The mRNA Option

Published on 12/09/21 | Saurav Sen | 4,296 Words

The BuyGist:

  • mRNA is a new phenomenon that has the potential to significantly improve our lives beyond the pandemic.
  • We’ve been reading about mRNA for a while (as have many people) but we never thought about investing in BioNTech or Moderna – two champions of mRNA technology – because we thought that all the potential growth was priced in.
  • But then we looked at our Watch List, and we were frankly amazed at the modest growth expectations built into BioNTech and Moderna’s stock prices.
  • But we realized that those modest expectations would require us to dig into mRNA’s potential beyond this pandemic.
  • We dig into mRNA, how it works, its potential beyond Covid-19, and whether it makes sense to invest in the technology.

What is the big deal?

The big deal is that this erstwhile theoretical technology got validated during the Covid-19 pandemic. mRNA (messenger ribonucleic acid, if you must know) as a technology is not new; it wasn’t discovered in 2020. But until now, it wasn’t taken too seriously by the scientific community. Covid-19 has been tragic, but mRNA may just be one of the few positive things to have come out of it. The pandemic was, to a large extent, a real-world clinical trial. So far, so good. If the last 12 months are any indication of things to come, mRNA is the next big thing in medicine.

Now, we at The Buylyst are not experts in the field of Medicine. We’re investors. We look for, as Charlie Munger puts it, “…a horse with one chance in two of winning and which pays you three to one.” We believe mRNA as a technology is such a “horse”. In this article, we dig into that hypothesis.

Our exploration of mRNA is an exception because it is outside our expertise. In fact, Healthcare as a field is outside our comfort zone. That hasn’t stopped us from investing in healthcare. But so far, our investment has been top-down – a thematic bet on the inevitability of growth in global demand for healthcare. With mRNA, this will be our first crack at some bottom-up candidates – specifically two companies called Moderna and BioNTech. However, we maintain that our focus is more on mRNA’s potential rather than the specific competitive advantages of these companies.

Both these companies have been front-and-center in the global effort to revert to normalcy. Their vaccines have been the most preferred Covid-19 vaccines across the world. Most of us take it for granted but the underlying technology – mRNA – in these vaccines is a first. If you’ve taken one of their vaccines, you’ve validated a technology that was considered impractical just a few years ago. Moderna and BioNTech have proven that mRNA is not only viable but a triumph.

We’ve been eyeing these two candidates as potential investments for some time now. But we’ve steered clear because they always seemed to be priced for perfection. However, before the Omicron variant came to fore, both stocks had taken a beating over a few weeks. Just a couple of weeks ago, both stocks seemed to be reasonably priced. Well, what is “reasonably priced?”, you might ask.

We keep tabs on our investment universe through our Watch List, where we estimate “what revenue growth do we need to believe to consider buying the stock?”. In this article, we won’t get into the details of how we do it; you can read about our methodology here. But here’s what we see:

Obviously, the historical 3-year annualized revenue growth number will end up being an aberration when we look back. However, regardless of what the historical number is, it’s our “revenue growth we need to believe” estimates for both companies that piqued our interest. If mRNA is indeed the next big thing in medicine, we thought, would it be so unreasonable to expect these companies to growth at a clip of, say, 6% annually?

The rest of the article is our attempt to answer this question. To do that. we will dig into what mRNA is, why it might be the next big thing, and then we’ll peel the layers of “what we need to believe if we were to buy stocks of BioNTech or Moderna today.”

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