Moderna investors should brace for more whiplash

Moderna’s cancer vaccine passed its first big test this past week. The bigger problem is that its stock is priced as if it has already passed them all.Moderna's new lab and manufacturing facility in Marlborough, Mass.Moderna has been a hugely volatile stock since the Covid-19 pandemic. Its value peaked near $200 billion in 2021, then collapsed along with vaccine sales, bottoming at about $10 billion last year.The latest big rally began in August, when Moderna and partner Merck said their personalized shot cut the risk of melanoma returning after surgery in a large trial. The stock nearly quadrupled in two months, even though many analysts saw a scientific milestone whose reach beyond melanoma was still unproven.This past week came the details, and a reality check. Moderna shares fell about 20% through Friday after results leaked Thursday, prompting the companies to release data two days before their planned presentation at a major oncology conference in Madrid.The data itself delivered, even if it fell short of the most bullish hopes. Among 1,137 patients whose melanoma had been surgically removed, adding the vaccine to Merck’s immunotherapy Keytruda cut the risk of the cancer returning, or of death, by 42% compared with Keytruda alone. That cleared the roughly 40% bar investors had set, and should be enough to win approval.But expectations built into the stock prior to the release were far too high. Consider the math. Analysts often value a drug at roughly four times its peak annual sales. An approved melanoma treatment could reach about $4 billion a year, according to analyst estimates. Split with Merck, that is about $2 billion in peak sales for Moderna, worth roughly $8 billion in market capitalization.Yet even after the latest selloff, Moderna is worth about $55 billion more than before the August news. That essentially prices in a scenario where the vaccine works across several tumors and becomes nearly as big as Keytruda, the world’s bestselling cancer drug.The bull case rests on what makes the approach novel. Tumors carry mutations that can produce abnormal proteins the immune system can recognize. Moderna sequences each patient’s tumor, uses an algorithm to select up to 34 targets most likely to provoke an immune response, and encodes them in an mRNA shot, using the same technology as its Covid vaccine. It is effectively a one-two punch in which Keytruda takes the brakes off the immune system and the vaccine provides it with the specific targets to hunt.Because mutations are common across cancers, investors hope the approach will prove to be a platform that works for many of them, from lung to kidney to bladder. But that remains a bet on trials that haven’t yet reported results. And melanoma is about as favorable a testing ground as this approach could ask for. Melanoma tumors carry lots of mutations, giving the vaccine plenty of targets to train the immune system to recognize. And they tend to be “hot,” meaning immune cells are already on the scene. Many other tumors carry fewer mutations or are better at hiding from the immune system, so the vaccine faces a higher bar elsewhere.Another worry: how melanoma is treated is changing. Doctors increasingly give Keytruda before surgery, as well as after, to help the immune system recognize the cancer. In a separate study, that approach improved outcomes by a margin some analysts say is similar to the vaccine’s, though the trials aren’t directly comparable. That raises an awkward question for a personalized shot that could cost around $300,000: Why not just give Keytruda earlier, especially once cheaper copies arrive after its patent expires in 2028? Not every patient is a candidate, and the two approaches could be combined. But the shift could chip away at the vaccine’s most obvious market.The trial also tracked whether patients’ cancer spread to other organs, such as the lungs or brain, which is the main driver of melanoma deaths. On that score, the vaccine cut the risk of spread or death by 38% after about two years. In an earlier, smaller trial, it had cut it by 59% after five years. Moderna has told analysts the gap partly reflects the larger trial’s inclusion of patients with earlier-stage cancer, which takes longer to spread.None of this takes away from the science. Improving on Keytruda, one of the most effective cancer drugs ever made, is a major achievement, and Moderna’s shot did it.From here, the stock will trade on what comes next. Kidney cancer data could arrive in a few months, while results from a bladder cancer trial could come in 2027. Moderna is also testing the vaccine in lung cancer, a potentially bigger opportunity.The vaccine works in melanoma. The stock needs it to work everywhere else.Write to David Wainer at david.wainer@wsj.com