ready to sell. These lipids are a core ingredient of the mRNA coronavirus vaccines being made by companies like Pfizer and BioNTech, both of which are already its customers for similar products. Will the timely new product position Merck KGaA as an upstream supplier for the entire mRNA medicine world and allow it to reap the benefits, or is it unlikely to reward shareholders?
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Why lipids matter
To start, let's quickly review the scientific concepts at hand so that it's clear why Merck KGaA's new product is worth knowing about. As you may know, lipid molecules don't dissolve in water. That's a useful property to have, because it means that they don't dissolve in the watery environment of the cells in a human body. So, for medical purposes, other molecules can be enclosed inside a lipid bubble, which protects those molecules from dissolving too. Then, the lipid bubble can fuse with a person's cells, dumping its payload right where it needs to be to have the desired effect.
Drugmakers have spent many years and many millions of dollars to develop complex drug delivery systems based on heavily modified lipids. For an especially fragile payload like mRNA in certain coronavirus vaccines, having a steady, high-quality supply of basic lipids is indispensable. But, before the pandemic, there wasn't such urgent demand for them, and so there wasn't much manufacturing capacity to tap into once mRNA vaccine makers needed it. That's where Merck KGaA comes in.
It isn't the first company to make a synthetic lipid intended for use with medicines, though it might be the only one with the production capacity needed to actually meet the amount of demand from vaccine manufacturers. And, because it prepared the new lipid product a stunning nine months ahead of schedule, it's ready to capitalize on demand right when it's at a peak. Given that mRNA medicines are likely just beginning their time in the global limelight, it's highly probable that Merck KGaA will be making money by selling lipids for years to come.
Don't put in a buy order just yet
Nonetheless, there's one issue that should give investors pause.
Trailing 12-month revenue for this company is $21.74 billion. For the new lipid sales to make a big enough contribution to its revenue to cause the stock to grow immediately, Merck KGaA would need to be making billions of dollars. Even its largest customers don't need that many lipids. In the last 12 months, BioNTech's cost of revenue was $347.93 million, which undoubtedly includes far more than raw-material costs alone. So, the new lipid revenue is far more likely to be an incremental addition to Merck KGaA's income than it is to be a revolutionary addition.
On the other hand, there's still no data about Merck KGaA's new sales volume for lipids, and there hasn't been a quarterly report that accounts for any of the additional revenue. To me, that means it's a bit premature to rush to buy the stock right now.
The next investor update will be on Aug. 5, when the second-quarter earnings report drops. While management might not even mention the exact impact of the lipid products, be sure to keep an eye on the top line. If revenue grows faster than the plodding pace that's the company's norm, there's a good chance that the new inflows will become a lasting feature, and that might make it worth a purchase.