A big challenge with Moderna (MRNA 1.03%) right now is that many investors see it as a COVID-19 stock and not much else. The company is developing more types of COVID vaccines, and its revenue for the foreseeable future will come primarily from Spikevax. Although the COVID vaccine has been a huge success story for Moderna, for forward-looking investors, the business remains full of question marks and uncertainty.
Last week, the company released news that has the potential to alleviate some of those concerns, and as a result, a wave of bullishness helped to rally the stock.
Moderna to work with Merck on a cancer vaccine
On Oct. 12, Moderna announced that drugmaker Merck (MRK 0.36%) exercised an option to develop a personalized cancer vaccine (PCV) with its business. The two companies have been collaborating on PCVs going back to 2016. A PCV, as the name suggests, is a personalized approach to treating cancer that takes into account an individual patient's immune system to help trigger a tailored response to a tumor.
Moderna's mRNA-4157 vaccine candidate for PCV is currently in phase 2 trials. With the two companies sharing in the development, there will be a 50% split of the profits should the vaccine be successful and obtain regulatory approval. The vaccine is being tested in combination with Merck's top-selling cancer drug, Keytruda, to see if it can be effective in treating people with high-risk melanoma, which is a form of skin cancer. The companies expect results from the trial to be available before the end of the year.
Is this a good sign for investors?
In the short term, this is a positive for Moderna for a couple of reasons.
The first is that by executing on this option, Merck has to pay Moderna $250 million. That's some good cash flow to bolster the company's cash balance; as of June 30, Moderna's cash and cash equivalents were just under $2.9 billion.
The second reason is that Merck's exercising the option and paying $250 million means that the healthcare company is encouraged by the results it is seeing from the trials thus far. After all, if the collaboration weren't demonstrating positive results, it's unlikely that Merck would have made a strong financial commitment to the project.
Does this news make Moderna a buy?
Shares of Moderna jumped last week after news of the deal with Merck, as investors were clearly excited about this news. The stock has continued to rally since then, closing at $139 on Monday, the first time it has finished that high in over a month. It's possible that this momentum could send the stock even further in the short term, but eventually, it's likely to come back down.
That's because investors need to temper their expectations a bit because this is still only a phase 2 trial, meaning that it can be multiple years before the PCV starts generating any revenue for the business, and obtaining approval isn't a guarantee either. The company's COVID-19 vaccine will generate an estimated $21 billion in revenue for the business this year. Moderna has a long way to go in making up for what will inevitably be a sharp drop-off in sales next year and beyond. The PCV won't fix all of its problems, but it can be part of a broader solution for the stock. Moderna, for instance, has a flu vaccine, a respiratory syncytial virus vaccine, and a cytomegalovirus vaccine, which are all in phase 3 trials that are further along than mRNA-4157.
In the end, this recent news doesn't by itself give investors a reason to buy the stock, as Moderna's business still faces an uncertain path ahead. The best option for investors is to wait on the sidelines for now, as this remains a volatile and risky stock to own.
