Sector

HealthcarePharma

Background

Jason Kelly is the CEO of Gingko Bioworks and Matthew Harrison is a biotech analyst at Morgan Stanley. We cover the history of programming cells, what differentiates Moderna from other biotech companies, and lessons for entrepreneurs and investors can takeaway from Moderna's story.

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Date

June 15, 2021

Episode Number

13

Moderna Business Breakdown

Background / Overview

Moderna, founded in 2010 in Cambridge, Massachusetts, is a biotech company pioneering messenger RNA (mRNA) technology to develop therapeutics and vaccines. Unlike traditional biotech firms focused on single-drug development, Moderna positions itself as a platform technology company, leveraging mRNA to program cells for a wide range of applications. Its breakthrough came with the development of one of the first COVID-19 vaccines, which validated its platform and propelled it into the global spotlight. The company employs approximately 3,900 full-time equivalents (FTEs) as of recent data, with significant operations in research, development, and manufacturing. Moderna’s story is one of a high-risk, high-reward compounder, scaling rapidly through strategic partnerships and substantial early funding to industrialize its platform.

Ownership / Fundraising / Recent Valuation

Moderna was initially funded through venture capital and strategic partnerships with pharmaceutical giants like AstraZeneca and Alexion, raising significant capital before its 2018 IPO. Early deals included $300 million in upfront payments from these partnerships, followed by additional fundraising that totaled $400–500 million within a year. The company’s IPO raised further funds, enabling it to scale operations and build a robust pipeline. While specific enterprise values (EVs) and multiples from recent transactions are not detailed in the transcript, Moderna’s market capitalization has fluctuated significantly post-COVID, reflecting its vaccine-driven revenue surge and subsequent pipeline expectations. Ownership includes public shareholders, with no mention of private equity sponsors, indicating a traditional public biotech structure.

Key Products / Services / Value Proposition

Moderna’s core product is its mRNA platform, which enables rapid development of therapeutics and vaccines by programming cells to produce specific proteins. The platform’s value proposition lies in its flexibility, speed, and potential to address a broad spectrum of diseases. Key products include:

• COVID-19 Vaccine: The flagship product, generating over $18 billion in 2021 from advanced purchase agreements for 800 million doses. It is the first mRNA vaccine approved for human use, with 95% efficacy.
• Pipeline Candidates: Approximately 15 drugs in development, including prophylactic vaccines (e.g., for cytomegalovirus, a multi-billion-dollar market) and therapies for rare diseases targeting missing proteins (potential market of hundreds of millions per drug).

The platform’s ability to iterate rapidly and customize mRNA sequences for specific diseases differentiates it from traditional drug development, which is often bespoke and slower.

Segments and Revenue Model

Moderna operates primarily in two segments:

1. Prophylactic Vaccines: Includes the COVID-19 vaccine and candidates like cytomegalovirus (CMV) and flu vaccines. Revenue is driven by government contracts and potential commercial sales.
2. Therapeutics: Focuses on rare diseases and oncology, where mRNA programs cells to produce missing proteins or target cancer cells. These are in earlier stages, with revenue potential from licensing or direct sales post-approval.

The revenue model pre-COVID relied on collaboration payments from pharma partners, essentially R&D offsets. Post-COVID, revenue is predominantly from vaccine sales via fixed-price government contracts. Future revenue will likely blend vaccine sales, therapeutic sales, and additional partnerships, with the company retaining 100% rights to some drugs (e.g., COVID vaccine) for maximum upside.

Splits and Mix

• Channel Mix: Currently, vaccine sales are driven by government contracts, requiring minimal marketing. Future therapeutics may target healthcare providers or patients, necessitating a broader sales force.
• Geo Mix: Vaccine sales are global, with significant U.S. contracts (300 million doses). Future markets depend on regulatory approvals and disease prevalence.
• Customer Mix: Governments for vaccines; potential shift to hospitals, clinics, or patients for therapeutics.
• Product Mix: In 2021, nearly 100% of revenue came from the COVID vaccine. The pipeline suggests a future mix shift toward other vaccines (e.g., CMV, flu) and therapeutics.
• End-Market Mix: Public health for vaccines; rare disease and oncology patients for therapeutics.

EBITDA contribution mirrors revenue, with the vaccine dominating. Historical mix was collaboration-driven, but post-2021, vaccine sales dominate, with therapeutics expected to grow as pipeline candidates mature.

KPIs

• Pipeline Size: ~15 drugs, significantly higher than typical biotech firms (2–3 candidates).
• Clinical Trial Progress: Key candidates like CMV vaccine have Phase 1/2 data, with others in early dosing.
• Revenue Growth: Explosive in 2021 (~$18B from vaccines), but pre-COVID revenue was minimal, indicating volatility.
• Operating Margin: 50% for the COVID vaccine, above traditional pharma (mid-30s) but aligned with specialty biotech (high 40s–low 50s).

Acceleration is evident in revenue and pipeline scale, but sustainability depends on new drug approvals.

Headline Financials

• Revenue Trajectory: Pre-COVID, revenue was negligible, driven by collaboration payments. 2021 saw a spike to $18B, but future growth hinges on new drugs. Long-term CAGR depends on pipeline success.
• EBITDA Margin: 50% for the vaccine, driven by high gross margins (80%) and moderate operating expenses. Future margins may compress as R&D scales.
• FCF: Not explicitly stated, but high EBITDA and moderate capex suggest strong cash conversion, tempered by R&D and inventory costs.

Value Chain Position

Moderna operates midstream in the biotech value chain, focusing on drug development and manufacturing. Upstream activities (basic research) are partially outsourced via licensing (e.g., mRNA silencing IP), while downstream distribution is handled through government contracts or future commercial channels. The company’s go-to-market (GTM) strategy for vaccines leverages direct government negotiations, minimizing sales costs. For therapeutics, GTM will likely involve traditional pharma channels (hospitals, clinics).

Moderna’s competitive advantage lies in its platform’s scalability and speed, enabling rapid iteration and customization. This positions it to capture significant value in high-margin biologics markets, though it faces risks from alternative technologies.

Customers and Suppliers

• Customers: Primarily governments for vaccines; future customers include healthcare providers and patients for therapeutics.
• Suppliers: Include raw material providers for lipid nanoparticles and nucleotides, plus contract manufacturers for scaling production. No specific supplier concentration is noted, but Moderna’s in-house manufacturing reduces dependency.

Pricing

Vaccine pricing is fixed via government contracts ($15.25–$16.50/dose in the U.S.), reflecting mission-criticality and scale. Future therapeutics may command premium pricing (hundreds of thousands per patient for rare diseases) due to small patient populations and high value. Pricing drivers include:

• Mission-Criticality: Vaccines and rare disease therapies are high-stakes, supporting premium pricing.
• Market Dynamics: Competition from other mRNA or protein-replacement technologies could pressure prices.
• Contract Structure: Long-term government contracts provide visibility; therapeutic contracts will depend on approval timelines.

Bottoms-Up Drivers

Revenue Model & Drivers

Moderna generates revenue through:

1. Vaccine Sales: Fixed-price contracts with governments ($15.25–$16.50/dose for 800M doses in 2021). Volume-driven, with pricing stable due to contracts.
2. Collaboration Payments: Pre-COVID, partnerships with AstraZeneca and Alexion provided $300M upfront, with potential milestone payments (“bio bucks”) and royalties.
3. Future Therapeutics: High-margin sales for rare disease and oncology drugs, with pricing reflecting small patient populations.

Revenue Drivers:

• Volume: Vaccine volume is contract-driven (800M doses). Therapeutic volume depends on patient populations (thousands to tens of thousands).
• Pricing: Fixed for vaccines; premium for therapeutics due to rarity and efficacy.
• Mix: Currently vaccine-dominated; future shift to therapeutics could increase margins.
• Growth: Organic from pipeline approvals; inorganic from partnerships or M&A.

Cost Structure & Drivers

Cost Structure:

• COGS: ~20% of revenue ($3.6B for $18B in 2021), typical for biologics due to complex manufacturing (lipid nanoparticles, mRNA synthesis).
• Operating Expenses: ~30% of revenue ($5.4B), split between R&D (clinical trials, pipeline development) and SG&A (minimal for government sales).
• Fixed vs. Variable: COGS and clinical trials are variable, scaling with volume. R&D and infrastructure (e.g., manufacturing facilities) are fixed, providing operating leverage as revenue grows.

Cost Drivers:

• Variable Costs: Raw materials (nucleotides, lipids), manufacturing labor, and clinical trial costs (e.g., $100K–$200K per patient for oncology).
• Fixed Costs: R&D facilities, robotics, and digital infrastructure. These enable scale but require upfront investment.
• Operating Leverage: High fixed costs mean margin expansion as revenue grows, assuming pipeline success.

EBITDA Margin: 50% reflects strong gross margins and moderate opex. Incremental margins could improve with scale, but R&D reinvestment may cap gains.

FCF Drivers

• Net Income: Driven by high EBITDA, but taxes and interest (not specified) reduce cash flow.
• Capex: Likely significant for manufacturing scale-up, though not quantified. Maintenance capex is moderate, with growth capex tied to pipeline expansion.
• NWC: Inventory build for vaccine production is a cash drag, but receivables are minimal due to government prepayments. Cash conversion cycle is favorable due to low payables days.
• FCF: High EBITDA suggests strong FCF, but reinvestment in R&D and capex may limit near-term cash flow.

Capital Deployment

Moderna’s capital allocation prioritizes:

• R&D: Reinvesting vaccine profits into pipeline development (e.g., flu, CMV, rare diseases).
• Manufacturing: Scaling production facilities to support vaccine and future therapeutics.
• M&A: Potential for acquisitions to bolster pipeline or technology, though not yet evident.
• Buybacks/Dividends: Unlikely given growth focus.

Organic growth dominates, with vaccine revenue funding pipeline expansion. Inorganic growth via partnerships has been key historically but less critical post-COVID.

Market, Competitive Landscape, Strategy

Market Size and Growth

The global biotech market is vast, with vaccines alone valued at ~$50B annually and rare disease therapeutics at ~$100B. Moderna’s addressable market includes:

• Prophylactic Vaccines: Multi-billion-dollar markets for CMV, flu, and other infectious diseases.
• Rare Diseases: Thousands of disorders, each with hundreds of millions in potential revenue.
• Oncology: High-value, high-risk market with significant growth potential.

Growth is driven by volume (increasing disease prevalence, vaccination rates) and price (premium pricing for novel therapies). Industry growth stacks include aging populations, rising healthcare spending, and technological advancements.

Market Structure

The mRNA therapeutics market is nascent but consolidating, with Moderna and BioNTech as leaders. The broader biotech market is fragmented, with thousands of players, but vaccines and rare diseases are oligopolistic due to high R&D barriers. Minimum efficient scale (MES) is large, requiring significant capital and data assets, limiting competitors to well-funded players like Pfizer, AstraZeneca, and emerging mRNA firms.

Competitive Positioning

Moderna leads in mRNA vaccines, with a first-mover advantage from its COVID vaccine. It targets high-value, underserved markets (e.g., CMV, rare diseases), differentiating through speed and customization. Risks include disintermediation by larger pharma or next-generation technologies.

Market Share & Relative Growth

Moderna holds a significant share of the mRNA vaccine market, with BioNTech as the primary competitor. Its revenue growth ($18B in 2021) outpaces the broader vaccine market (5–7% CAGR), driven by COVID demand. Future share depends on pipeline success and competition from alternative platforms.

Competitive Forces (Hamilton’s 7 Powers)

1. Economies of Scale: Moderna’s industrialized platform (digital R&D, robotics) lowers per-drug costs, creating a cost advantage over smaller players.
2. Network Effects: Limited, as therapeutics lack user-driven network effects, but data accumulation enhances platform efficacy.
3. Branding: Emerging brand strength from COVID vaccine success, enhancing trust and pricing power.
4. Counter-Positioning: mRNA platform disrupts traditional drug development, with incumbents slow to adopt due to legacy processes.
5. Cornered Resource: Proprietary data and IP (e.g., lipid nanoparticle optimization) provide a competitive edge.
6. Process Power: Streamlined R&D (days to design, weeks to test) outpaces traditional methods.
7. Switching Costs: Moderate, as therapeutics are mission-critical, but competition could erode loyalty.

Porter’s Five Forces:

• New Entrants: High barriers (capital, IP, regulatory) limit threats, but next-generation technologies pose risks.
• Substitutes: Alternative platforms (e.g., gene therapy, protein replacement) compete in specific verticals.
• Supplier Power: Moderate, as raw materials are commoditized, but specialized inputs (lipids) could create dependency.
• Buyer Power: Low for vaccines (government contracts); higher for therapeutics due to payer scrutiny.
• Rivalry: Intense in mRNA (BioNTech, others), but Moderna’s scale and data provide an edge.

Strategic Logic

Moderna’s strategy focuses on:

• Platform Investment: Reinvesting vaccine profits to expand prophylactic and therapeutic verticals.
• Vertical Integration: Controlling manufacturing to ensure quality and scale, reducing supplier risk.
• Horizontal Expansion: Targeting new diseases (flu, rare diseases, oncology) to diversify revenue.
• Capex Bets: Offensive investments in manufacturing and R&D to maintain leadership.
• MES Optimization: Scaling to achieve economies without diseconomies (e.g., bureaucracy), leveraging digital infrastructure.

Valuation

Valuation is driven by:

• Current Cash Flows: ~$18B in 2021 vaccine revenue, with 50% margins, supports a high multiple.
• Pipeline Potential: ~15 drugs, with markets ranging from hundreds of millions to billions, discounted by success probabilities (e.g., 10–30% for Phase 1/2).
• Platform Value: mRNA’s scalability and speed justify a premium over traditional biotech.

Comparable biotech firms trade at 5–10x revenue or 15–30x EBITDA, but Moderna’s unique platform and pipeline suggest a higher multiple, tempered by execution risks. Specific valuation figures are not provided in the transcript, but market cap likely reflects vaccine cash flows plus pipeline optionality.

Key Dynamics and Unique Aspects

Moderna’s business model is unique due to:

• Platform Scalability: The mRNA platform enables rapid iteration (days to design, weeks to test) versus years for traditional drugs, reducing technical risk and R&D costs.
• Industrialized R&D: Digital infrastructure and robotics allow scientists to test hundreds of constructs, a stark contrast to bespoke drug development.
• Customization Potential: mRNA’s flexibility supports niche markets (e.g., rare diseases), akin to internet-driven long-tail economics.
• First-Mover Advantage: The COVID vaccine established Moderna as the mRNA leader, with data and brand compounding competitive moats.
• Capital Intensity: Early funding ($400–500M pre-IPO) enabled scale, unlike typical biotech startups, positioning Moderna to own 100% of high-value drugs.

Standout Points:

• The ability to design a vaccine in days and produce test quantities in weeks highlights unprecedented speed, driven by digital R&D and lipid nanoparticle technology.
• The decision to fund at scale early on reflects a bold vision, enabling a robust pipeline (15 drugs vs. 2–3 for peers).
• The platform’s translatability across verticals (vaccines, rare diseases, oncology) reduces technical risk, though biological risks remain.
• Moderna’s 100% ownership of the COVID vaccine, unlike BioNTech’s 50/50 split with Pfizer, underscores its strategic independence.

Critical Considerations:

• Risk of Failure: Biological risks could derail pipeline candidates, as drug development remains unpredictable.
• Competition: Alternative technologies (e.g., gene therapy) or next-generation mRNA platforms could erode Moderna’s lead.
• Revenue Volatility: Post-COVID revenue may decline without new approvals, requiring sustained pipeline success.
• Regulatory Hurdles: Despite speed, therapeutics face rigorous testing, limiting the pace of commercialization.

Conclusion

Moderna’s mRNA platform redefines biotech by combining speed, scalability, and customization. Its COVID vaccine validated the model, generating $18B in 2021 with 50% margins, but the true test lies in diversifying revenue through its 15-drug pipeline. The company’s industrialized R&D, first-mover advantage, and strategic capital deployment position it as a potential category leader, but biological risks and competition loom. Investors must weigh the platform’s transformative potential against execution challenges, while operators can learn from Moderna’s focus on long-term platform capabilities over short-term wins.