Stéphane, 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. Stéphane, thanks so much again for your time today. Really looking forward to to catching up again, as it's, 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, 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're 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 R&D Day, we showed two rare genetic program, rare disease genetic program with good, you know, clinical outcome. Then, you know, just before Christmas, we had the cancer product, you know, the individualized neoantigen therapy, showing great data versus KEYTRUDA monotherapy in melanoma. And then RSV positive phase III in January. So a lot has changed.
So what we're very happy is over the last 10+ years, we invested because we believed we could build a platform, maybe one of the true first platforms in biotech pharma. So, you know, for 10 years, most people believed this was not possible. But we really built the company in terms of research, investment, process engineering, manufacturing, and so on, believing that it made no sense to us that this would be a one-drug company, that it would be either zero or a lot. So what is really exciting to see today is that in infectious disease, we now have two out of two vaccines, you know, COVID and RSV. The cancer is now in phase III.
The phase II data is exciting, and we look forward to sharing some more on the phase II when we get it, because it's case-based, event-based. And then the rare disease, same, you know, we see also more data on more programs to have six. So I already 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 monos with COVID, flu, and RSV, but then combine them, and then there is a latent we can talk about. And then cancer, we want to double, triple down, and as you saw, we did it. We announced yesterday in oncology to be able to code that biology. 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 in basic mRNA science in research, not development. You know, we're looking at, you know, at autoimmune disease, where we can learn delivery. So Moderna is 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 the operating system. So we have 40+ drugs in development, you know, a couple launches coming in the next year or so. So exciting.
Yeah. Okay, great. And, you alluded to this, 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, you know, are going to be in focus? Can you give us a little teaser?
I cannot give you a teaser, given the markets are open for a few more hours, and that would not be legal to do so. But as we've done every year, is we kind of give a big update on all the R&D programs. I mean, we said that we will have, you know, full data in Q3. Q3 finishes in a couple of weeks. So R&D Day tomorrow, so there might be some full data tomorrow. As we talk about the rare disease program, because those, you know, are ongoing, we might as well have some updates on potentially several programs, some updates on oncology and so on. So yeah, it's going to be a bit of everything tomorrow.
Okay, looking forward to it. The one other, you know, 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 hosted a conference where you guys presented, was, you know, when are... If companies are investing all these CapEx dollars, when are they going to get a return on these dollars? Is this, you know, three years away? Is it 10 years away?
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, you know, 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 we use in the manufacturing process. Those enzymes have basically improved the performance of previous enzyme that we used in the earlier days of the company, enzymes 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 proved to ourselves really work better, proved to the regulator they really 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 a portfolio. So I don't have a precise ROI for you, because I don't know what the sales are going to be forever.
Yeah.
But I don't need the finance team to run a long, complex financial model to realize, you know, for the investment in dollars, that is still, you know, 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 were happening pre-ChatGPT. So what we've done, when ChatGPT happened, and we all played with it a lot at Christmas, we're like, "Oh, geez, we want to use that to run the business." But we didn't want to teach ChatGPT what we use at the company. So the team has basically built a system called M-Chat, that we talked about on our Q2 call, that roughly half of our employees, so 2,500 people, now use every day.
We're starting workshops and an AI academy to teach people how to write prompt. Because as you know, for me, large language model is all about relearning your job and how do you use the systems, and how do you learn how to write prompts? I mean, one example, I mean, last week I was at a factory in Norwood, and actually, a lady from Germany was showing us how she used ChatGPT, I mean, mChat, the Moderna version, to code Excel macros to do a job that she used to do by herself in macros. And she taught herself and used mChat to basically do all the Excel kind of macro coding that she had never done before, and she was taught by mChat how to do that. People use that across the board.
I have seen a couple example where scientists actually are using it now to try to discover new chemical structure for lipids, and where the system is basically spitting chemical structure that people are then making and trying in animals. So I think it's gonna be really across the board, and, and some will get returns in a matter of quarters.
Mm-hmm.
Some, if it's a new molecule that has to get approved, of course, will be a multi-year journey. But our belief is that the ability to use large language 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 we do, especially as a new technology disruptor, that we want to use it across the company. So you see it in research. The teams are using it now in 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, you know, employees of regulatory teams' email, take the documents, put the answers, they just look at the answers and then submit it. So think about the time saved.
So we're trying to really use it across the board. Maybe it'll take a bit of time.
Yeah. 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, you know, a couple other variants, including BA.2.86-
Yeah
... 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-
Yeah
... than annual? I mean, how do you think about that in the context of where we are right now today?
Sure. So again, when you go with COVID, the new virus, you want to start by saying you need to be humble about what you're going to say next. What we currently believe is the virus is not going away. People that are at high risk are going to need annual boosters. Would you need people at very high risk to need twice-a-year boosters? It is possible. Some countries are doing that out of caution, you know, 75+, people that have cancer, immunocompromised, and others. But if you think about the general population, we don't think people are going to need two boosters a year. We think one booster a year would be good. A bit like a flu-like model, where you have the regulators, you know, 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 humans. And we've run that. Those blood samples against all the variants you mentioned, all the new ones, which were very high level of antibodies. We don't see loss of neutralizing antibodies. And as you, you know, unlike an antibody treatment, when we all get a vaccine, we don't make one antibody, we make a soup of antibodies. So we make new ones for the new epitope you've never seen before because of mutation, but all your old antibody repertoire get boosted away. And so I think it's important people remember that it's not one, one antibody, one epitope. It's actually a soup of antibodies.
Okay. That's, that's very helpful. And I guess the corollary question is just remind us the biggest driver variable in terms of the kind of low end versus the-
Yeah
... high end of your guidance for this year. The related question is, at the end of this year, do you think, you know, we as an industry will have enough to project kind of how COVID plays out over the medium term?
Yeah.
Because I think that's still one of the big-
Sure
... uncertainties-
Yeah
... with a lot of the companies.
So indeed, we've given a range of $6 billion-$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 100 million doses in arms, it may be closer to $8 billion of the range. Just to remind people, we're not close to those markets. Flu is 150 million doses in arm in the U.S. So what I find really interesting about what we all believe, and everybody, of course, a different answer if you're on a survey, of what will happen, we'll know much more at Christmas, is...
What is really hard for me to believe is that one in three Americans, the 150 million doses, that are going to walk into a pharmacy of a doctor saying, "I want a flu shot," is going to tell the pharmacist or the doctor, "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 was a lot of fatigue. Some people had gotten, you know, a spring 2022 booster, and some had gotten a January or February or December Omicron booster. So it was just a lot of booster for everybody.
So we're investing a lot of our marketing efforts in how do we increase vaccination rate in the U.S. in people at risk? So we're not going to try to spend marketing dollars to convince a 25-year-old healthy to go get the vaccine. If they want one, they walk into a CVS, they'll get one. And we'll be very happy, of course, that 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 at a high risk? That's really our target population. We're doing a lot of things on digital social platforms, you'll see influencers. So we're doing a lot of stuff that's going to kick out now because we did, of course, review approval before-
The U.S. Open.
Yeah, we had the U.S. Open, which is more corporate branding. But if you're going to look at the target population of the U.S. Open, it's directly in our age range as we care about.
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 as you think about the range of COVID outcomes? And obviously, you have this huge opportunity set that we were just talking about before-
Yeah
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 built 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 opportunity that was ahead of us. We knew that coming down from the pandemic, we're going to be oversized. That would be genius to know that. You know, I got three shots of COVID from Moderna in 2021. I never anticipated I would get three shots of COVID on Moderna the following years, going back to our previous discussion.
So our footprint is too big, which is why if you look at what Jamie, our CFO, said on the Q2 call, if you take out the one-time, 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 not the way you want to run a business. So what we are doing as we speak is actually working to right size, 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 geez, we're two out of two. The platform that we believe we have, we have, so let's create value because we had, you know, $20 billion balance sheet. It's like we have all, 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, we're going to be able to just crank a lot of product, and they're going to have a much higher probability of success to get to launch than your traditional pharma.
And so you don't want to sit on the cash in T-bills and just wait for the platform. And so you saw those big jump in R&D because we went from being a COVID company to a lot of phase IIIs. But as Jamie, 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 versus 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, you know, close to zero.
And same thing with flu. So if you think about that franchise as a business, you're going to be maybe two years from now, where the R&D cost is going to be down 70% from where it is now. But you're going to have that, those sales forever, and then you're going to start to combine, and those are small studies. Those are immunobridging studies. The R&D in onco, we share 50/50 with Merck, and rare disease is like $70 million in whatever, for $50-$70 million for phase III. It's a rounding error on the $4.5 billion budget. And so if you think about Moderna's budget, I think it is, reasonable to anticipate, a similar level of spend, but not the growth we have seen, on 2022 into 2023. You're not going to see the same growth, 2023, 2024.
It just doesn't make sense math-wise. And then we want, of course, to be careful in term of spend into the PNL. The other piece in term of SG&A, if I can maybe close quickly there, is as we launch RSV and flu, it's the same medical team because it's infectious disease docs on our side talking to infectious disease docs on the other side. I'm not going to add, you know, capacity in medical and so on. In the U.S., because we are already commercial this year, we got hired a lot toward the end of last year and early this year. So I think the PNL is going to improve on cost of goods-
Yeah.
But the R&D or SG&A is not going to grow.
Yeah. Okay, understood. I guess you're going to have other phase III programs that are going to backfill for the respiratory phase III's, because you said those are going to be rolling off, so.
Yeah. So the flu, COVID, and RSV are going to roll off.
Yeah.
Then you're going to have those studies to combine, because, you know, 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, so it's six months of safety, not three or four years of safety.
Yeah.
So, when you look at it from a cost standpoint, it is worth a fraction of what the phase III efficacy studies are.
Right. Okay. Very, very helpful. 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 details around this new construct, like the changes you guys made to better address the B strains?
Yeah. So in terms of flu, let me start by the end game, and I'll come back. Our end game is to have combination products, COVID, flu, 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 through product. As you know, flu in a good year, the efficacy is around 60%. In a bad year, it's around 20%-30%, where there's a big shift of strain between what WHO guesses in February and what happens within the U.S. following fall. And we think we can get there in two ways, technically. One is to add more H3 strain in the product. Why? Because H3, which is a A influenza, drives 80% of hospitalization.
And when WHO picks one strain, they pick one strain of H3. Why? Because the protein guys can only make four. They need two A's and two B's at the current setup, so they cannot pick two H3s. But in the case of Moderna, you can look at the H3 that WHO picked and which one was next on the list, and which was next on the list, and put them together. As you know, CMV vaccine has already six mRNA. It's in phase III and most fully enrolled, six mRNA in the vial. So putting six mRNA for three H3s and threes that, that cover the other A and the two Bs doesn't scare us technically. And so, so that's one way. The other way is using both the HA and the NA antigen.
As you know, flu gets into human cells by having binding through the HA or NA antigen, but the current products contain, you know, the HAs. And if you believe why it's only 50% in a good year in terms 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, if we had a magic wand, is put the HAs, put NAs, and put several H3s, so you're going to really have very few people getting hospitalized if they got your vaccine. And that's where we're aiming at, and we want, of course, to do this with COVID and with RSV. And so as you play movie backward, we had a lot of debates with the team.
Do we go for the perfect flu product, as I described?
Right.
But it might be a couple years out in terms of launch, or do you go more like an iPhone-like strategy, which is start with a non-inferior product to get your foot in the door for mono, that is non-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 two shots. One shot is better, but especially the payers.
One thing we realized during COVID, given we talked to a lot of, you know, healthcare ministers and their teams and so on, is they're starting to worry about how we're going to deal about a 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. They're 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, you know, cardio and cancer. So it's a big issue for governments who in most of the world, as you know, pay the bill.
And for example, you know, we've done long-term deals with the U.K., like U.K., Canada, and Australia, 10-year deals, building a plant and 10-year supply deal. For 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 their biggest worry was being able to even staff the hospitals. And when they look at all that, they're like, "Geez, if we could get a combinatory vaccine into a single dose," and if we know, you know, Stéphane got his vaccine from Moderna, and we know he has COVID and flu and RSV protection, we're very happy with it.
So that's a bit how we've been thinking about it.
Okay. Maybe two related questions is one of the... You know, you talked about the perfect profile. It included, you know, all these different combinations. So of those, what one did you implement to improve the formulation from the prior to-
Yeah
... the one we're going to see?
So the one we're going to see by the end of this month for the phase III of three study is we changed several features that we cannot disclose because there's a couple other companies doing mRNA flu vaccines. And through the data that some have shared, we think they've had 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, you know, head of R&D, said at R&D Day. So again, we'll 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.
Yeah. Okay, and I guess the second question is just the other debate, I think, is just the reactogenicity when you add, you know, let's say two vaccines or three 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 vaccine?
So it's, it's interesting, we've already done combinations. Most people have forgotten because this was pre-COVID, but if you go back to our data and our ideas before, before COVID, we showed in adult cells before going to infant, for HMPV, PIV, two respiratory virus that impact infants quite a lot, combined. And we even see more reactive combining them than not. The other thing, we're going to be able to play with is dose, which is if, as we all know, the Moderna vaccine is way superior in term of reducing hospitalizations than the other mRNA vaccine, and we believe it is mostly driven by the dose. At 50 microgram, we're almost twice the mass of 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 massive drastic difference of hospitalization rate between the Moderna vaccinees and the other mRNA vaccine vaccinees. And so we believe that there's so potentially ways for us to play with those, including potentially having several products. I think in the flu business, you know, there's some high-dose product and some low-dose product. Why would the COVID flu require the same thing? That, and it makes sense. If you're a 25-year-old that's healthy, with a strong immune system, might not need the same as a 75-year-old who has comorbidity factor, and, you know, T-cells have been dropped like crazy. And so having two products as you deal with age might be actually the right way to to basically do your different product positioning.
Okay, great. Just in the interest of time, I think we'll move on. But, I wanna talk about the Individualized Neoantigen Therapy. And, you know, the, the question we get a lot is just how should we think about the near-term opportunity for an accelerated approval here-
Yeah
... based on the phase II data? I mean, I think historically, it seems to me the FDA usually sets a very high bar, particularly in adjuvant early stage-
Yeah
cancers, whereas late line, the bar is lower for obvious reasons.
Yeah.
So I guess, how do you think about that opportunity when you weigh that in historical kind of FDA-
Yeah
- stance on adjuvant?
So I personally believe that we have a good case for an accelerated 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 end of July. As you know, the regulatory agencies, and I think they are right, do not want to give accelerated approval because some companies, as you know, have in the past slow walked their phase III. That's not fair. I mean, the deal is we believe it might work. Prove to me it work. It's working, and in the meantime, I give you accelerated approval. So we start 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 fight for accelerated approval and not be able to sell. That's not super useful. And then there's also a PR 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 individualized, it's the only product of all the portfolio that cannot use the same reactors as COVID.
To think about the platform, just to go back to it before I go back into more details on manufacturing and INT, the platform whether for flu, COVID, RSV, rare disease, it's all the same reactor we're choosing. That's the beauty of a platform. I don't even have a plant. It's the same reactor with same teams. The only exception we have in the entire portfolio is INT. Why? Because if you and I have prostate cancer, we're going to get two very different chemical matter. And so we're going to make one in a small volume for you and one in small volume for me.
Yeah.
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... It's our basically flagship site, where all our process engineers, more than 500 of them, are. And we are building the Marlborough site so that we can launch out of there. When you submit approval, you need to submit your CMC package. And for your CMC package, you need to have something big and be clear how you're going to do it. If not, you cannot even submit the package. We're trying to just triangulate those three things. Again, the phase III start is done, so that's good.
And I think again, if we can recruit a big chunk of the phase III, that will help the FDA, but also the other regulators, because we cannot forget, because of course, we cover the FDA because it's the biggest market in the world. But, you know, the phase II was started in Australia. The phase III was started in Australia. This is a country with the highest incidence of melanoma in the world. So it would be great if the FDA was the first country in the world to give us fast access approval, but it could be, you know, another country, that will also help us tremendously in many ways. And so manufacturing is very piece that we're working a lot on, and try to find the right balance. When is the right time to basically have all that data set?
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 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've even a better profile than we have now. And even if it's what we have now, it's superb at, you know, 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.
If you look at the downside, going back to your comment about later cancer stage, the downside will be safety. The safety profile is similar to KEYTRUDA. So if you think about it, you can have 44% of people having a better outcome with roughly the same safety profile. I don't think it will 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, Stéphane, but always a pleasure.
Thank you so much. Thank you.