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No participation trophies

21 Jul 2020 By Robert Cyran

Every person on the planet will be a winner if a good vaccine against the coronavirus emerges, but not every company seeking one will. Over a dozen listed biotechnology groups are trying. The market capitalization of five of them is up over eightfold, adding more than $50 billion of value since January. That’s excessive even if they capture the entire potential benefit. And with over 150 competing efforts, according to the World Health Organization, it’s looking like a bubble.

The initial set of anti-Covid-19 shots might bring their creators between $10 billion and $30 billion in sales, Morgan Stanley estimates. The wide range reflects variables like different governments’ ability to demand discounts, how many people get shots in developing countries, and so on. Assume $15 billion, given the likely political pressure on pricing. Apply a net margin of 20%, about par for big pharmaceutical companies, and that’s a one-time profit of $3 billion.

Sales will continue after that: Immunity may wear off, and newborns will need shots. Ongoing revenue could be somewhere between $2 billion and $25 billion annually, per Morgan Stanley. The lower end is more likely. Immunity to other coronaviruses can last years. Moreover, it’s unlikely producers could raise prices much once a vaccine becomes a standard health requirement. Assume that boils down to $4 billion a year. As a gut check, the vaccine market as a whole is worth something over $35 billion a year, Bernstein reckons. It’s reasonable that Covid-19, by then just one preventable disease among many, might account for around 10% of that figure.

Big pharmaceutical companies like Pfizer and Merck dominate the vaccine market. On average, they are valued at less than 5 times estimated revenue over the next 12 months, according to Refinitiv data. That suggests the ongoing coronavirus vaccine sales could be worth some $20 billion in present value terms, and under $25 billion adding the initial profit bump.

Yet Moderna, Vir Biotechnology, BioNTech, CanSino Biologics and Novavax – just a sample of the contenders – have seen their combined market capitalization rise more than eightfold since January, adding a combined $50 billion or so in value. Each set of shareholders may be gambling on their firm being the sole winner – or being snapped up by a bigger suitor. More likely, investors are lunging for every shred of hope they see.


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