Has Moderna Made a Bear Market Blunder?

In the past 12 months, shares of healthcare company Moderna (MRNA -1.39%) have fallen by more than 55% (the S&P 500 is down just 4% over that stretch). Although the company has generated billions from its COVID-19 vaccine, investors are getting more concerned about what the future looks like for the company beyond just COVID. 

Moderna has been sitting on billions in cash that could go a long way in investing in its business or even acquiring another company to expand its reach. Thus far, however, it has not found a deal to its liking. And with stocks recovering of late and rallying, the cost to acquire a business may only get higher from here on out. Has Moderna made a huge mistake?

Many other companies have been aggressive in M&A

One of the advantages of a bear market is that it brings lower valuations. For investors, that creates an opportunity to buy quality stocks at reduced prices that can set you up for long-term gains down the road. Companies themselves also have opportunities to do the same and acquire other businesses without having to pay nearly as much as they would have in the past.

In just the past few months, there have been multiple notable deals involving the healthcare industry. In July, tech giant Amazon announced it would be acquiring primary care company One Medical for $3.9 billion. Drugmaker Amgen is planning to buy biopharmaceutical company ChemoCentryx for $3.7 billion.

Moderna's rival Pfizer has also been active, announcing this month its plan to acquire Global Blood Therapeutics for $5.4 billion. And that's on top of other deals the company has closed on recently, including ReViral in June and Arena Pharmaceuticals back in March.

Is Moderna letting an opportunity pass by?

As of the end of June 30, Moderna stated that its cash and investments totaled $18.1 billion. That gives the company plenty of money to put to use and pursue a deal. However, that hasn't happened. On the company's recent earnings call, management suggested a couple of reasons why it hasn't made a big splash with an acquisition.

The first is that it doesn't want to diversify too much. CEO Stéphane Bancel said on the call, "What we want to do is to be the best nucleic acid company in the world. As we've said, we'll be very happy to go outside mRNA as long as we stay to the nucleic acid space. We'll be happy to do acquisition." That certainly limits the possibilities for M&A for Moderna, whether it's in a bull or a bear market.

The second reason is that the company doesn't appear to think there's a better use of its money than buybacks. On the call, Bancel noted that "the announcement of a third buyback plan today with a new $3 billion authorization by the board is a confirmation of the ability to return the capital if we cannot find good use in the company." While he left the door open to say that buybacks would be a last resort if a better use can't be found, it's unlikely better deals will pop up now as the markets look to be recovering. Falling valuations this year and the S&P having its worst first half in decades should have resulted in some attractive deals in biotech that Moderna could have jumped on by now.

Should Moderna investors be worried?

Moderna seems to be content with diving deeper into COVID, as most of its pipeline that is in phase 3 involves COVID-19. That should be a red flag to investors, as that makes the stock vulnerable as COVID-related revenue inevitably slows down. At a forward price-to-earnings ratio of just six, the stock might appear to be a bargain. However, investors may just be discounting it given the uncertainty ahead.

In 2022, Moderna anticipates generating $21 billion in revenue from its COVID-19 vaccine. But that number will likely be far lower next year. And without an acquisition to help expand its operations and make its business less dependent on COVID, it could be a dangerous stock to hold right now.