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How investors could pose as a headwind for Moderna

In this article:
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Hartaj Singh, Oppenheimer Analyst, joins Yahoo Finance to discuss downgrading Moderna earlier this month, future outlook on the stock, and questions around booster shots.

Video Transcript

- Of course, there is growing concern about the Delta variant, and how well the current vaccines that are on the market work against Delta and other variants. My next guest actually downgraded Moderna earlier this month ahead of the company's earnings. It seems to have been the right call now in hindsight. Joining me now is Oppenheimer analyst, Hartaj Singh. Hartaj, good to see you. Talk to us about that downgrade earlier this month. What didn't you like in Modernas' his company and the valuation that led to that downgrade.

HARTAJ SINGH: Yeah. Honestly, thank you very much for having me. It was really difficult. I'll tell you that for the three days before that, I was literally changing my mind every hour, you know, to keep or buy or you know, go to a neutral. We decide to go with neutral very simply. As I've said, you know, to a lot of our clients, that it's the tension between the expectations around COVID-19 sales for them going forward, the peak of sales in 2021 and 2022, and then the organic sales that they're going to get from their franchise going forward, plus and their pipeline. And you know, at that time is $170 billion market cap company.

The expectations had gone so huge on COVID-19, and we still need to see some work, you know, on the pipeline. There's an R&D day on September the 6th. We felt the right call, you know, was to sort of go to a neutral. I'd call it an optimistic neutral because we do think COVID-19 is going to be a very big business for them going forward. They're going to be profitable company. Then it's just a matter of time for waiting for what's the next big thing with the pipeline. So that was really the reasoning behind our downgrade.

- Would the next big thing in the pipeline be these booster shots, which we know now health officials are looking at perhaps offering booster shots to seniors as early as this fall?

HARTAJ SINGH: You know, I think that booster shots, there have been an expectation around them for a while. Viruses like coronavirus tend to mutate. Moderna has been talking about that, Pfizer, BioNTech's been talking about that, other companies in the space have talked about that. So we had the expectation of boosters, you know, sort of implicit in our model in the gross number that we had going forward. So it would be not really something that would move our view of the valuation of the company.

HARTAJ SINGH: I do think that, you know, people that are older or immune compromise will probably get boosters once every six months to a year. And then, you know, hopefully, healthy adults like myself will get it also probably every year or two years going forward. So that was part of our model. I think it has to come from the pipeline elsewhere aside from COVID-19.

- OK, so you mean something not having to do with the virus at all you think is the next sort of leg up in terms of growth for Moderna in particular or for Pfizer as well. I mean, I know that Pfizer is a much larger company and a much more diversified company.

HARTAJ SINGH: Yeah, we don't cover Pfizer. So unfortunately I can't comment on that. But I can say that they face similar issues. Look, with Moderna specifically, right? So let's see for sake of argument, in 2023 onwards, they get $10 billion in sustainable revenues. They'll do about 20 maybe $30 billion next year. But let's say they do $10 billion in 2023 going forward, including boosters, then the question becomes, what adds to that, right? And we think they can actually bring a flu virus into the market that could change the game, you know, 2023 or 2024.

They've got another vaccine in phase III development for cytomegalovirus, which tends to the area the focus is on women of childbearing potential. They've been working on that for a while. That was actually the original project we were always very excited on that should have a readout in 2023 with potential approval in 2024. And then they're focused in rare diseases.

There's about 650 rare diseases where people are missing enzymes or an enzyme is misfolded, usually tends to show up in children after they're born, they don't have long lifespans. And that's an area where by giving it mRNA you can replace that enzyme, and that's an area that investors get very excited about. And we'd hopefully like to see more data on that over the next few quarters starting with the R&D day on September 9. I'm sorry, September 6.

- Right. I know that, you know, the stock has nearly tripled in value this year, Moderna's stock. What is your price target on the stock right now? You know, we at-- Oppenheimer does not recommend price targets for neutral stocks. I tend to follow that. But if I had to put a price target on it, it would be between 350 and 450. So you can say 400 on the midpoint. One of the things I point out is that the stock's been up 600%, 700%, 800%, right, since COVID-19. They got a product approved in one year, and they're profitable company six months after the product was approved.

If you go back and look at Alexion or Regeneron, it took them, you know, once they got their first product approved, 5 years later, they had three to five times that amount in sales and earnings, and their stock was up 500% to 700%. So Moderna did in one year what it took those companies five to seven years to do. So this last move over the last year, that actually does not bother me. I think that's pretty rational. The stock has acted pretty rational in terms of a product being approved and the company becoming profitable. Now, it's a question of what's next? And that's what we're waiting to see.

- Well, certainly, one of the catalysts for the stock moving up was its addition to the S&P 500. I believe that was in July. But what do you think in terms of headwinds for Moderna? I mean, we talked a lot about some tailwinds, but what do you think is a major headwind for the company going forward?

HARTAJ SINGH: You know, having seen this sort of issue before with companies that had one or two years of declining sales, you know, after a big run up. For whatever reason, Gilead had that a few years ago, some other companies that are experiencing patent issues, that's not the case with Moderna. You know, the biggest issue honestly is just, you know, investors being patient, and understanding that in 2021 and 2022, quite a decent bit of the revenues are going to come to but are not going to be inorganic meaning they're going to be one-offs. And then we're going to see an organic sales from 2023 onwards.

And so we'll see a leg down in sales and earnings, and we have to be patient to work our way through that. I really think that's the headwind. It's more investor understanding around what's basically the issue between a one-off and recurring sales. And if investors over a long term time-rise are not willing to accept that, you know, I think the stock should be maybe range-bound for a few quarters. But I think it should be OK.

- All right. Hartaj Singh, Oppenheimer analyst. Thanks so much for stopping by and talking a little Moderna with us. We appreciate it.