Some companies grow so fast for so long that it would have been impossible to overpay for shares at any point in their history. Admittedly, they are few and far between. Still, it's worth noting that truly transformational companies can always look overvalued and still be cheap. The hard part is finding them.
That's what many are betting on with shares of Moderna (MRNA -4.43%). The company's stock has risen 1,910% since before the pandemic thanks to one of the first authorized vaccines for COVID-19. It's already pressing forward with new drugs using its messenger RNA (mRNA) platform. Let's dig in to see whether Moderna could be one of those companies that looks perpetually overpriced while delivering life-changing gains for shareholders.
The opportunity for mRNA
At this time last year, no country had ever approved a vaccine using mRNA. We now have two -- one fully approved by the Food and Drug Administration -- developed in less than a year. Moderna raced out of the starting blocks, designing a vaccine only 48 hours after China published the genetic sequence of the SARS-CoV-2 virus on Jan. 11, 2020. That could prove to be the starting gun in a marathon that transforms what we think of as medicine.
Theoretically, anything our bodies use proteins for -- which is just about everything -- could be substituted with mRNA. After all, in the words of Moderna President Stephen Hoge, "mRNA is the software of life." That should make traditional drug companies shudder at the potential.
At the beginning of 2020, yearly global pharmaceutical spend was estimated to be $1.27 trillion. About half of that is in the United States. Cancer drugs make up about $100 billion of that total while vaccines -- before COVID -- were less than $50 billion.
That's a huge opportunity for a technology that uses the human body to essentially manufacture the medicine it needs. For context, the best-selling drug in the world in 2020 was Abbvie's Humira, at nearly $20 billion. Johnson & Johnson is the largest drugmaker in the world, with $45.6 billion in pharmaceutical sales last year. It broke that out into 19 drugs plus unnamed contributors. In comparison, Pfizer sold $41 billion with 27 named drugs. To figure out if it's too late to buy Moderna, those numbers will be a useful comparison.
It has a lot of shots on goal
Before we do any math, it's important to acknowledge Moderna's foresight. The company has taken the approach of pushing many opportunities at once since its early days. In addition to the COVID-19 vaccine, it has 22 different programs listed in its pipeline. That includes some that could have massive payoffs.
For instance, its HIV vaccine may not be out of the lab, but Gilead's HIV drugs accounted for almost $17 billion in revenue last year. Moderna's influenza vaccine is only in phase 1 trials, but Sanofi sold about $2.9 billion worth last year. Competition will persist, but listing some of the multibillion-dollar opportunities helps narrow in on what Moderna's potential could be. Of course, much of that depends on the demand for its COVID vaccine. And no one knows what the demand for that will be beyond the next year or two.
Does it add up
Moderna's market capitalization is $159 billion. That's based on one drug on the market and a lot of potential. The company anticipates $20 billion in sales of the vaccine this year. Management already has agreements and options in place to sell about the same next year and anticipates having two to three times the production capacity. Much of that revenue is flowing into profit. It reported $4.0 billion of net income on $5.9 billion in sales. Even if it sells all of the vaccines it makes, and maintains the existing profitability, the demand is likely to wane beyond next year. Some analysts expect it could continue generating about $2 billion per year from the COVID vaccine.
As an exercise, we can map out the next few years and project some additional success with the other drug programs mentioned above.
|Year||Projected Annual Revenue||Projected Annual Profit|
|2021||$20 billion*||$13 billion|
|2022||$30 billion||$20 billion|
|2023||$2 billion||$1 billion|
|2024||$3 billion||$2 billion|
|2025||$5 billion||$3 billion|
|2026 to 2030||$7 billion||$4.5 billion|
They are back-of-the-envelope estimates, but it helps lay out what a successful decade may look like financially. However, it's really anyone's guess beyond next year. Discounting those profits back to present day at a rather aggressive 8% discount rate -- and carrying forward its astoundingly good profit margins -- puts the fair value of the stock around $300. That's about 25% below where it trades now.
Moderna has achieved a scientific feat once thought impossible. And success in the future feels like a matter of when, not if. But it will have to do significantly better than the projections I've laid out to justify the current stock price. That said, if the company can extend the growth beyond a few drugs and into a second decade it could make this projection look silly. So whether it's too late to buy Moderna stock really comes down to how bright you expect its future to be and how long you plan on holding shares.