What I Learnt About Moderna's (NASDAQ: MRNA) Business and Its Revolutionary COVID-19 Vaccine
A name that wouldn’t have rung a bell over a year ago.
But by now, everyone in Singapore would have heard about the company and its COVID-19 vaccine.
Recently, I chanced upon a podcast titled “Moderna: The Software of Life”.
The guests on the show — Jason Kelly, chief executive of Gingko Bioworks, and Matthew Harrison, a biotech analyst at Morgan Stanley — discussed Moderna, its ground-breaking vaccine technology, and investing in biotech companies in general.
Here are some of my key takeaways from the podcast.
What Is a Biotech Company?
First, Jesse, the interviewer, asked Jason to give a brief introduction to biotech companies and what they are about.
A biotechnology company basically develops therapeutics by using chemistry to treat diseases.
Jason went on to give a brief historical perspective as well:
“In the late ’80s, there was a new technology that allowed you to basically take a gene from one species and move it into another. This was when Genentech and Biogen, it was like the beginnings of what became the biotech industry. And the first products were really simple. Take the gene for human insulin, which diabetics can’t make, like my dad’s a diabetic, can’t produce it. Take that gene, put it into a bacteria like an E. coli or something, grow it up in a big tank and it makes human insulin. You put it in a syringe, shoot it in your arm, your leg, and you can treat diabetes.”
But since then, the biotech sector has evolved to what we have today, encompassing the revolutionary vaccine we have for COVID-19.
How Does Moderna Fit Into the Biotech Sector?
Jason views Moderna as a category leader in a new area of using DNA (or deoxyribonucleic acid) or RNA (ribonucleic acid) as a drug.
It’s the first therapeutics company to say, “What we’re going to do is program your cells with DNA, or RNA in their case, code, to make them do something new.”
Matthew explained further about Moderna as a company and its technology.
Our body uses many pieces of molecular structure to tell itself what to do, and mRNA (messenger RNA) is one of those pieces. mRNA is like a temporary piece of code.
So Moderna focuses on mRNA, and it tells our cells how to make things like proteins or other substances that we need.
Moderna has tried to capture this mRNA technology and make a company around it.
Other things that the company can do with the technology is to make drugs for proteins that a person’s body lacks and also teach cells to make antibodies (like the example of vaccines to protect us from diseases).
How Does Moderna’s mRNA Vaccine Work?
mRNA vaccines are a new type of vaccine that don’t use a live virus to trigger an immune response.
Instead, they teach our cells how to make a protein to trigger an immune response.
Once triggered, our body makes antibodies, which will help fight infection if the virus enters our body in the future.
How Does Moderna Make Money?
Before the pandemic, Moderna was mainly generating revenue through partnerships with other pharmaceutical companies.
What this means is that the company partnered certain drugs with larger companies through their development process. Revenue was more like a collaboration payment and not revenue in the sense of sales.
However, since the pandemic, more of Moderna’s revenue now comes from its COVID-19 vaccines and those agreements that it has made with global governments.
Moderna has advanced purchase agreements for over 800 million doses of its vaccine in 2021, and the pricing is fixed by contracts with different governments.
The only disclosed pricing level in the US is that the first 100 million doses were sold at US$15.25 each.
Additional doses, which are up to 300 million doses, were sold at US$16.50 apiece to the US government.
Together, it’s a little over US$18 billion that Moderna has announced in terms of advanced purchase agreements with governments around the world. Most of that revenue will come in this year.
Moderna owns 100% rights to the vaccine and thus, gets 100% of the profits related to its vaccine.
This is unlike the other COVID-19 mRNA vaccine co-developed by Pfizer and BioNTech, which has a 50/50 split.
The Different Cost Components for a Pharmaceutical Business
Different pharmaceutical drugs have different cost components. For instance, a chemical pill that comes in a small tablet form tends to have a cost of sales component of between 5% and 10%.
A biologics company (where the drug may be injected into the body) usually has a cost of sales component of somewhere in the high teens to low 20s range. The higher cost is because of the manufacturing process.
For Moderna, the company has provided guidance that its cost of sales is about 20%, and that’s fairly typical with other vaccines.
As for the operating margin of the Moderna COVID-19 vaccine, it is around 50%.
Traditional pharmaceutical companies have an operating margin in the mid to high 30% range. Most biotech companies that sell specialty drugs have higher operating margins between the high 40% and low 50% range.
The biggest cost for a pharmaceutical company is the clinical testing part, where phase three studies can be costly.
For example, if a company is running an extensive outcome study, such as for cardiovascular diseases, where it needs 20,000 patients at US$150,000 a patient, it could be hundreds of millions of dollars in costs to run those studies.
How to Evaluate A Biotech Company
Investors mostly look at the commercial opportunity of the drugs, and they assign their view on the probability of success for that drug. And then they look at today’s cash flows from that drug.
Generally, what defines different investors’ views of different companies is they have a different view of the probability of success of that drug, which is tagged to various factors.
Those factors include the clinical data that exists, preclinical data and management, as well as how other drugs that may have similar or different mechanisms have generated their clinical data.
Matthew added further on valuing the drug companies:
“The other cut that investors typically make is they traditionally don’t include all the programs. There may be a cut of certain investors may want to see, start to value them after they’ve generated some initial clinical data. Some investors may say, I’m only going to look at the most late stage programs because that’s what’s going to be a catalyst for the stock and that’s what’s going to drive the equity. So different people have a different perspective on what to include and what not to include in terms of how to value the company.”
How Is Moderna’s Drug Pipeline Like?
Matthew believes Moderna has around 15 different drugs in its pipeline. That’s a high number.
Compared to a biotech company that has been in business for five or 10 years, it may only have two or three clinical candidates.
So Moderna’s pipeline is a multiple of those companies.
What Lessons Investors Can Learn From Moderna?
Lastly, Jesse asked Matthew what the lessons for investors in the Moderna story would be.
To that, Matthew answered that it’s probably the same lesson for most stocks, which is to do your homework by looking at the data.
Early on, there was a lot of debate around whether Moderna could make a COVID-19 vaccine.
However, the data was out there, and the company already had made three or four early-stage vaccines against certain flu subtypes.
With that data and the company’s confidence that the vaccine could produce an immune response, something was brewing. So he advised investors to go back to the data and see what’s available and focus on that.
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Disclaimer: The information provided by Seedly serves as an educational piece and is not intended to be personalised investment advice. Readers should always do their own due diligence and consider their financial goals before investing in any stock. The writer may have a vested interest in the companies mentioned.