Moderna (MRNA, Financial) emerged as one of the biggest beneficiaries of the pandemic after it developed one of the first Covid-19 vaccines. However, the momentum created by the pandemic is fading, and the problem for Moderna is that the vaccine was the company's big breakthrough - its first blockbuster. As a result, Moderna finds itself in trouble with no way to replace the waning vaccine revenue in the near future. This was on full display in the company's recent quarterly earnings results, causing shares to fall more than 8% on Monday:
The company has various pipeline programs to commercialize new products, but bringing these products to market will require time. That is a luxury very few companies can afford during a bear market.
Moreover, investors don't really have time to wait around when the timeline is so uncertain. Even worse, the increased valuation compared to forward sales expectations still shows the potential for the stock to experience further declines.
Things are starting to get challenging
Moderna's exceptional success during the Covid-19 pandemic must be viewed in the context of this unprecedented period, and its long-term stock potential should not be judged solely based on this performance. The company expects its $18.4 billion in Covid-19 vaccine sales in the fiscal year 2022 to decrease to roughly $5 billion in 2023, even with additional agreements.
The critical issue is how Moderna will expand its pipeline beyond the pandemic. The company is expected to maintain its leadership position in Covid vaccines. It has already marketed an effective vaccine and is developing versions to target constantly-emerging variants. However, the potential for growth in Covid vaccine sales is limited going forward now that the world has a certain level of "herd immunity" to the virus.
To offset the drop in demand, Moderna plans to raise its vaccine's price to $130 per dose, a significant increase from its previous price of less than $30 when it was still selling to the U.S. government.
However, this strategy is not a long-term solution and may encounter obstacles. Private sector companies may not be willing to pay inflated prices for vaccine doses. The vaccine demand may not be as high as anticipated as people are forced to shoulder the cost themselves. Approximately 72.3% of the world's population has been vaccinated against the base form of the virus, and according to Moderna, an "international team of experts" has stated that there is no convincing evidence to support boosters for the general population.
In summary, the Covid-19 vaccine market is maturing, and it remains to be seen how Moderna will perform going forward as the rest of its pipeline is nowhere near ready to shoulder that big of a sales haul.
Bigger fish to fry
The Ipsos "What Worries the World" survey for March 2023 has revealed that concerns about Covid-19 are at their lowest since the survey began in April 2020. The survey ranks 18 issues of concern for people worldwide, with Covid-19 having recently dropped to 16th place. Inflation has topped the list of worries for most people.
This survey will likely have significant implications for companies like Moderna that have been relying on the demand for Covid-19 vaccines, including booster shots, to drive revenue growth. Moderna, in particular, has been developing and marketing booster shots as a crucial component of its strategy.
The reduction in concern about Covid-19 could translate to a reduction in demand for Moderna's vaccines even beyond existing forecasts, which could negatively impact the company's revenue.
Taking a long-term view
In terms of its pipeline, Moderna has announced positive phase 3 clinical trial results for its mRNA-1345 RSV vaccine candidate, which the FDA has granted Breakthrough Therapy designation. According to Moderna, the vaccine has proven to be 83.7% effective against lower respiratory tract disease caused by RSV. Without any regulatory hurdles, the vaccine could receive approval as early as April 2024, pending submission to the FDA by the end of June.
Additionally, the company has several other promising candidates in its pipeline, including a potential influenza vaccine and a cytomegalovirus vaccine, which estimates a market opportunity between $2 billion and $5 billion.
Although the company's shares may initially suffer as its Covid-related sales drop, Moderna's long-term prospects could recover when these products get to the commercialization stage. That will take a while to happen, though, and investors would also want to see Covid-related revenues stabiliizing.
Moderna has other various revenue-generating opportunities in its pipeline, such as a personalized cancer vaccine developed with Merck (MRK, Financial). However, it may take several years for these vaccines to reach peak sales, and they are unlikely to be as profitable as the Covid-19 vaccine.
Valuation does not reflect risks
In order to make up for the declines in Covid-related sales, Moderna is adding 2,000 employees to its team, which will increase Moderna's costs and make it harder for the company to stay profitable. It has the cash to do this for now, but investors aren't impressed.
Despite falling over 12% this year, the stock price remains overvalued in my view considering the near-term concerns. On paper, the company may look undervalued compared to companies like Johnson & Johnson (JNJ, Financial) as it has a price-earnings ratio of just 7. However, diversified conglomerates like Johnson & Johnson have advantages over Moderna in the form of already huge and diversified revenue streams As a result, investors are already beginning to price in future declines in product revenue.
Moreover, Moderna's costs will likely increase further as the vaccine market shifts towards the private sphere. Selling vaccine doses directly to health care providers will lead to higher logistics costs, as the company sells to multiple customers in each country and will try its best to hike prices as much as possible.
Additionally, investors may find it challenging to assess whether Moderna's stock is reasonably priced as there is still uncertainty regarding vaccine revenue in the current and upcoming years. The number of individuals opting for annual booster shots will be the primary determinant.
Takeaway
In conclusion, Moderna's current stock valuation may look attractive at first glance, but there are several challenges that the company is facing. The lack of product diversification and the shift towards a private Covid vaccine market are significant concerns that could soon impact Moderna's revenue and costs on top of already-declining Covid vaccine sales.
Therefore, investors should proceed with caution regarding Moderna's stock. While the company has shown significant potential in developing a successful Covid-19 vaccine, it will likely need to reverse its trend of sales decline before the share price can recover.
