BioNTech SE – “One hit wonder” or Game changing Biotech platform ?
This is not investment advice. PLEASE DO YOUR OWN RESEARCH !!!
Extra Health Warning
I guess some old time readers will think: Now that guy really lost his marbles or so. I have very little knowledge about Biotech companies and the industry in general and nothing qualifies me to write about a Biotech stock. My only experience with Biotech companies during the 10 years of the blog was Swiss based Actelion, but only as a special situation with a Spin-off component. So you might take this post as a warning signal that markets have become overheated and the author of this blog has indeed lost his marbles.
Despite my limited experience and understanding of the sector, I do think that BioNTech represents an interesting “bet” on the success of the underlying mRNA technology and the ability of BioNTech to establish (or having already succeeded) a platform that will yield much more than just this one blockbuster Covid-19 vaccine but many other successful vaccines and cancer drugs (and more). Their intention to become a “full fledged” pharmaceutical company could be the start of a long “Compounding story” if successful, but there are also clearly many risks involved.
BionTech history IPO & “Pivot”
Up until a few months ago, BioNTech was “just another Biotech company” that IPOed in September 2019 in the US. Since a few months however, BioNTech has become almost a household name all over the world, as they have developed the first and so far most effective vaccine against Covid-19.
It is very interesting to read the F-1 IPO prospectus of BioNTech. Back then, their product pipeline was 100% geared towards cancer and this were the main risk factors:
Our business is subject to a number of risks of which you should be aware before making an investment decision. These risks are discussed more fully in the section of this prospectus titled “Risk Factors” immediately following this prospectus summary. These risks include, but are not limited to, the following:
• We are a clinical-stage biopharmaceutical company with no pharmaceutical products approved for commercial sale.
• We have incurred significant losses since our inception and we anticipate that we will continue to incur significant losses for the foreseeable future.
• We will require substantial additional financing to achieve our goals.
• We will need to develop and expand our company, and we may encounter difficulties in managing this development and expansion, which could disrupt our operations.
• Pharmaceutical product development is inherently uncertain, and there is no guarantee that any of our product candidates will receive marketing approval.
• No mRNA immunotherapy has been approved, and none may ever be approved, in this new potential category of therapeutics. mRNA drug development has substantial clinical development and regulatory risks due to the novel and unprecedented nature of this new category of therapeutics.
So they had so far no pharmaceutical product that was approved and not even a single mRNA treatment had ever been approved back then.
According to several stories, the BioNTech founder and CEO Ugur Sahin started extremely early to “gamble” his company on the vaccine as it is mentioned here in the FT:
Two months before the World Health Organization had even declared a pandemic, Dr Sahin suggested that the 12-year-old firm devote the vast bulk of its meagre resources to coming up with a vaccine. “He has a very high hit rate when it comes to predicting outcomes,” Dr Tureci says of her husband — a trait she jokingly admits was initially “annoying”. She and the rest of the company’s board approved the plan soon after.
Clearly some luck was at play here as well, but very often, luck hits those who are prepared.
Stock price/ Valuation: “One hit wonder” vs. “Platform”
Looking at the stock price, it is pretty clear that I am unfortunately not the first one who has noticed the success of BionTech: From the IPO price of 1 USD, the stock has increased to more than 6x its valuation back in September 2019 and clearly some shareholders are very happy at a market cap of ~23 bn EUR:
According to what I have found on the internet, BioNTech and Pfizer are selling the vaccine at around 15 USD per shot and that the original deal was a revenue split of 50/50. It currently looks like that so far ~ 1bn doses have been ordered and that for 2022 there are some news articles that up to 3 bn doses could be required.
So Even if we optimistically assume that BioNTech could actually sell 5 bn doses in the next 3-5 years or so, this will “only” generate up to 35 bn EUR total sales and maybe 10 billion (?) profits after tax and would not justify the current valuation. This is where the underlying mRNA technology enters the picture.
mRNA technology as a platform
In the past, pharmaceutical companies more or less were chemical companies, extracting and mixing together some ingredients and sold them as therapeutics.
Biotech companies “disrupted” this field by actually using genetically modified bacteria to create more complex molecules that first replaced existing (animal) substances (Insulin) before moving to new substances that could be used as treatments where “chemical” pills did not succeed.
mRNA technology as far as I understand it is now one step further: mRNA therapeutics are also produced in a “biotech” type of way, but instead of producing a finished product, mRNA “medicine” stimulates the body’s own cells to create proteins which then again can fight illnesses within the body (many MRNA links at the end of this post).
BioNTech and other mRNA players claim that this is a new kind of platform that enables them to fight different diseases, such as cancer or other hard to battle illnesses as their way leads to much more targeted results.
These days every company wants to be a run “platform” so I am very skeptical on any company claiming to be the next platform. However in BioNTechs case with mRNA, I think there could be some truth in that claim. The fact that they developed a new vaccine not only faster than the existing specialists but also with a superior outcome could be luck, but maybe also the result of actually having established a kind of revolutionary drug development platform. in addition, BioNTechs vaccine seems to be easier to manufacture if you know how to do it.
The obvious next step would be clearly to develop more (and better) Vaccines for instance against the flu. According to sources, the flu vaccine market alone is around 5 bn USD sales per year and this is based on pretty ineffective vaccines. If BionTech would be able to develop a more efficient and easier to manufacture flu vaccine, I think it is not unrealistic that they could both, expand the category and and gain significant market share.
A quick back of the envelope calculation (assuming 25% EBIT margins) would require around 4 bn in annual vaccine sales for BioNTech (on top of the one time Covid-19 vaccine sale) to more or less justify today’s valuation. This would be less than 10% of the current global vaccine market which I don’t find unrealistic as mRNA vaccines seem not only to be more efficient but also quicker to manufacture.
If they would really be successful to develop cancer treatments, the valuation clearly has significant upside in my opinion, but I have no clue how much. The biggest blog buster drugs seem to have generated sales over 100 bn USD in their lifetime, However I have no idea how valuable BioNTechs current pipeline is at the moment
In the Spiegel interview, Sahin and Türeci mention a few interesting things such as:
DER SPIEGEL: BioNTech’s origins are actually in cancer research. You first attracted attention three years ago with a successful study on a vaccine against cancer. When will the first drug of that type be approved?
Türeci: We have several products in the pipeline, and major efficacy studies for some of them are approaching. In other words: We believe it could be 2023/24.
Şahin: At the moment, we are mainly working in two areas: infectious diseases and cancer research. But we also want to develop beyond these core areas. In the medium term, we see ourselves as an immunotherapy company. We will be addressing inflammation, autoimmune diseases and regenerative therapies. There will surely be some product candidates in those areas in the next year or two.
DER SPIEGEL: Progress has accelerated particularly rapidly recently in the area of oncology. Some experts are hopeful that, at this rate, many forms of cancer will be readily treatable by the end of the decade. Are you as optimistic?
Şahin: We are on the path to detecting and treating cancer earlier. This could be a real revolution. What is still missing are curative procedures for early-stage patients. Thirty to 40 percent develop metastases again at some point after surgery. This is an area in which we will be particularly active with BioNTech. And I see a realistic chance that we will succeed in fundamentally changing how cancer is treated.
My current impression is that these guys are no bullshitters but know what they are talking about and they have proven themselves already multiple times. Money is not a problem for many years and with the vaccine success, they might have it easier going forward.
CEO/Founder/Shareholders/ other VIPs
As I mentioned in the blog earlier, the founders, a married couple are children of Turkish immigrants. Interestingly, BioNTech is their second company. The first company, Ganymed, that specialized in more “traditional oncology drugs, became a “Unicorn” when it was sold in 2016 to Japanese company Astellas for 1.2 bn EUR (including earn outs). It seems that the wife ran Ganymed as CEO and in parallel, Ugur founded BioNTech in 2008 to focus on more “cutting edge” technology.
There is an interesting 8 year old video (German) about the couple and their activities back then:
(Observation: Ugur really aged since then, but the vision of the platform was already there….). This is Ugur in Decmeber 2020:
Personally I do really like the way he communicates: very precise, understandable and no hype.
Another parallel to Ganymed is that the biggest investors were the Strüngemann brothers, two German self made billionaires who created Hexal, a leading German generics company that they sold themselves for around 5,6 bn EUR to Novartis in 2002. The combination of researchers with experienced pharma entrepreneurs seems to work. The Strüngemann brothers still own more than 50% of BioNtech at the time of writing. I guess this also helped them to strike co-operations and scale up production surprisingly fast.
One very important person with regard to the underlying mRNA technology seems to be Hungarian born Katalin Kariko who is one of the pioneers of mRNA technology and joined BioNTech in 2013. She seems to be one of the prime candidates for a Noble Prize in the next years.
On becoming a “full pharma” company
On several occasions, Sahin and also Strüngemann mentioned that they plan to create a new “full fledged pharma” company. Sahin’s motivation is relatively simple: He wants to bring treatments to patients, which he cannot ensure if he is just a researcher. The Strüngemann brothers on the other side want to prove that they cannot only create a pharma company that copies existing non-patented stuff (Hexal) but one that really creates new groundbreaking treatments.
This combination has worked well so far. I think it is also important that no one should expect that they will pay out big dividends. I think that they will reinvest most of the vaccine profits into building this business.
I think this is a risky but potentially smart move:
- there is a lot of political tailwind for a German/European “Champion”. The recent discussions have clearly shown the advantages of having supply chains and production in one’s own country.
- Although the vaccine is often named the “Pfizer vaccine”, BioNTech has become a brand name in a very short time in the relevant places. This has been a multi billion marketing campaign for free.
- With the exception of Moderna, BioNTech is currently building a significant and expanding competiitve advantage against other mRNA players: They learn how to mass produce mRNA vaccines and literally hundred of million people will hopefully verify that their drug is both safe and efficient. Why gamble on a competitor if you can have the “gold standard” ?
- I think the Strüngemann brothers have enough experience how to scale a pharmaceutical company which should limit the risk of this expansion
I mentioned above that some of the IPO risks have been resolved by the Covid-19 vaccine. However many risks remain, only to mention a few:
- mRNA competition (Moderna), especially in the short term as the BioNTec vaccine needs to be stored at -70 degrees celsius
- some problems down the road with the vaccine (long term adverse effects ?)
- political interference (Vaccines for free etc.)
- corporate espionage / Government sponsored (I am sure the Chinese or Russians try everything to get the “secret sauce”)
- Litigation law suits
- Key woman>/man risk
- “business model” risks from going full pharma
And I am sure there are another hundred risks that I didn’t mention or even don’t know about. Make no mistake: This is a risky company.
As always, a quick summary of pros and cons:
- Good combination of entrepreneurial CEO and long term shareholders
- pandemic has accelerated development by at least 5-10 years
- clear competitive advantages in application of the technology, which increases due to mass production
- superior vaccine (easier to produce, more better efficacy)
- Interesting strategy to source in production
- political tailwind to produce “national champion”
- Pandemic was a free “marketing” event worth billions in sales and marketing euros
- underlying technology could indeed be a game changer, not only in the vaccine segment
- very positive short term results to be expected
- political uncertainty around vaccines
- application to other areas still unproven
- competition through other mRNA players (Moderna)
- Theft of intellectual capital
- competition through other, cheaper vaccines
- some residual risks of longer term side effect
- Key person risks
- “Double pivot” risk
- hard to value
I have to admit that some “fear of regret” plays a role here. i would deeply regret not to have invested if this becomes an even bigger success. Therefore I decided to invest “only” 2% of the portfolio into BioNTech within my “Long term growth bucket” at around 98 EUR/share, reflecting the inherent risk at this stage.
My game plan would be to hold this at least 2-3 years and only consider to sell if the stock drops for no reason by more than -50% or goes up by more than +100%.
I expect very positive results both, for 2021 and 2022, however after than, vaccine sales will clearly go down and then it needs to be seen how the cancer pipeline works out or if they can come up with more vaccines.
If initial pipeline would become more concrete and the valuation still makes sense, I might increase the position in 2 or 3 years from now. In between, the position will motivate me to learn more about mRNA and Biotech in general, which is a nice side effect.
Another side effect is that theoretically, the stock could hedge me against a “Covid-19 worst case mutation” scenario for my more Tourism related stocks (Sixt, Wetherspoon) as more mutations would mean more business for BioNTech. this is however not the primary motivation.
I aslo need to manage overall risk in the protfolio. With Play Magnus, JET and BioNTech, I have now 3 high risk growth companies in the portfolio. The total exposure here is 7%. Anything above 10% would make me nervous.
Interview with Sahin and his wife in Spiegel from December 2020
Pre Covdi-19 comparison Moderna, BioNTech & Curevac (German)