Right now, nearly everyone in the healthcare investment world -- and perhaps in the general investment world -- is talking about Moderna (MRNA -1.39%). The biotech, which is developing a potential COVID-19 vaccine, has returned nearly 380% to investors since October 2019. That gives the company a $27 billion valuation less than two years after its IPO in late 2018.
With Moderna stock as high as it is, current investors are thinking about taking profits, while new investors are contemplating whether or not the stock will soon see a severe correction. As it turns out, plenty of great stocks have a habit of never seeming "cheap" as soon as they get the ball rolling, and enjoy a continued momentum. Today, let's take a look at why Moderna's rally is probably far from over.
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Nearing the end of the coronavirus vaccine race
Moderna has dosed 29,521 out of approximately 30,000 participants in its phase 3 clinical trial evaluating the experimental messenger RNA (mRNA) COVID-19 vaccine, mRNA-1273. The company expects to have top line results by the end of November, and to submit an application for an Emergency Use Authorization (EUA) with the U.S. Food and Drug Administration (FDA) in December. That puts it just one month behind Pfizer's (PFE -0.12%) clinical study schedule for its own vaccine candidate.
Before the new trial data arrives, multiple administrative bodies worldwide are fast-tracking Moderna's candidate. The company is preparing or initiating submissions for approval of mRNA-1273 in Canada and the E.U.
Moderna has already signed deals with the U.S., Canadian, and E.U. governments to supply the countries and supranational entity with up to 716 million doses of its experimental vaccine if approved. At a price of $15 per dose, that gives the company a potential revenue backlog of $10.74 billion. Not bad for a biotech that IPO'd two years ago.
Keep in mind that's only enough vaccines for 358 million people, since mRNA-1273 requires two doses to be effective. Moderna expects that it will have the manufacturing capacity to produce between 500 million to 1 billion doses of its vaccine by next year.
Will you get what you pay for?
Right now, Moderna appears ridiculously expensive at a price-to-sales (P/S) ratio above 250. Like all growth stocks, however, Moderna might actually be undervalued compared to its future potential. Since valuation metrics reflect only past financial results, it is essential to account for a company's business opportunities going forward. Otherwise, it'd be like attempting to drive a car while looking in the rearview mirror.
Once vaccine sales projections are factored in, the company is trading for just 3.7 times its forward sales. That is pretty cheap, considering most companies in the biotech sector trade at 6.9 times sales. Aside from its coronavirus vaccine candidate, Moderna also has four therapeutics in phase 2 clinical trials and 18 therapeutics in early stage or phase 1 clinical testing.
But the company's evaluation looks even cheaper when investors consider Moderna's recent relatively small net loss of $116.7 million in Q2 2020 (compared to $134.9 million in Q1 2020) and a cash balance of $3.1 billion. If we were to take account of the company's enterprise value (EV), then Moderna is only trading at 3.32 times EV/Sales.
Takeaways for investors
Investors are anxious over whether or not mRNA-1273 can succeed in large-scale clinical testing and generate revenue beyond that of a one-time medication. After patients receive coronavirus vaccines, it's likely that they will not require further immunization for an extended period of time -- but questions about how long that immunity will last still abound. On top of that, it's estimated by the World Health Organization (WHO) that about 50% of all vaccines go to waste every year worldwide due to broken logistics or insufficient temperature control. The coronavirus market may be more perilous for Moderna and its competitors than investors first anticipated.
But I still see no reason why Moderna could not generate COVID-19 vaccine revenue for at least a few years after it is approved, and reinvest those earnings into boundary-pushing mRNA clinical programs. For investors with a philosophy of buying high and selling even higher, now is not too late to get into its stock, or to hold onto those profits and wait for shares to fly even higher.
