Accounting in Multi-National Enterprises 2.

4 – 2022

Case I – Moderna, Inc., and BioNTech SE

Total points: 80 points

Recent years have seen a large boom in biotechnology firms that use innovative applications of biology
research to develop a wide range of products. As noted by The Economist (11 Aug 2021, extracts edited):

“Since 2010, an index of biotech firms listed on the Nasdaq exchange has quintupled in value, and the
number of companies in it has more than doubled. Between 2011 and 2020 the money that biotech
startups raised in American initial public offerings ballooned from $4bn to $65bn. […] In the past year,
biotech has become synonymous with the fight against covid-19. The ingenious mRNA vaccine,
developed by Moderna and Pfizer/BioNTech, has saved millions of lives.

The boom has several causes. Many investors pursue what is described as “philanthropic capitalism”:
making money from products that benefit society. Other reasons are more hard-headed. 64% of drugs in
late-stage development are being created by youngish biotech companies built around a novel
technology rather than by big pharma firms such as Pfizer (which often team up with smaller biotechs
like BioNTech, or acquire them, to juice up development pipelines). […] New money is flowing into firms
developing treatments for cancer, illnesses of the immune system or the brain, and infectious diseases.
Everyone is vying to be the next Moderna, whose market capitalisation has jumped from $5bn when it
went public in late 2018 to $156bn. Many are hoping to emulate it by expanding from developing
therapies to manufacturing them.

Yet it is easy to overlook the risks. People with both a PhD in life sciences and managerial nous are rare.
Many clever ideas never come to fruition. Those that do often cost a lot, which increasingly angers
politicians and has led to calls for price controls. The greatest danger though is a common one for
startups: can they make money? Biotech firms mainly strive to go public because drug development is
expensive, such that they aim to use the proceeds from listing to finance their research activities. Hence,
these firms are nearly always loss-making: Only one in six firms in the Nasdaq biotech index made a
profit in 2020. The other firms lost a combined $33bn. One of them lost money from its founding in
1989 until 2017. Moderna will turn a profit this year for the first time in a decade.”

As noted, both Moderna and BioNTech are biotech companies that became widely known in the past
year. The former, being U.S.-based, applies U.S. accounting standards (US GAAP), while the latter,
located in Germany, reports based on IFRS. One key difference between the two reporting frameworks
concerns the accounting for research and development (R&D), where US GAAP requires the expensing
of all such expenditures in the income statement. Under IFRS, research expenditures are expensed in
the income statement, while development expenditures are capitalized on the balance sheet.

On the next page are the (slightly edited) financial statements of Moderna and BioNTech for the third
quarter of 2021.1 These are unaudited statements, but represent the most recent financials available.

1You may of course consult the entire financial reports of Moderna (https://d18rn0p25nwr6d.cloudfront.net/CIK-
0001682852/39ef6609-621f-4f85-994d-f3472dd77117.pdf) and BioNTech (https://investors.biontech.de/static-files/1479016a-
9cf8-49c4-bef1-c3e12440ad74). However, all relevant case information is included in this document.

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Accounting in Multi-National Enterprises 2.4 – 2022

Moderna:
30 Sep 2021 30 Sep 2021
USD, millions (unaudited) 31 Dec 2020 (unaudited) 31 Dec 2020
Property and equipment 960 387 Deferred revenue, non-current 498 177
Financial assets 6,453 650 Other liabilities 344 210
Other assets 85 2 Total non-current liabilities 842 387
Total non-current assets 7,498 1,039 Accounts payable 1,163 488
Deferred revenue 7,977 3,867
Cash and cash equivalents 8,906 4,608 Other liabilities 817 34
Inventories 965 47 Total current liabilities 9,957 4,389
Accounts receivable 3,554 1,643 Total liabilities 10,799 4,776
Total current assets 13,425 6,298 Total equity 10,124 2,561
Total assets 20,923 7,337 Total equity and liabilities 20,923 7,337

(unaudited) Nine months Ended 30 Sep

USD, millions 2021 2020
Revenue 11,260 232
Cost of Sales 1,665 -
R&D expenses 1,343 611
Administrative expenses 366 109
Operating profit (loss) 7,886 (488)
Finance expense (income) 11 (15)
Profit (loss) before taxes 7,875 (473)
Income taxes 541 1
Net income (loss) 7,334 (474)

BioNTech:
30 Sep 2021 30 Sep 2021
EUR, millions (unaudited) 31 Dec 2020 (unaudited) 31 Dec 2020
Property, plant and equipment 442 326 Loans and borrowings 592 263
Intangible assets 163 164 Other liabilities 26 78
Other assets 76 162 Total non-current liabilities 618 341
Total non-current assets 681 652 Loans and borrowings, current 944 83
Cash and cash equivalents 2,393 1,210 Trade payables 259 102
Inventories 393 64 Other liabilities 3,700 421
Trade receivables 10,654 194 Total current liabilities 4,903 606
Other current assets 112 199 Total liabilities 5,521 947
Total current assets 13,552 1,667 Total equity 8,712 1,372
Total assets 14,233 2,319 Total equity and liabilities 14,233 2,319

(unaudited) Nine months Ended 30 Sep

EUR, millions 2021 2020
Revenue 13,444 137
Cost of Sales 2,328 18
R&D expenses 678 388
Administrative expenses 187 66
Other operating income 333 9
Operating profit (loss) 10,584 (326)
Finance expense 252 25
Profit (loss) before taxes 10,332 (351)
Income taxes 3,206 1
Profit (loss) for the period 7,126 (352)

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Accounting in Multi-National Enterprises 2.4 – 2022

Question 1: Strategy Analysis 8 points

Industry analysis entails the embedding of a focal firm in its industry to enable a comparison with
competitors (e.g., by drawing on Porter’s Five Forces). Before conducting such analysis, it is important to
define the industry in which a company operates. For Moderna and BioNTech, we could consider the
following three approaches:
(i) Moderna and BioNTech are the only firms that have successfully launched mRNA vaccines, so
they constitute the relevant industry by themselves.
(ii) Moderna and BioNTech are biotechnology firms, so could be compared to firms in the respective
Nasdaq biotech index (as noted above).
(iii) Moderna and BioNTech produce drugs/medication, and hence should be place in the larger
pharmaceutical industry.

Briefly assess each of these approaches as to their suitability for analyzing Moderna and BioNTech.
Explain which approach has your preference, also in light of financial statement analysis as a whole.

Question 2: Accounting Analysis (I) 14 points

a. Explain how the accounting for R&D expenditures illustrates the two themes underlying our
course discussion of financial statements (accrual accounting and management discretion).
Which of the two accounting treatments (US GAAP or IFRS) makes it easier for firms to
communicate that they anticipate profits in the future? Explain. (6 points)

b. In its 2020 annual report (p. F-20), BioNTech explains its accounting policy for R&D expenditures
as follows:
“Research costs are expensed as incurred. Development expenditures on an individual project
are recognized as an intangible asset if, and only if, all of the following six criteria can be
demonstrated by the Group:
• the technical feasibility of completing the intangible asset so that the asset will be available
for use or sale;
• its intention to complete the project;
• the ability and intention to use or sell the asset;
• how the asset will generate future economic benefits;
• the availability of resources to complete the asset; and
• the ability to reliably measure the expenditure during development.
Due to the inherent risk of failure in pharmaceutical development and the uncertainty of
approval, management has determined that these criteria are not met in the biotech sector
until regulatory approval has been obtained. The related expenditure is reflected in the
consolidated statements of operations in the period in which the expenditure is incurred.”

Required:
i. Explain why ‘regulatory approval’ is the key threshold that BioNTech draws on to decide
whether to recognize project expenditures as an intangible asset. Also, explain which of the six
criteria (one or more) the company likely draws on to make that argument. (4 points)
ii. How does BioNTech’s accounting policy create an asset distortion in the firms’ financial
statements? Explain. (4 points)

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Accounting in Multi-National Enterprises 2.4 – 2022

Question 3: Accounting Analysis (II) 8 points

Stephanie is an analyst of BioNTech and posits the following:

“Accounting-wise, covid-19 lets us neatly assess the expenditures of developing BioNTech’s vaccine. The
virus’ genetic sequences were released in January 2020 and BioNTech obtained regulatory approval for
its vaccine in December of the same year. Hence, the firm’s 2020 R&D expenses of 388 million Euros
indicate the costs incurred for developing the vaccine and we can capitalize these to more properly
assess the firm’s financial performance. Put differently, before 2020 the disease was unknown, meaning
that earlier expenses cannot relate to the vaccine, while after obtaining regulatory approval the firm has
capitalized all related expenditures as intangible assets anyway, as per its accounting policy.”

a. Discuss Stephanie’s argument on capitalizing BioNTech’s R&D expenses. Do you agree with the
analyst’s selective capitalization strategy? (4 points)
b. Contrary to Stephanie’s suggestion, we assume that an analyst wishes to capitalize both 2020
and 2021 R&D expenses. Present the adjustment table that results from such a procedure.
Note: Assume that the useful life of the resulting R&D asset is five years (mid-year convention),
and record any tax effects in the balance sheet under ‘other liabilities’. (4 points)

Question 4: Financial Analysis (I) 16 points

Use BioNTech’s financial statements to analyze the firm’s performance in the third quarter of 2021,
based on:

a. The traditional decomposition of Return on Equity:

i. Compute the components of Return on Equity separately; (4 points)
ii. Briefly discuss the result that you obtain. (2 points)
iii. How do your adjustments from question 3.b. affect this decomposition, as computed
under 4.a.i.? Briefly explain. (4 points)

b. The alternative decomposition of Return on Equity:

i. Compute the components of Return on Equity separately; (4 points)
ii. Discuss where the company’s profitability comes from. (2 points)

Question 5: Financial Analysis (II) 19 points

Conduct a financial analysis for Moderna and BioNTech using the two firms’ statements of Q3 2021,
specifically by:
a. Common-sizing the firms’ income statement and briefly discussing key findings; (4 points)
b. Assessing the firms’ working capital management (seven ratios) and briefly discussing key
findings; (9 points)
c. Analyzing the firms’ financial management, particularly its liquidity and solvency, and briefly
discussing key findings. (6 points)
Note: For relevant ratios, see our course slides. Also, one ‘leverage’ ratio will be sufficient.

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Accounting in Multi-National Enterprises 2.4 – 2022

Question 6: Prospective Analysis (I) 4 points

Both Moderna and BioNTech experienced a large increase in revenue and profit in 2021 due to their
production and sale of covid-19 vaccines.
a. Generally speaking, does this superior performance imply that, prospectively, the firms will
inevitably return to ‘normal’ profitability? (2 points)
b. In their earnings presentations, both firms highlight their research pipelines that display the
different clinical trial stages of the firms’ drug/vaccine candidates. Explain how these overviews
shed light on the firms’ prospects and may also affect your answer to a. (2 points)

Question 7: Prospective Analysis (II) 7 points

a. Following BioNTech’s Q3 2021 earnings release, the firm’s share price was 216.86 EUR, resulting
in an equity value of about 47 billion EUR. Use a one-period discounted cash flows model (i.e., a
discounted perpetuity with growth) to approximate the growth rate implied by BioNTech’s
market value. Briefly discuss the growth rate you obtain. (3 points)

Note: BioNTech’s cost of equity is 6.35%. Cash flow from operations for the nine months ended
30 Sep was 1,089 mEUR, which you can assume to remain at that level for the full year. The firm
expects capital expenditures to be 200 mEUR. The increase in borrowings can be derived from
the financial statements. Again, assume there is no further change in the fourth quarter.

b. Following Moderna’s Q3 2021 earnings release, the firm’s share price was 284.02 USD, resulting
in an equity value of about 115 billion USD. Use a one-period discounted abnormal earnings
model (i.e., a discounted perpetuity with growth) to approximate the growth rate implied by
Moderna’s market value. Briefly discuss the growth rate you obtain. (4 points)

Note: Moderna’s cost of equity is 8.98%. Also, gross up the firm’s revenue for the nine months
ended 30 Sep to obtain expected yearly sales. Apply the net profit margin computed above to
obtain expected net income for the whole of 2021. Finally, use the firm’s book value of equity
for 2020 for computing abnormal earnings.

Question 8: Investment Recommendation 4 points

Moderna currently trades for 172.74 USD, while BioNTech’s share price is 160.35 EUR (as of 2 Feb 2022).
Using your analysis above, what is your investment recommendation (buy, hold, sell) for the two firms?
Appropriately support your recommendation, where necessary. If you require further information to
make such a decision, specify which additional aspects you would be interested in.

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