The Bear Case For Moderna 

Moderna’s share price soared to unprecedented heights this year, no doubt reflecting the special opportunity the company has with its unique and game-changing gene altering technology.

Throw in a worldwide pandemic crisis that drove demand for its product, and the drug manufacturer found itself positioned as the key player in the nascent messenger RNA space.

Seen as one of the most important and exciting pharmaceutical success stories of recent time, Moderna (MRNA) faced little opposition in its rise to the top.

That was until now.

Following in the wake of its peak market capitalization in early August – when the company briefly topped a valuation in excess of $195 billion – more and more pessimistic voices have added their thoughts to what is becoming an increasingly downbeat and cautious narrative. Foremost among those was Bank of America analyst, Geoff Meacham, who warned that Moderna was on course to lose up to 70% of its current worth.

Meacham’s prophecy wasn’t without merit. In his letter to investors a couple weeks ago, the Bank of America (BAC) analyst estimated Moderna would need to sell 1.5 billion Covid-19 vaccines every year for the next 17 years for the Cambridge, Massachusetts-based firm to maintain its peak valuation of just under $200 billion. 

In addition, Moderna (MRNA) would need to have a 100% success rate with its current pipeline of candidate drugs, while also generating $30 billion in peak sales in the process. And this is a pipeline which includes eight preclinical programs which haven’t even begun human testing yet, a further 10 Phase 1 programs, and only four which have made it to Phase 2. 

Instead of hopping on the bullish bandwagon, Meacham advised readers to expect a share price target of around $115 per share, giving the company a more modest market cap of $46 billion.

Things Could Get Even Worse For Moderna

It’s not just the point about Moderna needing to rack up such high sales volumes that put the company in peril – the Bank of America letter also highlighted a number of reasons that suggest the long-term demand for vaccines might be less than first thought.

To begin with, breakthrough Covid infections are rare, and when they do occur, they tend to be mild or moderate in severity. And as new variant forms of Covid-19 pop-up throughout the population, exposure to these variants generally lead to enhanced immune protection as time goes on.

Furthermore, there is evidence that new variants are also less likely to be as pathogenic as those that preceded them. All these factors tend to reduce the need for more booster shots, which was one potential revenue stream that companies like Moderna were hoping they could exploit.

Even if there was a market for recall doses, it’s probable it’d only be for a small number of immune-compromised patients, anyway.

Although Meacham’s analysis appeared to present a worst-case scenario, there are still other headwinds that Moderna could face in the near-term too.

For instance, no mention was made of the fact that Moderna isn’t the only company pioneering in the mRNA field, as competitors such as Sanofi and Translate Bio – who are using the same technology as Moderna to develop a Covid-19 vaccine – are poised to take market share away from their more established rival. 

Moderna: A Fair Valuation?

The more savvy investors have been taking profits out of Moderna lately, as its share price dropped 18% from previous highs, implying that the current rally it enjoyed is well and truly over.

But the bigger questions appear to be about whether Moderna can beat the market in the long-run, whether this is just a lull in price action after which the company will trend upwards, or if in fact there’s a punishing correction on the cards.

Moderna’s earnings and sales multiples are both set to shorten over the coming year, with its P/E ratio expected to fall from 49 to 14, and its Price-to-Sales fraction from 23 to 8.

Despite these improvements in Moderna’s raw metrics, however, the sentiment felt around Wall Street isn’t anywhere near as bullish. Analysts there predict Moderna’s bottom line having already peaked in 2021, with the following two years seeing an overall drop of 63% in the drug manufacturer’s earnings.

The consensus EPS estimate has Moderna’s 2022 per share earnings dropping 14% to $25.65, then falling a further 57% again in 2023 to just $11.03 a share.

While the outlook for Moderna is still uncertain, investors shouldn’t discount the bull thesis for the company completely. How the medical evidence is interpreted with respect to Covid-19 is as much political as it is scientific.

The Delta variant which is now running rampant is responsible for 90% of new cases in the US, and daily cases are on the rise.

No government official wants to be seen as dragging their feet when it comes to tackling the disease, and the pressure to ramp up the vaccine program – which will almost certainly include the provision for booster shots – will be strong. If Moderna is in the right place at the right time, its fortunes could go either way. 

Shareholders might have reason to be wary right now, but sometimes a highly overpriced valuation is just part of an early stage growth company’s story. Holding onto Moderna stock until things become clearer might be the wisest move at the present time. You might be selling at the top, but you also might be selling at the bottom too. 

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.