Moderna Therapeutics was one of the first movers in the race to develop a vaccine for COVID-19, the disease caused by the novel coronavirus. Up until the week of July 20, 2020, everything seemed to be running smoothly for its candidate, mRNA-1237; the results of biotech’s phase I clinical trial were overwhelmingly positive, with 100% of inoculated patients producing the necessary neutralizing antibodies to combat the disease. Additionally, in early July of 2020, the company announced the completion of enrollment for its phase II study. However, just before the commencement of the phase III trial on July 27, 2020, Moderna received some unexpected news: Arbutus Biopharma, a small biotech, owns the technology Moderna is using in its vaccine to deliver messenger RNA or mRNA to patients’ cells. Will Arbutus’ patent hinder Moderna’s progress in the COVID-19 vaccine race? Is Moderna still a buy? Let’s find out.
By: Matthew Rojas, Biotech Financial Analyst
In 2011, Moderna needed mRNA technology and wanted to outsource instead of developing in-house. The company became interested in Arbutus’ technology but turned to a smaller company, Acuitas Therapeutics, to access it via a sublicense. Later, Arbutus terminated its licensing agreement with Acuitas to use its technology and stated that the licensing agreement did not extend to Moderna. In January of 2019, Moderna went to court, claiming Arbutus’ mRNA technology was unpatentable. On the other hand, Arbutus firmly stated that they were within their rights and demanded reparations from Moderna on the grounds of patent infringement. Some of you may be asking, “what does it take to earn a patent”? Well, there are three basic requirements an invention must meet to receive a patent in the United States: it needs to be novel, useful, and non-obvious. To satisfy the novelty requirement, the invention must be unknown to the public at the time of filing for the patent. Next, to pass the usefulness test, the invention needs to be, you guessed it, useful! This requirement is often harder to meet when attempting to patent a pharmaceutical or chemical compound because a practical use must be established. Lastly, the non-obvious requirement states that an invention has to go beyond something that “a person having ordinary skill” could create; in other words, an invention must have a degree of creativity and complexity. Now, we are going to examine the mRNA technology that Arbutus patented and see if it meets these three requirements.
Does Arbutus Pass the Test?
Arbutus’ patent covers lipid formulations for the delivery of nucleic acids; specifically, the technology in question is their lipid nanoparticle (LNP) technology. According to Precision Nanosystems, “Lipid nanoparticles (LNPs) are the most clinically advanced non-viral gene delivery system. Lipid nanoparticles safely and effectively deliver nucleic acids, overcoming a major barrier preventing the development and use of genetic medicines”. Furthermore, LNP technology takes advantage of the body’s natural processes to silence disease-causing genes. It just so happens that Moderna’s COVID-19 vaccine uses Arbutus’ LNP technology to carry mRNA that codes for coronavirus spike protein, SARS-coV-2, antigens to be produced in the human body. Once the antigens are produced, the body fights off the infection and then develops neutralizing antibodies that will protect against future COVID-19 exposure.
Beginning with the novelty test, Arbutus easily passed because its LNP technology was completely unknown to the public at the time of filing for the patent. Next, the company passed the usefulness test with flying colors; the LNP technology is broadly applicable in therapeutic areas because it can incorporate a variety of RNA triggers, such as siRNA, miRNA, and mRNA. Now, onto the non-obvious test — this is the area that prompted Moderna to challenge Arbutus’ patent. Although Arbutus claimed that their technology was “a surprising discovery”, Moderna countered that it would have been “obvious at the time of invention”. The court ultimately ruled in favor of Arbutus, stating that Moderna failed to produce adequate evidence that the technology was obvious. Moderna appealed the decision; however, the appeal board sided with Arbutus. Moderna’s efforts need to be fully focused on COVID-19 — this patent infringement issue may hold them back and, as a result, stain their track-record of steady progress.
What Does This Mean for Moderna?
Immediately following the press release of Moderna’s failure to win the appeal of the patent court’s original decision, its shares (NASDAQ: MRNA) tumbled by over 8% from over $75.00 to around $69.00. However, the company’s shares have since regained some ground and are trading at around $78.00, still considerably off from its 52-week high of $95.00. Conversely, Arbutus’ shares (NASDAQ: ABUS) increased by nearly 180% from around $3.00 to $8.00 after the news. The small biotech’s shares have since declined by over 50% to around $3.80. The fact that Moderna’s shares recovered quickly is a good sign that investors still have faith in the company; nevertheless, I am unsure of what the future holds because Moderna and Arbutus are now in an arranged marriage, and the two do not seem to fancy each other.
The likely scenario is that Arbutus will be entitled to a royalty, a designated sum of money paid to a patentee for the use of a patent, in exchange for Moderna to use its LNP technology for the COVID-19 vaccine and any other product candidates in its clinical pipeline. However, recently, new information has come to light: Arbutus signed away most of the rights to the LNP technology patent to Genevant in 2018. Now, the small biotech has a minority (40%) interest in the patent in question; therefore, the royalty will be split among the two companies, with Genevant receiving the majority of the compensation. This royalty payment is unlikely to hinder the progress of Moderna’s vaccine candidate, but Mani Foroohar, the analyst at SVB Leerink, wrote, “Any meaningful royalty burden could hamper Moderna’s pricing flexibility and margin profile versus other players in the SARS-CoV-2 vaccine market.” The royalty could potentially hurt investors in the long-run; nevertheless, the Biomedical Advanced Research and Development Authority (BARDA) of the U.S. government recently pledged an additional $472 million for Moderna’s vaccine. Therefore, Moderna should still have adequate funding to persevere through this patent dispute.
On one hand, Arbutus and Genevant are within their rights to hold Moderna accountable for its actions; on the other hand, the companies must be careful not to present any obstacles in the development of the COVID-19 vaccine. If they do slow down the process with this legal dispute, they will undoubtedly face public scrutiny for interfering with a vaccine with the potential to mitigate the devastating pandemic, permanently damaging their financials and professional reputations.
Is Moderna Still a Buy?
Although Moderna is in the middle of a patent dispute with Arbutus, this duel will not likely not pose a threat to the development of its COVID-19 vaccine. The company is one of the leaders in the COVID-19 vaccine race, with competitors Oxford/AstraZeneca and Pfizer/BioNtech in close proximity, and I expect it to stay that way. There is a slight chance that a royalty payment to Arbutus and Genevant will damper its vaccine pricing flexibility; however, the additional funding from BARDA should help if it comes to that. At this point, I would say that Moderna is still a buy, and this brings us to a valuable learning opportunity. Investing in biotech is a roller coaster; when a company comes to a hurdle, it is important to not immediately sell. People need to access whether the company in question can overcome the obstacle — If not, then sell. In the case of Moderna, I have full confidence that it can prevail in this situation.