Summary
- The manufacturing deals for candidates set the stage for Emergent to ride the momentum of COVID-19 vaccine development.
- Until a winner emerges, its antibody therapy can be a bridge to control the pandemic though rivals have already entered the late-stage trials.
- The vaccine deals diversify the revenue base, and low gearing supports more debt financing to reinforce the record liquidity level.
- Contrasting the peak valuations of developers, the company’s trading multiple with a premium to reflect the promising outlook highlights a better risk-return trade-off.
Investment Thesis
The stakes have never been higher in the battle for a promising COVID-19 vaccine. The valuations of developers have reached a peak leaving no room for error. Several contracts to manufacture the experimental vaccine candidates have turned Emergent BioSolutions, Inc. (NYSE:EBS) into an indirect COVID-19 vaccine play. And the company's polyclonal antibody therapy against the virus can act as a bridge to contain the pandemic until a vaccine takes over. Set to enter the Phase 3 trials this month, its development, however, trails more specific monoclonal counterparts. The newly-signed deals, meanwhile, will accelerate Emergent's path towards the long-term revenue target, and diversify its top-line away from government dependence. The federal funding supports the near-term margin expansion, and the current level of liquid assets has reached an all-time high even as low gearing supports more debt financing.
The brighter outlook has seemingly gone unnoticed as the company still trades in line with the historical average. With a premium multiple to better reflect the enhanced prospects, the consensus EBITDA estimates reveal an undervalued stock for the risk-averse investors to benefit from the COVID-19 vaccine race.
Source: The Company Website
Contract Development is a Pick-And-Shovel Play?
The raging COVID-19 pandemic has intensified the humanity's resolve to find a successful vaccine. Unfortunately, in the crowded race, not everyone can succeed. Given the heavy initial investments, uncertain markets, and sharp government scrutiny, even the eventual winners will struggle to make profits. Yet, the investors are seemingly oblivious to the lopsided risk-return tradeoff. With no margin of safety for failure, the developers with largely unproven technologies such as Moderna, Inc. (MRNA) trade at sky-high valuations. Against this backdrop, one strategy to bet on the COVID-19 vaccine race is to spread the risks by backing several developers advancing a range of technologies. The investments in companies playing a supportive role to developers is a safe bet too, similar to the California Gold Rush of 1840s and 1850s when the pick-and-shovel sellers made a fortune as diggers searched for gold with no guarantee of success. These contract manufacturers stand to benefit even if today's vaccine front runners disappear into oblivion as the late-stage clinical trials unfold.
Let's take Emergent as an example. The company has already struck deals with four developers to manufacture their experimental vaccine candidates. The agreement with Novavax, Inc. (NVAX) supplies the Phase 1 trial that yielded positive data recently. Expecting to start the Phase 1 trial in early 2H 2020 (second half of 2020), the development work is currently underway for an oral candidate advanced by Vaxart, Inc. (VXRT). Even though the financial terms of the aforementioned contracts are unclear, two long-term agreements with Johnson & Johnson (JNJ) and AstraZeneca PLC (AZN) are set to reveal a billion-dollar market opportunity in COVID-19 vaccine manufacture. Johnson & Johnson has started the Phase 1 study for its lead candidate, while the Phase 3 studies are already underway for AstraZeneca's candidate. With both companies expecting to supply billions of doses globally by 2021, Emergent could also be a winner even if a few also-rans suffer losses as the candidates enter the final stretch of development.
A partner to U.S. Government's Operation Warp Speed Program with a contract valued at ~$628 million, the company will sign up more collaborations as the developers secure funding to accelerate their vaccine development efforts. Last week. Sanofi (SNY) and GlaxoSmithKline plc (GSK) announced a $2.1 billion funding from the program to deliver up to 600 million doses for the U.S. government. However, it's not yet clear if the two foreign pharma giants will seek U.S. manufacturing partners.
Source: Koyfin
