Down 13% in a day, is Moderna stock in trouble?

Modernhis (MRNA -2.63%) Shares fell 13 percent on Sept. 12 after the announcement of extensive cost cuts that would affect several of its pipeline programs and end several others. Now, management is warning investors that a return to routine profitability may not be in the books for several years.

Is the drop in shares just a blip as part of the announcement of some less-than-great news, or is there a real risk of a longer decline? Let’s look at what’s on the chopping block and what it means for shareholders.

Sales are not keeping up as expected and neither are profits

Moderna’s fortunes haven’t been great since public interest in getting their coronavirus vaccines has plummeted over the past two years or so.

Its quarterly revenue has fallen 95% over the past three years, reaching $241 million in the second quarter of this year. It’s no longer profitable, and while it expects sales of up to $3.5 billion by 2024, that includes some assumptions about the adoption of its jabs that may not hold true based on its sales performance by now this year.

The cause of the stock price drop was the announcement that starting in 2027, the biotech will cut its research and development (R&D) spending by $1.1 billion. Its research and development spending over the last 12 months is more than $4.8 billion, so the cuts represent a major reduction in its future business, on top of previously announced and implemented financial discipline measures of about $607 million in the last year or so.

Five of its preclinical and early-stage clinical programs are being discontinued immediately, including its vaccine candidate to prevent respiratory syncytial virus (RSV) in infants. Individual programs are cut from biotech pipelines all the time, but a smaller R&D budget means much less potential for long-term growth, and it’s not very common for an established biotech generating sales revenue to cut more than one or two programs. at the same time. So perhaps Moderna’s management is genuinely concerned about the health of the company and its expense ratio over the next few years.

It now explicitly states that it will not be profitable based on its operational use of cash until 2028. Although management does not anticipate needing to issue new shares 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 did not reassure shareholders about the ability to take on new debt. If it relies heavily on debt financing, it could ultimately lead to even less cash flow to reinvest in growth.

So is Moderna 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 stock and its grim reduction in future R&D activity, the odds are still in its favor for the long term, and the short term may not be as bad as investors might anticipate . Here’s why.

Management’s rationale for the research and development cuts is that the company now has so many late-stage products in development that are nearing regulatory approval that it needs to focus more on developing its commercialization capabilities and development efforts in late phase to actually realize the income. these products could bring. In total, it could have up to 10 different programs hit the market by 2027, if regulators give their go-ahead to all candidates that are eligible for approval.

Given the biotech’s unusually strong knack for succeeding in its clinical trials — management argues — continuing to go all-in on research and development would result in some sort of reserve in the making.

For a big pharmaceutical business, any similar claim about a pipeline reserve would be laughable at best and discrediting to management at worst. But there’s no denying that Moderna’s spectacular growth from 2020 to 2022 would have overwhelmed the marketing resources of most biotech companies if their pipelines had continued to churn out programs that advanced to approval so quickly. And importantly, he’s not done advancing and updating his coronavirus vaccine programs, so it’s not as if the resources he initially used to launch his jab are now free to be tasked elsewhere part.

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 has outpaced its ability to commercialize its drugs. 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 continued, even if it involves a temporarily financially difficult and somewhat painful (in shareholders’ view) young adulthood after the stunning debut of biotechnology.

So while investors shouldn’t expect the next couple of years to be comfortable, if you have a strong stomach, it could be a smart move to buy Moderna stock as it eases market pessimism. There’s no guarantee that all of the products it plans to launch will come to fruition, but with the strength of its pipeline — assuming it survives the cuts — in the long run, a few misses along the way won’t matter much.