Moderna, Inc. (MRNA) Earnings Call Transcript & Summary

Great. Well, good afternoon, everybody. Thanks for joining us. I'm Terence Flynn, the U.S. biopharma analyst at Morgan Stanley. We're very pleased to be hosting Moderna this afternoon. We have Stephane Bancel, who is the company's CEO. Stephane, thanks so much for being here. Before we get started, for important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. Stephane, thanks so much again for your time today. Really looking forward to catching up again as it's been a while, as we were just talking about before.

Maybe I thought the place to start, just high level, give us an update on kind of strategic focus for the company here and capital allocation priorities as obviously, we're shifting to this kind of post-pandemic world here. And again, the company has a big opportunity set across the pipeline beyond COVID, but how are you thinking about strategy and capital allocation priorities as we come out of this pandemic?

Sure. So thank you so much for having me, and good afternoon, everybody. So as you saw since last year, R&D Day, and as you know, we have R&D Day again tomorrow here in New York, a lot of things have changed outside of infectious disease because for most people in the world, Moderna was a vaccine company with a single product COVID. Last year at the R&D Day, we showed 2 rare genetic program -- rare disease genetic program with good clinical outcome. Then just before Christmas, we had the cancer product, the individualized neoantigen therapy, showing great data versus KEYTRUDA monotherapy in melanoma, and then our RSV positive Phase III in January. So a lot of strains and so, what we're very happy is over the last 10-plus years, we invested because we believe we could build the platform, maybe one of the true first platform in biotech pharma. And so for 10 years, most people believe this was not possible. But we already built the company in terms of research investment, process engineering, manufacturing and so on, believing that it made no scientific sense to us that this will be a one-drug company. They would be ever 0 or a lot. And so what is really exciting to see today is that in infectious disease, we now have 2 out of 2 vaccines, COVID and RSV. The cancer is now in Phase III. The Phase II data is exciting, and we look forward to showing some more on the Phase II when we get it because it's case-to-case event-based. And then the rare disease, same, we should also have more data and more products than we have 6. So I only think that over the next few months and quarters, people are going to start to more and more realize that we have a very strong infectious disease franchise. We're not only going to do more [ nodes ]. We've COVID, flu, and RSV, but then combine them. And then this [indiscernible] is the late time we can talk about. And in cancer, we want to double, triple down. And as you saw, we didn't -- [indiscernible] we announced yesterday in oncology to be able to code that [ virology ]. And then the rare disease. We're still investing a lot in science. We believe it's still the early days of mRNA. And so we're still investing hundreds of millions of dollars in basic mRNA science in research, not development. We're looking at autoimmune disease, we're looking at lung delivery. So Moderna still extremely focused on expanding the platform. We don't think we're done. And there's a team of several hundred scientists whose only job in life is to expand the use of [indiscernible] system. So you have 40-plus drugs in development, couple launches coming in the next year or so, so exciting.

Okay. Great. And you alluded as you mentioned the R&D Day later this week. Can you give us a little preview of kind of what we should expect? Are there any programs that are going to be in focus, a little teaser.

I cannot give you a teaser, the markets are open for more hours and it will not be legal to do so. But as we've done every year, we kind of give a big update on all the R&D programs. I mean we said that we will have full data in Q3. Q3 finishes in a couple of weeks. We have R&D Day tomorrow. So there might be some full data tomorrow. As we talk about the rare disease program, because those are ongoing, we might have some update on potentially several programs, some update on oncology and so on. So yes, you're going to be a bit of everything tomorrow.

Okay. Looking forward to it. The one other topic, just high-level, I want to touch on before we go through some of the pipeline, is just the company's investment in AI. Obviously, you guys have been front and center here. It's one of the big themes in the market this year in addition to obesity. Maybe just as you look at what you've seen internally at the company, where has been the highest return on those investments you guys have made because the pushback that I got, we did a note and we have the conference where you guys presented was -- when are -- if companies are investing in all these CapEx dollars, when are they going to get a return on these dollars. Is this 3 years away? Is it 10 years away? So maybe you could speak to what you've seen in terms of returns from the AI investment.

Sure. So we've been doing machine learning way before ChatGPT because we've been a digital company for a long time. And a few examples that actually happened pre-ChatGPT, is for example, our teams have used machine learning to invent new enzymes that you use in the manufacturing process. Those enzymes have basically improved the performance of previous enzyme that we use in the earlier days of the company, enzyme that I expect most competitors are still using. But some of those enzymes were creating byproducts where they're making the manufacturing process, and we had to invent purification technology to take those out from the products so they don't end up in the vial. Well, we engineered through machine learning new enzymes that don't exist in nature, that we prove to ourselves, really work better, prove to the regulator, they will work better where you don't need the purification anymore, and we remove the purification step out of manufacturing. So we save CapEx, OpEx, people, forever, for every product of the portfolio. So I don't have a precise ROI for you because I don't know if the sales are going to be forever, but not only the finance teams are on a long complex financial model to realize for the investment in dollars that is still in the hundreds of thousands of dollars in terms of IT teams and so on. The return is pretty spectacular. So those type of examples are happening pre-ChatGPT. So what we've done when ChatGPT happened and we all played with it a lot like Christmas, like "Oh, geez", we want to use that to run the business. But we don't want to teach ChatGPT what we use at the company. So the team has basically build a system called mChat that we talked about on our Q2 call that roughly half of the employees, so 2,500 people now use every day. We're starting workshops in an AI academy to teach people how to voice prompt, as you know, for me, large language model is all about relearning your job and how to use the systems. And how do you learn to -- prompt. I mean one example, I mean, last week, I was at a factory in Norwood. And actually, a lady from Germany were showing us how to use ChatGPT -- I mean, mChat, the Moderna platform, to code Excel macros to do a job schedule that she used to do by herself in macros. And she taught herself to use mChat to basically do all the Excel kind of macro coding that she had never done before, and she was thought by mChat how to do that. People use that across the board. I have seen a couple of examples where our scientists actually using it now to try to discover new chemical structure for lipids and where the system is actually speaking chemical structure that people then are making and trying in animals. So I think it's going to be really across the board and some will get returns in a matter of quarters. Some if it's a new molecule that has to get approved, of course, will be a multiyear journey. But our belief is that the ability to use large network model or machine learning, to complement humans, to learn much faster because we believe it's a world of compounding and learning is key in what [indiscernible] especially as a new technology disruptor that we want to use it across the company. So you use it in research. The teams are using it now regulatory to actually answer regulators' questions because the questions are always similar but written in a different way. And you can think about how you can even scan employees of regulatory teams e-mail, check the documents, put the answers. They just look at the answers and that's submitted. So think about the time saved. So we're trying to use it across the board. They will take a bit of time.

Yes. Okay. That's great. Great. I guess just moving on to the pipeline and maybe we'll start with COVID first. And the vaccine strain. I know you got the approval yesterday from the FDA for the updated XBB.1.5 strain, but there's also a couple of other variants, including BA.2.86 that's circulating. So I guess my question is just as you look out here, do you still think an annual update is most appropriate? Or is this something where -- because there's still so much uncertainty around COVID and how this plays out, that we might need more frequent updates than annual. I mean, how do you think about that in the context of where we are right now today?

Sure. Again, when you go COVID, new virus, you want to start by saying you need to be [indiscernible] what you're going to say next. What we currently believe is the virus is not going anywhere, people that have high risk are going to need annual boosters. Would you need people at very high risk to need twice a year booster? It is possible. Some countries are doing that out of caution, 75-plus people that have cancer, immunocompromised and others. But if you think about the general population, we don't think people are going to need 2 boosters a year. We think 1 booster a year will be good, a bit like a flu-like model, where you have the regulators now picking up the most recent strain. As you know, we've run -- we're actually the only company that has run a clinical study with XBB in human. And we've run that -- those broad samples against all the variants you mentioned or the new ones, which were very high level of antibodies. We don't see loss of neutralizing antibodies. And as you know, unlike an antibody treatment when we -- all get a vaccine, we don't make one antibody, we make a super antibodies. So you make new ones for the new epitope you have never seen before because of mutation, but all antibody repertoire get boosted away. And so I think it's important people remember that 1 antibody, 1 epitope, is actually a super antibodies.

Okay. That's very helpful. And I guess the corollary questions is, just remind us the biggest driver of variable in terms of the kind of low end versus the high end of your guidance for this year? And then the related question is, at the end of this year, do you think we, as an industry, will have enough to project kind of how COVID plays out over the medium term because I think that's still one of the big uncertainties for a lot of the companies.

So indeed, we've given a range of $6 billion to $8 billion of sales this year, and the swing is the U.S. vaccination rate. If you believe it's going to be 50 million doses in arms similar as a percent of what happened last year in the U.S. You are in the $6 billion range. If you think it's going to be closer to 200 million doses in arms and may be closer to the $8 billion of the range. Just to remind people, we're not close to those markets. Flu is 150 million dose in arm in the U.S. So what I find really interesting about what we all believe and everybody has sure a different answer, if you want a survey of what will happen, we will learn much more [indiscernible] Christmas, is -- what is really hard for me to believe is that 1 in 3 Americans, the [ $150 million ], that are going to walk into a pharmacy of a doctor saying, "I want a flu shot." He's going to tell the pharmacist, please don't give me COVID. Don't give me a COVID shot. Because that's why you do the math from 150 to 50, the low case of things. So do I believe we're going to be as low as last year? I don't. I think last year, there was a lot of confusion. There's a lot of fatigue. Some people have gotten a spring '22 booster and so it was in the January or February or December Omicron booster. That was just a lot of booster for everybody. So we're investing a lot of our marketing efforts in how do we increase the vaccination rate in the U.S. in people at risk. So we're not going to try to spend marketing dollars to convince the 25-year-old healthy to go get a vaccine. If they want one. They walk into a CVS they'll get one. And we'll be very happy, of course, as they get protected. But what we're trying to use our marketing budget in the fall is how do we drive utilization -- vaccination for people with a high risk. That's really our target population. We're doing a lot of things on the digital social platforms, you'll see in France. So we're doing a lot of stuff that's going to pick up now because we did, of course, with the approval.

Because the U.S. Open?

Yes, because of the U.S. Open, which is more [ corporate ] branding. But if you look at target population of U.S. Open is directly in our age range that we care a lot.

Yes. Okay. Okay. Great. The -- I guess the other question is on the spend side. So given that wide range of outcomes and given we'll know more, how do you think about the levers on spend think about the range of COVID outcomes. And obviously, you have this huge opportunity set that we were just talking about, you have 4, that you want to continue to move the ball forward on. So how do you kind of balance all those priorities?

Sure. So a few things. If I just take the P&L quickly in terms of cost, we build a very large manufacturing footprint during the pandemic, because we had to in terms of saving lives, getting people back to living a normal life, like meeting together physically and also, of course, maximizing the business opportunities that was ahead of us. We knew that coming down from the pandemic, we're going to be oversized. Not to be a be genius on that. I got 2 shots of COVID from Moderna in 2021. I never anticipated I will get 3 shots of COVID from Moderna, the following years going back to our previous discussion. So our footprint is too big, which is why if you look at what Jamey, our CFO said on the Q2 call, if you take out the onetime drivers, the cost of goods was around 20% like it was before. But when you add the write-offs we had for the old vaccine, 1273, that we didn't need anymore. And the unused capacity at the partners we have that drove down the gross margin. Of course, that's the way you want to run the business. So what we are doing as we speak is actually working to rightsize, i.e., downsize our manufacturing footprint across the board to get our gross margin back to where it should be, according to industry standards and so on. On R&D, there was a huge jump in R&D from last year to this year because of where I started our discussion, which is the rare disease became real. The cancer was like, wow, the data is spectacular. And then RSV in January, so, [ G ] were 2 out of 2, the platform that we believe we have, we have. So let's create value because we had $20 billion on our balance sheet, it's like we have all that capital thanks to COVID. And then we have a platform working. And the vision has always been, if this platform is going to work and be able to just crank a lot of products, and they're going to have a much higher probability of success to get to launch then you have traditional pharma. So we don't want to sit on the cash and T-bills and just wait for the platform. And so you saw this big jump in R&D because we went from being a COVID company to a lot of Phase IIIs. But as Jamey, our CFO, explained at Vaccine Day, the good news about, for example, the respiratory Phase IIIs is they are going down. For example, COVID cost of R&D is going down. As I said, we just did a small Phase II/III study for the XBB variant. The cost [indiscernible] 30,000 people Phase III is a fraction of that. RSV, the product has been filed. So of course, we have a tail end of cost for the safety monitoring of the participants in the study, but RSV is going down and in a couple of years will be close to 0. And something we threw. So if you think about that franchise as a business, you're going to be maybe 2 years from now. With the R&D cost is going to be down 70% from where it is now. But you're going to have those sales forever and then you're going start to combine of will have more studies that are in the [ bulging ] studies. The R&D in onco, we share 50-50 with Merck. And rare diseases like $70 million, whatever, for $50 million, $70 million for Phase III. It's a rounding [ around ] on the $4.5 billion budget. And so if you think about the [ budget ] I think it is reasonable to anticipate a similar level of spend, but not the growth we have seen on '22 into '23, you're not going to see the same growth '23, '24, it just doesn't make sense math-wise. And then we want, of course, to be careful in terms of spend into the P&L. The other piece in terms of SG&A, if I kind of maybe close quickly there is, as we launch RSV and flu, it's the same medical team. Because it's infectious disease doctor on our side talking to infectious disease docs on the other side. I'm not going to have capacity in medical and so on. In the U.S., because we are already commercial this year. We hired a lot towards the end of last year and early this year. So I think the P&L is going to improve on cost of goods, but the R&D or SG&A is not going to grow.

Yes. Okay. Understood. I guess what -- I guess you're going to have other Phase III partners that are going to backfill for the respiratory Phase III because you said those are going to be rolling off. So...

Yes. So the flu, COVID, and RSV are going to roll off. Then you're going to have those studies to combine, because it's a combination is a huge piece of our strategy, but those are small. Those are a few thousand people, not 30,000 people. Those are immunobridging for 6 months of safety not 3 or 4 years of safety. So when you look at it from a cost standpoint, it's a little or a fraction of what the Phase III efficacy studies are.

Right. Okay. Very, very helpful. The -- I guess that's a good segue to the seasonal flu program. Again, it sounds like we'll get some more details here over the near term. But maybe just remind us what the target profile was that you set out to achieve? And then any more deals around this new construct, maybe the changes you guys made to better address the [indiscernible].

Yes. So in terms of -- let me start by the end game, and I'll come back -- our end game is to have combination products, COVID through RSV, with a much higher efficacy on flu. We believe scientifically that there's a lot of tools we have with the mRNA platform to drive a much higher efficacy [ flu ] product. As you know, flu in a good year, the efficacy is around 60%. In the bad year is around 20% to 30%, when there's a big shift of strain between what WHO guesses in February. And what happens is in the U.S. following fall. And we think we can get there in 2 ways technically. One is to add more H3 strain in the product. Why? Because H3, which is A influenza, drives 80% of hospitalization. And when WHO picks 1 strain they pick 1 strain of H3, why? Because the protein [indiscernible] can only make 4. They need 2 As and 2 Bs to be at the current setup. So we cannot pick 2 H3s. But in the case of Moderna, you can look at the H3 that WHO picked and which one was next on a list and which one was next on list and put them together. As you know, CMV vaccine has already 6 mRNAs in Phase III, most fully enrolled, 6 mRNA in the vial. So putting 6 mRNA for 3 H3s and 3s that cover the [ over ] A and the 2 Bs that are on [ scarce ] technically. And so -- so that's 1 way. The other way is using both the HA and the NA antigen. As you know, flu get into human cells by ever binding through the HA over any antigen. But the current products contain the HA. And if you believe why it's 50% in a good year in term of efficacy, we believe it's because the virus can still get into human cells and replicate in your body and create disease. And so we think that the perfect product is for the magic wand is put the HA to 3 NAs and put several H3s. So you're going to really have very few people getting hospitalized if they go through a vaccine. And that's why we're aiming at, and we want, of course, to [ adjust ] with COVID and RSV. And so as you play move backward, you have a lot of debate with the team. Do we go for the perfect flu product as I described, but it may be a couple of years out in terms of launch? Or do you go more like an iPhone X strategy, which is start with a non-inferior product to get your foot in the door for mono that is not inferior to what people can get at the CVS, and you can combine with COVID because I already believe commercially, there's a huge opportunity for us to take share from the other mRNA player in COVID, monotherapy and the flu guys. If you can bring the combination in a single dose. Nobody likes to get 2 shots, what shot is better, but especially the payers. One of the thing we realized during COVID, given we talked to a lot of health care ministers and [ their ] teams and so on, is we are trying to worry about how going to deal about the post-COVID pandemic world where we hope that people at risk will get a COVID shot, a flu shot every year, and now you put RSV into the mix. And then like what's going to be the compliance of that, because that's what we want, so people don't get hospitalized. Because we should not forget the respiratory disease combined are the third cause of death after cardio and cancer. And so it's a big issue for government in most of the world, as you know, pay the bill. And for [ mentally ] now, we've done long-term deals with the U.K., like U.K., Canada and Australia deals, building a plant, a 10-year supply deal. In the U.K., they did the deal because they did the math, given aging population and you need to build the capacity of your hospital for the peak winter season, that they will have to build more hospitals in the U.K. at a very high cost, of course. And the biggest worry was being able to even staff the hospitals. And when they look at that like [indiscernible] if we could get a combinatory vaccine into a single dose. And if we know, Stephane, got his vaccine from Moderna, and we know he has COVID and flu and RSV protection, well, they're happy with it. So that's a bit how we've been thinking about this.

Okay. Maybe 2 related questions, is one of the -- you talked about the perfect profile included all these different combinations. So of those, what one did you implement to improve the formulation from the prior to the one we're going to see?

So the one we're going to see by the end of this month for the P303 study is we changed several features that we cannot disclose because there's a couple other companies doing mRNA flu vaccines and prove the data that some have shared, we think they have a similar technical challenges than we have. But because of the insights we have on the platform, given we've been doing mRNA for 11 years. We think we fixed it. That's what Stephen Hoge, Head of R&D, stated at R&D Day. So again, we see the data this month. But it's several changes that we did across different parts of the product design that makes Stephen and the team confident it should work. So we'll see when we get the data. And that's really the first generation product. It's a non-inferior product. It was designed as a non-inferior product to what you can get at CVS because we believe that's what you minimally need to combine with COVID.

Okay. And I guess the second question is just the other debate, I think, is just the reactogenicity when you add, let's say, 2 vaccines or 3 vaccines together into one. So are you comfortable when you talk about the ideal vaccine candidate, a triple combo vaccine that the reactogenicity profile is going to be comparable to what you see with a single COVID?

So it's interesting. We've already done combinations. Most people have forgotten because it was pre-COVID. But if you go back to old data and our R&D Days before COVID, we showed in adult first before going to infant, for hMPV/PIV2 respiratory virus that's impacting France quite a lot combined. And we don't see more reactor combining them than not. [ But I think ] we're going to be able to play with this dose, which is, as we all know, the Moderna vaccine is way superior in terms of reducing hospitalizations than the overall mRNA vaccine. And we believe it is mostly driven by the dose. At 50 micrograms, we're almost twice the mass of the mRNA that you get versus the other mRNA vaccine. If you look at the data, in big, big real world evidence studies as you're highly aware, but maybe not everybody in the audience, there's a drastic difference hospitalization rates between the Moderna vaccinees and the other mRNA vaccine vaccinees. And so we believe that also potentially ways for us to play with those, including for the sharing several products, [indiscernible] to a business, there are some high dose products and some of those products. Why would the COVID, flu require the same thing. That -- and it makes sense, if the 25-year-old that's healthy with a strong immune system might not need the same as the 75-year-old who has comorbidity factor and T cells having dropped like crazy. And so I think 2 products as you deal with the age might be actually the right way to basically do the [ current ] product positioning.

Okay. Great. Just in the interest of time, I think we'll move on. But I want to talk about the individualized neoantigen therapy. And the question we get a lot is just how should we think about the near-term opportunity for an accelerated approval here based on the Phase II data. I mean, I think historically, it seems to me that FDA usually sets a very high bar, particularly in adjuvant, early-stage [indiscernible] answers, whereas late line, the bar lower for obvious reasons. And so I guess, how do you think about that opportunity when you weigh that in historical kind of FDA stance on adjuvant?

So I personally believe that we have a good case for [indiscernible] approval. Let's go back to what do we need to be able to even file. We need the Phase III to be started, which now is the case since the end of July. As you know, the regulatory agencies, and I think they are right, do not want to give us the approval because some companies in the past, slow walk their Phase III, that's not fair. I mean the deal is we believe it might work, proved to me it works. It's working in the meantime and give you FDA's approval. So we started the Phase III ahead of time, which I'm very pleased about the work the team have done, both the Merck team and the Moderna team. We should start very soon the lung study in Phase III. So that's done. The second piece we need is a bit more data. As you know, there's the next interim data without coming potentially in the coming months. I'm not talking weeks, but I'm not talking quarters, coming months. And the third piece is manufacturing, which is -- not a lot of people ask about manufacturing, which is I don't think you want us to file for accelerated approval and not be able to sell. That's not super useful. And then there's also a peer side of the house with the doctors and the patients, which is I don't want to have a product approved that I cannot supply. And because it's individuals, it's all in product of all the portfolio that cannot use the same reactors as COVID. So think about the platform, just to go back to it before, I go back into more details on manufacturing and I&T. The platform whether for flu, COVID, RSV, rare disease, it's all the same reactor its using, that's the beauty of a platform. I don't need another plant. It's the same reactor, the same teams. The only exception we have in the entire portfolio is IND. Why? Because if you and I have prostate cancer, we're going to get 2 very difficult chemical matters. [indiscernible] to make 1 in a small volume for you and 1 is more volume for me. So that we're actually currently building for launch. If you look at our Q2 press release, we bought a site in Marlborough, very close to our Norwood, [ Massachusetts ] site where we -- basically, flagship site where all our process engineers, more than 500 of them are. And we are building the Marlborough side so that we can launch out of there. But when you submit approval, you need to submit your CMC package. And for your CMC package, you need to have something built and be clear how you're going to do it. It's not you cannot even submit the package. So we're trying to just triangulate those 3 things. Again, the Phase III start is done, that's good. And I think, again, if we can recruit a big chunk of the Phase II that will help the FDA, but also other regulators because we cannot forget -- because, of course, we cover the FDA because it's the biggest market in the world. But the Phase II was already in Australia. The Phase III was today in Australia. This is probably the highest incident of melanoma in the world. So it would be great if the FDA was the first country in the world to give us accelerated approval, but it could be another country that will also help us to tremendously in many ways. And so manufacturing is the very piece that we are working a lot on and try to find the right balance when is the right time to basically have all that asset. Again, soon, we should have additional data in the Phase II because if we hold or even improve the efficacy profile compared to KEYTRUDA, because if you look at the survival curves, which I know you have, the Moderna curve is flattening. The KEYTRUDA curve is not, and we know what it looks like because we have our Phase III data. So my guess, and I've seen no data because it's an event-based study. My guess is it might widen even further. So if you show the time duration of treatment, we -- even a better profile than we have now. And even if it's what we have now, it's superb at a 44% improvement. I believe a lot of regulators around the world are going to want to go just because of how many lives you could save. And if you look at the downside going back to your comment about later cancer stage, the downside will be safety. The same team profile is similar to get the [indiscernible] on. So if you think about it, you can have 44% of people having a better outcome. We worked with the same safety profile. I don't think we'll take a lot of doctors or patients a long time to decide which one they prefer.

Great. Well, I think we're up against time, Stephane, but always a pleasure.

Thank you so much.

Thank you.