What's in the Moderna Q2 earnings call?

Somebody asked me (different “somebody” this time, though the same subject) about the Moderna Q2 earnings call. Do I look like I know the answer to questions like that?! On close inspection, though, it looks like a python swallowing a pig: a smallish company tackling a big problem with COVID vaccines.

Honest, this is not the all-Moderna-all-the-time blog! You want that, you go to their web site. This is the anxious retired statistican research scientist blog, where people keep asking me questions about COVID-19 vaccines during the pandemic. Promise there will soon be more content on other subjects!

Also… really, I dunno why I should have an opinion about earnings calls? Those things are a cross between kabuki accounting and managerial propaganda theatre designed to convince analysts to give a good rating, or to put a postive-mental-attitude spin on bad events. For example, my rule on how to read a stock proxy: the good news is in the front under the picture of the chairman, and the bad news is in the back in the footnotes to the financial statements. Nothing deeper than that, really. And nothing less cynical.

Quarterly Report to Analysts

Still… somebody asked me “What do you think of this?” “This” turned out to be a fairly vanilla quarterly report to analysts. Nearly every big company, especially public ones, and many small ones, do this. The slides are heavily reviewed and sanitized before disclosure to the public: to be truthful, not to reveal company secrets, and occasionally not to raise expectations too much. It seems to be the Q2 update from Moderna on 2020-Aug-05. Let’s see if we can make anything of the contents!

One of my close associates described them as “a very promotional company” which “did some very hype things” and had “ethical problems”. I was curious to see if there was any evidence of that, and am happy to see that there’s nothing here with which I have a problem. (Other than the usual very low opinion I have of corporate types. As these things go, the report looks ok.)

A Look Through the Slides

For a (mini-) pharma company like Moderna (“mode RNA”, get it?), this involves a pipeline report. They will tell you exactly nothing about their preclinical research which is where all the exciting new ideas are (and where I spent the bulk of my career). But they will tell you all about products that are in development, i.e., clinical trials – what the compound is, what the disease application is, what the patient biomarker is, what stage of trials they’re in, what results have been approved by the regulatory bodies for release, etc. They will do this until submission to the FDA and hope for approval, or until they fail (in which case they often sink beneath the waves like a rock, never to be seen again except in case of lawsuit). So here on slide 7 you see the stuff they have going on that they want to tell you about. They know you want to hear all about COVID-19 vaccines, but they’re gonna make you sit through reports on their CMV & Zika vaccines now that they have your ear.

So Moderna is telling you that they have (a) a highly innovative technology for delivering mRNA-based therapies, and (b) an advanced pipeline full of potential near-term approvals. Point (a) is without a doubt true: I know some of their people and they’re really good (and only disklike one of them, who impressed me as being a bit of a predator), and their technology is also good (others have been developing some similar technology, and someday there’s gonna be a patent war hated by everybody but the attorneys). Point (b), on the other hand, is arguable.

This slide deck is their attempt to argue both points to you in their favor, so you’ll think their stock is worth a lot — and despite what anybody says about this being “a very promotional company”, this is absolutely normal behavior for a biotech and sometimes for a pharma company. Yes, they’re boasting; boasting of this very specific, very carefully sanitized-by-lawyers form is what this kind of earnings call presentation is all about!

Content & Interpretation

Some thoughts on the content:

• They raised \$1.3bln in a stock offering and got a \$0.5bln grant from BARDA for ‘1273 (the COVID vaccine candidate). Add in considerable in-house investment that they’ll never tell you about, and they’re up to their eyeballs to the tune of more than a \$2bln bet here. Interpretation: This vaccine is a make-or-break thing for them. You might not like to take that risk, personally or as an investor, but you certainly can’t accuse them of timid half-measures! Taking risks is great… when it pays off. We call it “risk” because sometimes it doesn’t pay off, and this looks to me like a financially existential risk for them (as in, if it blows up, they won’t exist afterwards).

• Some of that money is being plowed into “at risk” manufacturing, meaning they’re making supplies of the vaccine and warehousing it to make sure it’s available immediately if it gets approved. Usually you only do that if you damn sure of yourself, because the “risk” is you may have a warehouse full of toxic goop that is not an approved medication, and you’ve just blown a billion dollars. Interpretation: They’re pretty damn sure of themselves. If they get approval, they’ll be heroes. If they don’t, nobody will remember their names, or their company.

• They managed to run Phases 1 & 2 of the trials in spite of quarantines, lockdowns, equipment shortages, and for all I know invasion from space aliens. They are proud of this, and spend some time saying so. Interpretation: They are quite justified here; give them a round of applause.

• They’re trying really hard to say “Hey, we know you’re here for the ‘1273 COVID program, but we have a whole pipeline full of other potentially great stuff”. See, for example, slide 7-8 (above), where they really want you to listen to their story on a CMV or Zika vaccine. And in ordinary times, it would be a good story. Interpretation: Nobody wants to hear it. Either ‘1273 gets approved and then we’ll listen to everything else, or ‘1273 goes down and takes the company down with it.

• Keep in mind: Moderna has never had an approved drug, and they are using a technology which has never been used before in an approved drug. Interpretation: Scientifically fascinating, but full of risk! Nothing wrong with that; risk-taking is how you make money. But it’s also how you lose money. Don’t fall in love with the company yet, because if ‘1273 goes down, it will be dead next year.

• Slide 16: this is the place where they start talking about ‘1273, and it’s a timeline of data releases that have already happened. Nothing new here. (“But let me tell you about our CMV/Zika vaccines…”) Amusingly, they say they reported results in The England Journal of Medicine, when this very famous journal is actually called The New England Journal of Medicine. Interpretation: Yes, I am a very mean person. I snicker at typos. But when something this, heavily filtered through proofreaders, lawyers, managers, and other grand panjandrums, still has a typo in the name of an crucial publication in one of the world’s most widely known medical journals, it tickles me. Somebody got yelled at. Pretty loud, too.

• Slide 21: this is where they talk about their “value proposition”, i.e., their plan to make a bundle. Interpretation: My guess is that in case of success, they will not make a bundle: they will survive, break even, maybe a small profit. But the vaccine will be immediately put under compulsory license so it can be made all over the world by everybody and given away essentially for free. The real value proposition then, is that they’ll be heroes and everybody will listen to them about the rest of their pipeline. And… maybe that’ll be the right thing: they do have interesting tech, and an interesting pipeline in things beyond vaccines (even some cancer immunotherapy stuff, which used to be near my bailiwick, and that looks pretty good).

• Slide 22: They did something called an ICER analysis (“incremental cost effectiveness ratio”) which basically is a lot of hand-waving to justify picking a price. Interpretation: Look, it’s not gonna matter. In their favor, see slide 25 where they say it’s their responsibility to manufacture at-risk ahead of approval, and make it available to everybody regardless of ability to pay no matter what the “value proposition” is. So… good on them! Seems like they’re looking at ~\$35/dose x 2 doses/course = \$70/course. That’s cheap enough for people in the US middle-class and above to afford, and still cheap enough for the government to subsidize for the rest. How it will play out in the international arena, especially the developing world, is yet to be seen.

• Slide 28: Check out the top line of the table! In March they had \$1.7bln in cash, equivalents, and investments; but now they have \$3bln! Remember I told you above they took in about \$2bln? There it is. Interpretation: Money comes with strings attached; the people who gave it to them will want something back. Like, a profitable COVID vaccine. This will be in tension with the goal to make it freely available. Also, the table says they’re running at a net loss (unsurprising, with no products).

Conclusions?

So, unlike my friend’s judgement, I have no problems with them ethically: they look like everybody else, and are at least trying to do the right thing, to the extent that they’re betting their company and probably their careers. They are self-promoting, but no more so than one would expect. They are pretty up-front about the existential risks to them, at least if you know how to read a slide deck like this.

OTOH, I will not personally invest in them. Not because I don’t like the company, but because one should invest in index funds! (Give your stock-picker friends a minute to let their head explode; they’ll be back with us in a minute.) For example, Vanguard’s VTWAX fund invests in substantially every investable company in the world. Once Moderna’s big enough, they’ll be in there too. In the meantime, picking stocks you think are undervalued or good growth opportunities is saying you’re smarter than every single other market-maker out there who has set prices the way they are.

I’m pretty smart, but I’m also smart enough to know nobody’s that smart.