Moderna, Inc.‘s (NASDAQ:MRNA) decision to significantly reduce the scope of its R&D activities shows a lack of confidence in its Covid business and/or its pipeline and will meaningfully lower the number of “shots on goal” that it has going forward. Meanwhile, its Covid vaccine business is contracting rapidly amid significant challenges. Also negative for MRNA stock is the possibility that worries about mRNA technology will curtail the demand for its future shots.
On the positive side, Moderna looks set to be the first to launch a combined Covid/flu vaccine. Still, the shot is likely to have significant competition over the longer term. And given the high forward price-to-sales valuation of MRNA stock, along with its other issues, I rate MRNA stock as a sell at this point.
A Lack of Confidence and Fewer Opportunities
On Sept. 12, Moderna disclosed that it would reduce its R&D budget by about $1.1 billion between 2024 and 2027. Specifically, the firm’s R&D outlays are slated to drop to $3.6 billion to $3.8 billion in 2027 from $4.8 billion this year. As a result of the change, the vaccine maker is dropping five of the programs in its pipeline.
The decision shows either a lack of confidence in the ability of the revenue generated by its Covid vaccine to fund the previous level of R&D, reduced optimism about the efficacy of the programs that it dropped, or some combination of the two factors.
Of course, increased pessimism about the amount of revenue that its Covid vaccines can generate bodes badly for the outlook of MRNA stock. And a lack of confidence in the efficacy of five of its pipeline programs, in my view, suggests that the company’s mRNA platform may not be very sound.
An Uninspiring Late-Stage Pipeline
And of course, after dropping five programs, Moderna will have many fewer chances to develop successful shots over the longer term.
On the positive side, Moderna is conducting several late-stage studies. However, one of these studies, a Phase 3 trial of its norovirus candidate, hasn’t started yet and consequently likely won’t be approved for at least 18 months. Meanwhile, Moderna expects to submit its combined flu and Covid vaccine for FDA approval later this year, likely making it the first such shot to be approved. But as I mentioned earlier, this vaccine is likely to face significant competition over the longer term. Indeed, Novavax, Inc. (NVAX), in partnership with Sanofi, expects to report data from a Phase 3 trial of its own combined flu-Covid shot by the middle of 2025. Further, although the combined shot being developed by Pfizer Inc. (PFE) and BioNTech SE (BNTX) failed to meet the primary endpoint against influenza B in a Phase 3 trial, investment bank William Blair wrote that the firms are not necessarily out of the race.
And its RSV vaccine for adults 18 to 59 will have to take on two strong competitors: GSK plc’s (GSK) Arexvy and Pfizer Inc.’s (PFE) Abrysvo. Arexvy has already been approved by the FDA for adults between the ages of 50 and 59, giving it a first-mover advantage over Moderna in that key group. Also boding badly for the outlook of Moderna’s RSV shot, which was approved by the FDA for adults 60 and over, the firm warned during its Q2 earnings call that early sales of its RSV shot in the U.S. were lower than expected due to “competitive pressures.”
In light of these points, I’m generally not very bullish on the company’s late-stage offerings.
mRNA Issues
Only 43% of Americans intend to get an updated Covid shot this year, a recent survey by Ohio State University found. The reluctance of a majority of Americans to obtain a Covid vaccine, which of course bodes poorly for Moderna and MRNA stock, is likely partly due to worries about the adverse effects associated with mRNA technology. In February, a multi-country study which evaluated almost 100 million individuals who had received Covid vaccines” affirmed the vaccines’ previously observed links to increased risks for certain adverse effects including myocarditis and Guillain-Barré syndrome,” The Hill reported. As I noted in a previous column, the Florida Department of Health in 2023 “noted that there was a 1,700% increase in the reporting of adverse events associated with vaccines during the launch of the Covid shots.”
Worries about the side effects of the mRNA shots likely were part of the reason that the company’s revenues, which are predominantly generated from its Covid vaccines, sank 30% last quarter versus the same period a year earlier. It’s entirely possible that trepidation among many about the mRNA technology could negatively impact the demand for Moderna’s shots apart from its Covid vaccines.
Valuation
Moderna expects its 2025 revenue to be between $2.5 billion and $3.5 billion. That puts its forward price-to-sales ratio at 10.2 times. That’s very far above the industry average of 3.8 times. It’s also much higher than Novavax’s forward P/S ratio of 2.66 times and BioNTech’s level of 7.8 times.
Upside Risks and the Bottom Line
If worries about the coronavirus suddenly increase, uptake of Moderna’s coronavirus shots could quickly increase. Such a development would likely meaningfully boost MRNA stock. Moreover, the RSV shots of Pfizer and/or GSK could suddenly become less popular due to a dangerous side effect that emerges, allowing Moderna’s RSV shot to generate much more revenue for the firm. Over the longer term, a number of Moderna’s vaccine candidates that are currently in early-to-mid stages of development could perform very well in later-stage clinical trials, boosting MRNA stock.
Despite these upside risks, I recommend selling the shares now due to the lack of confidence that the company has shown in itself, worries about the side effects of mRNA vaccines among some consumers and experts, the company’s unimpressive late-stage pipeline, and the high valuation of MRNA stock. If one or more of these factors change significantly and/or any of my upside risks materialize, investors can consider buying the shares in the future.
