Moderna (NASDAQ:MRNA) startled everyone with a gloomy quarter report on November 2, 2023. Despite beating revenue estimates by $448.98 million, the company suffered a staggering GAAP EPS loss of $9.53, undershooting estimates and instigating a flurry of Wall Street analysts lowering their price targets. Deutsche Bank (DB) didn’t hold back, downgrading it to sell with a $60 price target, implying a 28% dive from November 16’s $76.55 stock price. HSBC (HSBC) analyst Yifeng Liu also trimmed the price target from $89 to $69.

Critics who questioned the waning COVID-19 infection rates in 2023 and the trajectory of Spikevax demand finally got their answer. Moderna’s management delivered a grim verdict, stating that the sales of its sole product, the Spikevax vaccine, would continue to plummet after reaching an all-time high of $18.4 billion in 2022, rendering the company unprofitable for several years to come. Notice from earlier in the year that the U.S. government planned to halt COVID-19 vaccine purchases and retreat the market to the private sector had prepared investors for the dip in Spikevax demand. The company’s shares tumbled around 16% at the open but clawed back, hovering around the same pre-earnings release level by November 16.

In my previous analysis, I cautioned about the crumbling fundamentals and emphasized that investing in Moderna was an adventurous wager on the prowess of its mRNA platform and drug pipeline success. Fast forward to the present, and this statement couldn’t ring truer. The stock’s trajectory in the coming years will likely be steered more by news about the company’s drug pipeline than earnings reports. Anyone considering Moderna should have faith in its ability to bring its drug pipeline to fruition and monetize it in line with its projections. This article delves into Moderna’s COVID-19 business, the recent earnings report, and prospects for a resurgence in growth and profitability.

The COVID-19 Conundrum

Moderna witnessed a seismic shift in the COVID-19 market in the third quarter as the demand for Spikevax shifted from government-driven to commercially driven sales in a prevalent market. The imminent challenge that investors once fretted about was whether the company could sustain its market share against new rival COVID-19 vaccines. Concerns about market share erosion have now largely dissipated as the only mRNA vaccine makers to achieve COVID-19 vaccine approval were Pfizer (PFE) and BioNTech (BNTX), alongside Moderna. The threat from the Johnson & Johnson (JNJ) viral vector vaccine petered out after it failed to secure full FDA approval and exited the U.S. market on May 7, 2023. Novavax (NVAX) entered the race much too late, obtaining FDA approval only in July 2022. With its slow entry, it’s unlikely to pose a significant threat in a contracting COVID-19 market. Moderna has impressively clinched a larger slice of the COVID-19 U.S. market. The graph below depicts the company’s weekly market share, rising from the high 30s in September 2022 to a staggering 51% as of October 20.

Despite the ebbing demand in the COVID-19 market, management anticipates $6 billion in vaccine revenue for fiscal 2023. They forecast at least $1 billion in U.S. sales and an additional $1.1 billion internationally in the fourth quarter through advanced purchase agreements. Arpa Garay, the Chief Commercial Officer, emphasized that once the vaccines are shipped internationally and accepted by the customer, the sale is final and non-returnable. On the other hand, U.S. commercial entities only remit payment for the used vaccines, projected to be 50 million jabs.

Management does not foresee a sales uptick for Spikevax in 2024, projecting a dismal $3 billion in sales, marking an 84% plunge from the peak in 2022.

The Upcoming Drug Pipeline

In 2024, Moderna plans to introduce mRNA-1345, its Respiratory syncytial virus (“RSV”) vaccine targeting adults over 60, in the U.S. and several international markets. RSV is a common respiratory virus that poses mild symptoms but can be severely harmful to infants and the elderly. The company touts “efficacy of 83.7%” against RSV lower respiratory tract disease among older adults. Lavina Talukdar, Senior Vice President of Investor Relations, highlighted the superiority of the RSV vaccine over competition in terms of efficacy, safety, and convenience during the Jefferies London Healthcare Conference. She anticipates the RSV vaccine to generate $1 billion in revenue in 2024.

In 2024, Moderna forecasts $4 billion in total revenue from COVID-19 and RSV vaccine sales. The company lays out plans to reinvigorate revenue growth in 2025 with the launch of three additional vaccines targeting RSV. Expectations for a lift in revenue post-2025 stem from the 15 pipeline vaccines slated for 2028.

Moderna anticipates the above-mentioned drug launches to rekindle revenue growth in 2025, leading to eventual profitability after 2026.

The Financial Future of the Drug Pipeline

For the third quarter, Moderna’s cost of sales surpassed reported revenue by a hefty $0.4 billion, resulting in negative gross margins. As the demand for Spikevax plummeted, the company churned out more COVID-19 vaccine than it could sell, necessitating adjustments in its Spikevax business to correct the situation. This led to a hit on gross margins in 2023.

Moderna estimates $5 billion in cost of sales for fiscal 2023, encompassing “$3.5 billion of inventory write-downs and charges related to CMO purchase commitments, cancellation fees, and wind-down costs,” according to CFO Jamey Mock. The company aims to reduce its cost structure to 20% – 25% of sales, reinstating gross margins to 75% – 80%, but a complete recovery will take several years. The following chart elucidates the company’s financial projections for 2024 and 2025.

As revenue growth accelerates, Moderna expects cost of sales to darken, hinting at dwindling capital expenditures upon the completion of manufacturing sites in the U.K., Canada, and Australia. With a significant decrease in capital expenditures, free cash flow should surge beginning in 2025. The chart below outlines Moderna’s operating objectives for the next few years.

Don’t anticipate immediate gratification if you invest in Moderna. Patience is the name of the game.

The Balance Sheet

The company boasts $7.57 billion in cash and short-term investments with no long-term debt, accompanied by a current ratio of 2.46 and a quick ratio of 2.35. Moderna’s sturdy balance sheet stands witness to its financial fortitude.

As of the end of the third quarter, the trailing 12-month free cash flow was negative, burning $2.65 billion. The company anticipates a turnaround in FCF starting in 2025, eventually relieving the pressure to raise equity.

Risks

Investing in Moderna is not for the faint-hearted, given the inherent risks associated with biotech firms. The arduous and uncertain drug approval process poses the most conspicuous risk. Moderna’s financial forecasts hinge on the FDA’s timely approval of the four drugs expected to enter the market by 2025.

Moreover, the nascent mRNA technology, if marred by adverse reports, could prompt vaccine hesitancy and deal a blow to Moderna’s growth strategy. The specter of intense competition in the vaccine and mRNA market, mired in intellectual property battles, adds another layer of risk. Legal skirmishes, such as the patent lawsuits involving Arbutus Biopharma (ABUS) and its litigations against Pfizer and Moderna, pose a potential threat.

To Buy Or Not To Buy?

Moderna’s GF Value stood at $79.41, barely 4% above the $76.55 closing price on November 17, 2023. Despite the valuation rating of C, Seeking Alpha Quant deems it a strong sell. Presented with these conflicting evaluations, the key lies in the nature of the investor. Those seeking quick wins should steer clear of Moderna due to its potential short-term turbulence and sudden dips attributed to news about its drug pipeline. On the other hand, investors willing to play the long game and wait for the fruition of Moderna’s mRNA drug pipeline may find the stock an intriguing prospect. I cautiously advocate a Buy rating for investors geared for the long haul.