Moderna's (MRNA 0.40%) stock fell by 13% on Sept. 12 upon the announcement of extensive cost cuts that would affect a handful of its pipeline programs and terminate a few others. Now, management is cautioning investors that a return to routine profitability may not be in the cards for a couple of years.
Is the stock's decline just a blip that's part and parcel with the announcement of less-than-great news, or is there a real risk of a longer downturn? Let's analyze what's on the chopping block and what it means for shareholders.
Sales aren't holding up as expected, nor are profits
Moderna's fortunes haven't been very good since the public's interest in getting its coronavirus vaccines waned sharply over the last two years or so.
Its quarterly revenue crashed by 95% over the last three years, reaching $241 million in the second quarter of this year. It's no longer profitable, and while it expects to bring in as much as $3.5 billion in sales for 2024, that includes a few assumptions about the uptake of its jabs that may not hold true based on its sales performance so far this year.
The cause for its tumbling share price was the announcement that starting in 2027, the biotech will slash its research and development (R&D) expenses by $1.1 billion. Its trailing-12-month R&D expenses are more than $4.8 billion, so the cuts represent a major reduction in its future activity on top of previously announced and implemented financial discipline measures of around $607 million over the last year or so.
Five of its preclinical and early-stage clinical programs are being discontinued immediately, including its vaccine candidate for preventing respiratory syncytial virus (RSV) in infants. Individual programs get cut from biotech pipelines all the time, but a smaller R&D budget means far less potential to grow over the long term, and it isn't very common for an established biotech that's generating sales revenue to trim more than one or two programs at the same time. So it is probably the case that Moderna's leadership is genuinely worried about the company's health and its rate of spending over the next few years.
It is now explicitly stating that it won't be profitable on an operating cash usage basis until 2028. Though management doesn't anticipate that there will be a need to issue new stock to shore up its cash reserves between now and then, as it has nearly $8.5 billion in cash, cash equivalents, and investments as of Q2, it didn't reassure shareholders about the possibility of taking out fresh debt. If it leans on debt financing heavily, it could eventually lead to having even less cash flow to reinvest into growth.
So is Moderna's stock in trouble? For now, the answer to that question is yes.
This could be a decent opportunity to buy the dip
Despite the market's dumping of Moderna's shares and its grim trim of future R&D work, the odds are still in its favor over the long term, and the short term may not be as bad as investors may be anticipating. Here's why.
Management's rationale for the R&D cuts is that the company now has so many late-stage products in its pipeline approaching their shot at regulatory approval that it needs to focus more on building out its commercialization capabilities and late-stage development efforts to actually realize the revenue those products could bring in. In total, it could have as many as 10 different programs reaching the market between now and 2027, if regulators assent to all of the candidates that are eligible for approval.
Given the biotech's unusually strong knack for success in its clinical trials -- management claims -- to continue going full-bore on R&D would lead to a backup of sorts in the pipeline.
For a big pharma business, any similar claims of a pipeline backup would be laughable at best, and discrediting to management at worst. But it's undeniable that Moderna's spectacular growth from 2020 to 2022 would have overwhelmed the commercialization resources of most biotech companies if their pipelines continued to produce programs that advanced into approval so quickly. And, importantly, it isn't done advancing and updating its coronavirus vaccine programs, so it isn't as though the resources it used to launch its jab originally are now free to be tasked elsewhere.
In other words, it actually seems to be the case that Moderna's pipeline is so productive in so many different disease areas that its R&D output overshot its ability to commercialize its medicines. Such a scenario is, to my knowledge, unprecedented in biopharma. It's also very bullish for the stock's long-term performance if the same degree of research productivity can be carried forward, even if it implies a temporarily financially awkward and somewhat painful (in the view of shareholders) young adulthood after the biotech's stunning debut.
Therefore, while investors shouldn't expect the next couple of years to be comfortable, if you have a strong stomach it might be a smart move to buy Moderna stock as it dips on the market's pessimism. There's no guarantee that all of the products it plans to launch will come to fruition, but with the power of its pipeline -- assuming it survives the cuts -- in the long run, a few misses along the way won't matter much.
