John Buckingham is a leading value oriented money manager; in The Prudent Speculator he highlights a trio of drug development stocks that have been making new progress in mRNA research, beyond its familiar role in treating Covid.

Illustrating why our focus is always on the long term and not on short-term fluctuations, shares of Moderna (MRNA) traded as low as $163 and as high as $217 last week before closing out the roller-coaster ride up 9% from where they ended the prior week.

The major catalyst for the big rally for the COVID-19 vaccine maker was that results from a mid-stage clinical study of Moderna’s experimental personalized mRNA cancer vaccine for melanoma in combination with Keytruda — a drug from Merck (MRK) were revealed.

The combination demonstrated a statistically significant and clinically meaningful improvement in primary endpoint of recurrence-free survival (and reducing the risk of recurrence or death by 44%) versus Keytruda alone (which already reduced the risk of death or recurrence by 43% vs. placebo in testing). Moderna and Merck plan to initiate a Phase 3 study in melanoma patients in 2023, which will need to confirm the findings from Phase 2.

Nevertheless, the recent data was a terrific win for MRNA not only given the commercial success of Merck’s leading drug, but it also adds credibility to Moderna’s pipeline outside of respiratory vaccine candidates. There is also potential that a similar combination (which incorporates patient tissue samples) achieves additional oncological indications beyond skin cancer.

The challenges in producing revolutionary vaccines are numerous and are compounded by the dramatic reduction of revenue anticipated from the firm’s COVID-19 vaccine in the coming years.

Aside from COVID, Moderna also has therapies for three different diseases in Phase 3 trials at present (RSV, influenza & CMV), each of which are potentially $1 billion sales opportunities. We also appreciate the $17 billion of cash and investments on the balance sheet at the end of September. Our Target Price for MRNA is $252.

Looking at Merck, it has had several major successes with Keytruda, Lagevrio, Gardasil and Januvia on pace to each gross well over $3 billion in 2022 (the first 2 clearing that hurdle in a single quarter).

We think MRK offers significant growth at a very reasonable valuation, given a deep pipeline and room to add to existing franchises. Shareholders are rewarded with a 2.7% dividend yield, while MRK still trades for a reasonable NTM P/E multiple in the 15 range. The company boasts a history of returning cash to shareholders, a diversified revenue stream and solid free-cash-flow generation. Our Target Price has been bumped up to $125.

Meanwhile, Pfizer (PFE) projected a $15 billion sales opportunity for its own mRNA franchise (which includes flu, combination flu/COVID and other experimental vaccine candidates) out to 2030.

Of course, Pfizer generated more than $60 billion from its COVID vaccine over the past two years, but analysts project that figure to drop to below $10 billion by 2030. The pharmaceutical behemoth is prepared to quadruple the price to offset fewer individuals signing up for its jab in recent months, a move that has caught the eye of more than one politician.

We continue to appreciate the diversity of Pfizer’s current revenue base (in addition to COVID-19 therapies) as well as management’s increasing confidence for organic growth potential from its emerging pipeline of products as trial data is set to emerge over the next few years.

Even as COVID sales are expected to wane in the coming years, the success of the products has loaded up Pfizer’s balance sheet with over $30 billion of cash, while the average maturity of its debt is 2034 (with individual maturities as far as 2050).

Shares have offered shelter from the market volatility over the past 12 months, especially given a robust dividend yield of 3.2%. PFE trades for less than 11 times expected 2023 EPS and our Target Price is now $72.

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