The Problem

You are not going to find a standard valuation metric to validate the stock price of any of the leading COVID-19 vaccines that are currently in clinical trials. To the contrary, the measure is market potential if, perchance, one or more of these companies gain regulatory approval. All the leading candidates appear to have sufficient funding from myriad government, private and philanthropic sources. Early-stage clinical trial results are slowly trickling into the public domain, creating outsized market moves to both the upside on trial successes and to the downside on profit-taking.

Historically, the probability of one or several companies successfully completing trials and mustering regulatory approval looms frightfully small, about 9.3%. The slow, painstaking pace of clinical trials curiously juxtaposes against endless fundraising for small biotech companies, the contracting for manufacturing and distributional scale, and the sheer enormity of achieving so-called 70% herd immunity of a given population base deemed essential to halt the further spread of COVID-19 remains just short of daunting. For the US, that figure comes to about 200 million people. Further complicating the equation is the estimate from a Massachusetts Institute of Technology of 84 countries surmising that for every COVID-19 case identified, another 12 go unrecorded. And for every recorded death, about a third are misattributed to other causes. Changing social norms is difficult. The causes of HIV have been known for decades. Still, 770,000 people died from the disease worldwide in 2018.

In an increasingly autarkic global political environment, individual countries are spending billions to secure exclusive purchase rights of COVID-19 vaccines still in varying stages of development as safety and efficacy results slowly seep into the public domain - but long before regulatory status has been determined. Sadly, countries of lesser financial means could suffer unduly as a result. The World Bank binned a bond sale for a second Pandemic Emergence Financing Facility after widespread criticism of its response to the 2014 Ebola outbreak in West Africa for being too deliberate in channeling public money to aid poor nations in that outbreak, while paying double-digit interest rates to donor nations for the use of the funds. Curiously, even London appears to be acknowledging the long-arm advantage of EU buying power with international drug companies, quietly putting aside at least for the moment its political desire to sever ties with Brussels. Demand for a medical solution to COVID-19 remains the ultimate goal of governments and the driving force of markets worldwide. In the US, the communication breakdown and reluctance to acknowledge the seriousness of Aprils pandemic wave is painfully repeating itself, as the new case count exceeds 56,000 in the US and almost 229,000 worldwide.

Given the historically low probability of any particular vaccine coming to market, the projection of any one or combination of technologies crossing the finish line becomes a highly assumptive endeavor. That pent-up investor demand shows up in the ebb and flow of clinical trials, with outsized spikes in share prices falling in both directions of publicly listed biotech companies around the world racing to bring a medical solution to market.

Yet, absent a medical solution to COVID-19, normal commercial activity simply cannot happen. In the meantime, global economic growth continues to contract. Until a medical solution is found, limiting the resulting economic damage remains the most viable policy response. And herein lies the negative feedback loop.

Figure 1: AstraZeneca Price Performance against the S&P 500

AZD1222 is a collaborative venture of AstraZeneca (AZN) (green-red line) and the University of Oxfords Jenner Institute and the Oxford Vaccine Group. AZD1222 uses a spike protein from the SARS-CoV-2 coronavirus combined with genetic material, which, after vaccination, triggers the bodys immune system to attack the virus, thus preventing infection. AZD1222 is now in late-stage Phase 3 clinical trials - the first new vaccine program to reach a late-stage trial. While phase 1 and 2 studies appear to have satisfactorily addressed safety and effectiveness issues, to date, the actual results of these early clinical trials have yet to reach the public domain given the unprecedented government push to bring a medical solution to market. Bringing a vaccine from petri dish to pharmacy shelf usually takes the better part of a decade. The AZD1222 project began in mid-January and is now the first candidate vaccine to reach Phase 3 human trials - all in the space of seven months.

Phase 3 trials involves a sample of 10,000 volunteers across the UK, South Africa and Brazil. AstraZeneca owns the rights to distribute AZD1222 worldwide and is one of four COVID-19 vaccine programs selected to be part of the Trump administrations Operation Warp Speed, funded by a Congressional appropriation of $10 billion. The inclusion in the US program garnered the company $1.2 billion from the US Biomedical Advanced Research and Development Authority (BARDA), part of the US Health and Human Services. Early funding came as grants from the Coalition for Epidemic Preparedness Innovations (CEPI), founded by Bill and Melinda Gates Foundation from a working session at the World Economic Forum in 2017. Another $100 million is coming from the Serum Institute of India, one of the worlds largest vaccine manufacturers.

On the manufacturing end, AstraZeneca has contracted with Emergent BioSolutions (EBS) to produce 300 million doses of AZD1222 in its Baltimore Maryland Bayview facility. (EBS is currently working with grant funding from the Department of Defense to test whether a drug derived from the blood plasma of recovered COVID-19 patients can prevent infections in doctors, nurses, first responders and the military.) The program is being funded by the Department of Defense with a $34.6 million grant. Up to 400 million doses will come with an agreement with Europes Inclusive Vaccines Alliance, a group that includes the governments of Germany, Italy and the Netherlands for up to 400 million doses for potential delivery in late 2020/early 2021. Currently, AZNs manufacturing capacity worldwide stands at 2 billion doses.

Assuming 2 billion doses at a median price of $25/dose (Jefferies assumes $50/dose) for most flu vaccines, the increase in revenue to AstraZeneca could hit $50 billion by the end of FY2021. Total revenue through the end of FY 2019 came to $24.4 billion, essentially doubling the companys total revenue through the end of 2021 if AZD1222 debuts on world markets. AZN is well above its 200-day moving average (blue line), logging gains of 42% since the S&P 500 (black line) hit its low for the year on the 23rd of March. Short activity remains minimal, about 0.05% of the companys public float (see Figure 1, above).

Figure 2: Novavax Price Performance against the S&P 500

Novavax (NVAX) began the year in a sleepy, backwater corner of the market with a valuation multiple of $4.49/share, about $256 million in resulting market cap. The company has largely bounced around that figure for most of its thirty-three years on the Nasdaq. It has never brought a vaccine to market. By todays market close (28 July), the stock (green/red line) traded just short of $150/share, well above its 200-day moving average (blue line), sporting a market cap of $8.09 billion. The S&P 500 (black line line) started the year at 3,257 and finished the period still in negative territory at 3,230 (see Figure 2, above).

Novavaxs technology resembles that of AstraZeneca/University of Oxfords AZD1222 in its use of a SARS-CoV-2 protein spike. The technology goes one step further by using the whole protein spike in the hope that the immune system will trigger more of a robust response from the immune system and, hopefully, building enough neutralizing antibodies, which promotes stronger cell resistance to the COVID-19 strain.

Novavaxs NVX-CoV2373 also attracted initial funding package from CEPI in the beginning stages of Phase 1 trials. By the end of Phase 2 trials, CEPI awarded the platform $388 million for development and manufacturing of the vaccine. The 11th May CEPI announcement, the groups biggest grant disbursement to date, sent the stock soaring 62% by market close on the 12th of May and up another 43% by market close on the 18th of May (see Figure 2, above). The grant and immediate market interest in NVX-CoV2373 turbo-charged the companys development and manufacturing plans. With immunogenicity and safety results now trickling into the public domain and CEPI funding already in hand, the company rushed to announce the purchase of Praha Vaccines of the Cyrus Poonawalla Group, based outside the Czech town of Bohumil on the 27th of May. The purchase gives the company an annual capacity of over 1 billion doses in 2021.

The purchase further complimented the agreement reached in March with Emergent BioSolutions to provide contract development and manufacturing (CDMO) services for the companys recombinant quadrivalent seasonal influenza vaccine, NanoFlu, that has just completed its Phase 3 trials. The agreement was augmented to include NVX-CoV2373 and the manufacturing of 100 million doses by the end of 2020. The company now had demonstrated competence in two critical areas: a potentially viable COVID-19 vaccine and the timely capacity to manufacture and develop the product for markets worldwide. Further funding came in early June from the Department of Defense of up to $60 million for the delivery of 10 million doses in 2020. A private placement with RA Capital Management of 4.4 million convertible preferred shares at the 12th June close of $47.57 would raise another $200 million. Investors could only salivate at the attention and market potential, as the stock price almost tripled through yesterdays close (28th July). Earlier in the month, Novavax was selected for Operation Warp Speed funding, which gave the company a $1.6 billion in additional funding (see Figure 2, above). The funding will add 100 million doses to the US market through 2021. CEPI funding carries an unspecified number of doses for low-income countries.

The market potential for Novavax for 200 million doses at the median price of $25/dose adds about $5 billion to its total revenue picture through the end of 2021. Total revenue came to $18.7 million through the end of 2019. Just over 14% of the companys 57.9 million public float is shorted.

Figure 3: Moderna Price Performance against the S&P 500

Moderna's (MRNA) technology, co-designed with the National Institute of Allergy and Infectious Diseases, uses a genetic sequence from the coronavirus rather than inert COVID-19 proteins. The resulting mRNA code then carries the instructions from a persons own DNA telling cells what to do. The genetic material is encased in tiny particles, called lipid nanoparticles, dissolved in a fatty solution that aids with penetrating the cells that comprise the bodys immune system. The messenger RNA then prompts the cells to churn out a tiny piece of the virus, causing the immune system to produce sufficient antibodies to resist the attack of the coronavirus.

One potential advantage mRNA technology is in the manufacturing process. The vaccine can be produced quickly and does not require growing the virus or proteins over durations of time often measured in weeks or even months. This fits well into the literal crash course vaccine approval process, where ease of manufacturing remains a critical component in delivering a medical solution to COVID-19. Beyond the medical solution, of course, looms the restart of an economy that currently remains operating at about 75-80% of its pre-pandemic capacity and sports an unemployment measure last seen during the Great Depression. For governments worldwide, currently the major source of COVID-19 vaccine funding to date, the political dimension of successfully bringing a vaccine to market is likely unmeasurable.

Modernas market valuation started the year at roughly $7.1 billion and with a share price of about $19.23. The companys uber-growth spurt came within a month of the outbreak of the coronavirus in Wuhan, China, this past January and early February. The companys mRNA technology has long tracked infectious disease outbreaks, and COVID-19 provided a stellar opportunity to use its mRNA technology to target its eradication. While the S&P 500 was scratching out its market floor in the waning days of March, Modernas mRNA1273 was beginning its outsized market surge to the upside by spinning out a possible medical solution to COVID-19 based on its mRNA platform used to find medical solutions on other infectious diseases of the recent past, including the West Nile virus, H1N1 influenza and Ebola, as well as Severe Acute Respiratory Syndrome (SARS) and Middle East Respiratory Syndrome, both of which are also caused by coronaviruses. While mRNA1273 remains a promising technology, the platform has yet to bring an mRNA-based vaccine to market. Investors appear unfazed to date. The share price (green-red line) hit 300% above the S&P 500 on a price performance basis through the latter weeks of May, soaring above its 200-day trading average (blue line). The stock has falling back on profit-taking to about 215% of the benchmark through the market close on 28th July (see Figure 3, above).

Moderna received an additional $472 million from BARDA on Sunday (26th July), bringing the total amount of US governmental funding to $955 million, and has been included in Operation Warp Speed. The funding will go mainly to meet manufacturing and distribution expenses, as well as to pay for late-stage clinical testing. Moderna has contracted with Catalent (CTLT) to produce an initial 100 million doses of mRNA-1273 beginning in the 3rd quarter, with additional millions of doses being negotiated pending the approval of the vaccine by regulatory authorities. Internationally, the company has an agreement with the Swiss manufacturer Lonza (OTCPK:LZAGY), which will produce up to 1 billion doses/year beginning in 2021. The first tranche of 30,000 volunteers were given either MRNA-1273 or a placebo in Savannah, Georgia, the first of one hundred test sites around the US participating in the clinical trials. Half of the volunteers will receive two shots 28 days apart, and the other half will receive a saline solution. Neither the volunteer nor the medical provider will know which volunteer gets the real vaccine booster. Modernas testing will include 13 sites in Texas, a current COVID-19 hot spot. The stock price jumped 5% at the announcement.

The market potential of 1 billion doses through the end of FY 2021 at $25/dose adds $25 billion in revenue to the companys bottom line. Modernas total revenue picture stood at $60.2 million through the end of 2019. Just over 8% of the companys 307 million public float is being shorted.

Figure 4: BioNTech Price Performance against the S&P 500

BioNTech (BNTX), a German-based biotech company, uses a full length SARS-CoV-2 spike glycoprotein on its mRNA delivery platform. Teaming with the global pharmaceutical giant, Pfizer (PFE), early trials with a two-dose regime spaced three weeks apart generated a strong show of neutralizing geometric mean titers (GMT) or antibodies in a German trial of 24 people between the ages of 18 and 55. The results corresponded to an earlier US study using BNT162b2 done in March. Further, the second dose produced a strong breadth of epitopes recognized in T-cell responses to COVID-19 antigens in the body, triggering an immune system response.

Pfizer owns about 1% of BioNTech outstanding shares, but all rights to BNT162b2 belong to the German company which has done the bulk of the research to date. The majority owners of the company are Thomas and Andres Strngmann, with the Bill and Melinda Gates Foundation, Sanofi (SNY) and closely held Genentech (RHHBY) holding minority shares in the company.

The UK was the first country to secure purchase rights of BNT162b2, signing an agreement for 30 million doses, while the US is committed to buy 100 million doses at a cost of $1.95 billion, which will be distributed to US citizens for free pending regulatory approval. The US also retained purchase options on 2.6 million doses for an additional $500 million. BNT162b2 is part of Operation Warp Speed.

BioNTech and Pfizer began Phase 3 trials on Monday (27th July), with the first volunteers receiving either the real vaccine or a saline booster at the University of Rochester. The trials will then expand overseas to include about 120 test sites, with full enrollment taking about two months. Results from the trials are expected to be four to six months out.

The market potential of 1 billion doses through the end of FY 2021 at $25/dose adds about $25 billion in revenue to BioNTechs bottom line calculation - a big boost for a company whose FY2019 revenue came to $121.8 million by any measure, irrespective of the revenue split with Pfizer. Almost 16% of the companys public float is being shorted.

Figure 5: Johnson & Johnson Price Performance against the S&P 500

Johnson & Johnson (JNJ), through its affiliate Janssen Pharmaceutica, begins its human trials of its vaccine entry adenovirus-26 (Ad-26) this week (27 July) as it races to get its COVID-19 vaccine play available for market in early 2021. The accelerated Phase 1/2a clinical trials will enroll about 1,000 adults in Belgium, with trials slated to begin in the US next week. Phase 3 trials with 30,000 volunteers begin in late September.

Janssens Ad-26 platform inserts a vector gene from a surface protein of the coronavirus to help trigger an antibody response from the immune system. The platform was also used for vaccines against HIV, Ebola, Zika and the respiratory syncytial virus, which exhibited similar symptoms to COVID-19. AD-26 trials with mice produced coronavirus antibodies. A similar result occurred with monkeys. A similar result is expected in human trials. Janssen is currently collaborating with Beth Israel Deaconess Medical Center on the COVID-19 vaccine project.

Operation Warp Speed gave Janssen $456 million and Johnson & Johnson invested another $500 million on the Ad-26 project. Further funding has come from BARDA. Johnson & Johnson has manufacturing and distribution facilities already in place in the US, Europe and Asia, and promises capacity of 300-900 million doses by the end of the 1st quarter of 2021 and up to 1 billion doses through the end of 2021, assuming the success of its human trials set for September and regulatory approval for Ad-26.

The successful marketing of AD-26 as a COVID-19 vaccine would yield about $25 billion in added revenue through the end of 2021, based on the formula of $25/dose by 1 billion doses/year. J&J revenue through the end of FY 2019 came to $82.1 billion. Less than 1% of its public float is being shorted by investors.

A recent study from Kings College London revealed the not-so-startling discovery of volunteers antibodies declining significantly within a month of infection, raising longevity issues for each of the leading vaccine candidates. An interesting question arises. If the antibody response of the immune system wears off over time, how many vaccines and over what duration of time would be required to create a herd immunity level of 70% in a given demographic application?

Evidence is emerging that the T-cells as well as the antibody response by the immune system in the face of COVID-19 antigens are critical components of the equation. T-cells, among other responsibilities, provide the memory component of the immune systems defensive posturing against infection in the body. The most powerful antibodies recognize the coronavirus spike protein, the part of the virus that attaches to human cells in the body. That is why an inert spike protein is part of the vaccines.

There are many particulars of COVID-19 that are simply unknown at this juncture. Issues of longevity, the number of doses, the duration of effectiveness - not to mention adverse side effects of any of the technology offerings - are all questions that should be better answered as the results of Phase 3 clinical trials become available later this Fall. That said, there are only a small number of vaccines that give lifetime immunity for most people - measles vaccinations come to mind. COVID-19, like influenza viruses, could turn out to mutate from year to year, requiring a continuing adaptation in the defensive mechanisms produced to keep the virus in check.

Meeting such an effort on a global scale creates a daunting task for supply chains, manufacturers and distributors of the vaccine. Revenue streams for companies supplying, manufacturing and distributing the vaccine could expand geometrically over time as a result.

Disclosure: I am/we are long MRNA, NVAX, BNTX, LZAGY, CTLT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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The Race To Erase COVID-19 - Seeking Alpha