value and opportunity

Disclaimer: This is not investment advice. PLEASE DO YOU OWN RESEARCH !!!

What a difference a year can make. Less than a year ago, I tried to enlarge my circle of incompetence by looking at BioNTech. This was my summary back then:

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.

In between the stock did hit a peak of ~390 EUR in August 2021, I.e. almost quadrupling from the level that I bought before falling back sharply to a level EUR 150 at the time of writing

I did actually sell 30% of my position at prices between 270-300 at the end of July, getting back my invested money (before taxes).

The big question is: What to do now ? 

In such cases, I think the first step should always be to revisit the initial assumptions and see what has changed. The case back then was that the assumed profits of the vaccine plus a future 10% market share in the global “traditional” vaccine market would justify the valuation of back then ~32 bn EUR.

In this case, many things have changed over the last year and in my opinion almost only to the upside:

Assumption 1: Covid vaccine – 10 bn EUR profits after tax

Let’s revisit the assumptions I made when i thought that 98 EUR/Share would be a good deal:

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.

So my assumption was 10 bn EUR total profits after tax for the Covid vaccine. According to the last IR presentation, BioNTech seems to have hit this target in 2021 alone  by delivering an unbelievable 3 bn doses together with Pfizer.

To keep things simple, I assume another 10 bn in total profits and assuming that Covid-19 will not be a problem beyond 2022.

This does not cover any ongoing  campaigns like for instance flu vaccination (see below). Based on these assumptions, Covid-19 adds another 10 bn EUR in value compared to the initital thesis.

Assumption 2: 10% Market Share vaccine market – 13 bn EUR valuation 

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.

My implicit valuation for the vaccine part back then was 13 bn EUR (23 market cap minus 10 bn assumed Covid profits).

As of today, I would actually increase the valuation here  because of several points:

1) The uncertainties about the execution ability of BioNTech and the safety of the vaccine are gone. We now know that they can produce and distribute huge amounts at a high quality. This clearly shows that their approach is much more scalable than Vector vaccines or vaccines with dead viruses. This stuff just scales, period. And the stuff is really safe.

2) I think I have also underestimated the possibility, that the vaccine market could actually significantly expand. One of the projects they are working at is Malaria vaccination which would be a Mega Blockbuster on its own and would expand the global accination business significantly. Another upside could be that as with the flu, Covid-19 vaccinations are required on an ongoing basis for some time or forever, if we like it or not.

Overall, I think one could justify to “round this up” to 20 bn EUR including risk adjustments. In my opinion, mRNA is clearly a game changer for vaccination and as CureVac and the Chinese efforts show, it is not so easy to copy and paste the technology. There seem to be some very serious barriers to entry.

This leaves us with a value of 20+20 bn = 40 bn EUR value which, by coincidence (I swear, this is was not intended), is quite similar to today’s market cap.

So again, we are at a situation, where based on my assumptions, the rest of the pipeline (Cancer, etc.) comes basically “for free”.

“Upside Optionality” 

In my opinion, there is a lot of additional “upside Optionality” for BioNTech on top of what I have described above::

a) Although I really hope that Covid is over, there is still a small probability that there might be new variants that require a new vaccine and the whole vaccination effort has to start again. I do think it is a small probability but still BioNTech is a “tail hedge” for these scenarios.

b) There might still be the chance that they might reach a deal with China. As Covid-19 is not going away and the Chinese vaccine very ineffective, I still see a chance for BioNTech to sell a few hundred million )or a few billion) doses to China. China will not be able to hold up its “Zero Covid” policy forever.

c) With the success of the vaccine (and the money) they can now choose between the best cooperation partners and/or do M&A to broaden or accelerate their pipeline. They made already two interesting acquisitions with Phagomed and KITE

d) I also think that they have no problems in attracting the best and brightest to the company. They seem to have increased their R&D staff by 40% in the last few months.

Even after thinking hard, I haven’t identified anything really negative with the exception of “extreme anti-vax” movements within a small part of the society.

Valuation of the Pipeline

As a technical point, with more money on its Balance sheet and all other assumptions held equal, the probability of executing the pipeline without shareholder dilution cleary increases. This in turn technically increases the value of the pipeline. However as I am not able to value the Cancer pipeline, I cannot account for this effect.

Risks: 

There are of course also a lot of risks, just to mention a few:

• a wonder cure for Covid-19
• a lot of competitors manage to develop equal or better mRNA vaccines
• The Chinese are able to steal the “secret sauce”
• there are severe negative long term effects of mRNA vaccines
• They allocate capital badly

Nevertheless, as a summary, I honestly do think that BioNTech at 150 EUR per share in 2022 is a similar or even better deal than at 98 EUR in 2021.

Summary:

As outlined above, I do think that BioNTech represents at least the same attractive deal at 150 EUR in 2022 than at 98 EUR in 2021 as a lot of things have gone better than I expected back then.

However Mr. Market can do anything in the next few months /years. Often, share prices overshoot in both directions.

So my game plan hasn’t changed that much: I will keep my remaining position and watch how things develop. Selling now doesn’t make sense fundamentally, and “Trading around/within the position” is clearly not my strength.

The answer to the initial question “What to do now ?” at least for me is clear: Observe and do nothing.

Disclaimer: This is not investment advice. PLEASE DO YOU OWN RESEARCH !!!