Moderna (MRNA 12.68%) investors have gotten used to reports of major growth and billion-dollar-plus quarterly earnings. The biotech company is a leader in the coronavirus vaccine market -- and its Spikevax product has helped it deliver a whopping $37.8 billion in revenue over the past two years.
But things are changing across the entire COVID-19 vaccine landscape. As we head toward a post-pandemic world, demand for those vaccines is declining. And in Moderna's latest earnings report, one number clearly reflects this changing environment. But does that mean it's time for investors to sell Moderna stock?
A number that stands out
So, what's this number that stood out in the Q4 report? I'll give you a clue: It rose throughout last year. I'm talking about the cost of sales -- in other words, the costs involved in producing a commercialized product -- for Moderna's coronavirus vaccine. The cost of sales for Spikevax totaled 39% of product sales in the fourth quarter -- that's compared to 14% a year ago.
Here's how this percentage increased: First, Moderna took a charge of $297 million due to inventory writedowns on vaccine doses that had passed or almost passed their expiration dates, and therefore couldn't be sold. The company also lost some purchase commitments and incurred cancellation charges of $281 million. Finally, Moderna took a contract manufacturing organization charge of $376 million as it wasn't able to fully use that manufacturing capacity in the quarter.
Some of this was due to Moderna's shift from its original coronavirus vaccine to the updated booster targeting the omicron variant. And its cost of sales also included a catch-up in royalty payments to the National Institute of Allergy and Infectious Diseases. But it's fair to say a good deal of the pressure on its cost of sales came from decreasing vaccine demand.
Moderna's contracts for the year
And Moderna offered additional evidence that COVID vaccine sales are on the decline. Fourth-quarter product sales slid 30% to $4.9 billion. For 2023, the company may pick up new vaccine orders from the U.S. and other countries -- and even directly from healthcare providers as the market for COVID vaccines transitions to the private market. But for now, Moderna's contracts for the year total $5 billion. That's a far cry from the sales volumes it has had over the past couple of years.
Before we get to the question of whether you should sell Moderna -- or avoid the stock -- let's consider another question. Should we be worried about how Moderna is managing its costs? After all, it's no surprise that COVID vaccine demand is on the decline.
We probably can give the company's management team a break here. While it was obvious that demand would decrease, it's been difficult to pinpoint exactly when and at what pace. Moderna had to produce certain quantities of vaccine to ensure that enough supply would be available based on the data it had regarding demand at the time. And as for excess capacity, Moderna has built out infrastructure for its vaccine programs over the long term -- including the ongoing production of coronavirus boosters. Especially in this period of market transition, it's natural that there will be times when that capacity isn't fully used.
A drop in vaccine revenue
Now, let's consider that inevitable drop in coronavirus vaccine revenue. Here's why I'm not worried. The market for coronavirus vaccines and booster shots likely will follow the same pattern as the flu vaccine market -- and that could result in the company collecting recurrent blockbuster revenue.
This, plus the pile of cash Moderna has built up from vaccine sales so far, should help the company bring more products to market -- and soon. Moderna expects to submit its respiratory syncytial virus (RSV) vaccine candidate to regulators in the first half of the year. And it has vaccine candidates for the flu and cytomegalovirus in phase 3 trials, so other launches may be close behind.
Given all that, I'm still optimistic about Moderna over the long term. The company's sales may be sluggish this year -- and its share performance may, too. The coronavirus vaccine market has reached a transition point. But Moderna remains a dominant force in its niche -- and it has the cash and scientific strength to bring more products to market soon that will expand its footprint. This stock could be a winner over the long haul -- which makes this a great time to get in on the story.
