Shares in Moderna (NASDAQ:MRNA), maker of the breakthrough mRNA shot against Covid-19, jumped to a three-month high this month [April 2024] after its cancer vaccine showed promising results in an early-stage clinical trial for patients with head and neck cancer.[1]
This bright spot might buoy the stock for a while. But it ignores the legal cloud hanging over the company — one that could hammer Moderna with a massive judgment. Just days before the cancer vaccine news, Moderna’s stock fell 4% after a U.S. judge ruled against the company on several claims in a patent dispute.[2]
At issue is Moderna’s use of intellectual property developed by Genevant Sciences and Arbutus Biopharma (NASDAQ:ABUS). These two companies hold the patents for lipid nanoparticles (LNP), which allow mRNA vaccines to evade the body’s defenses and deliver their payload.[3] This technology was the secret sauce that enabled Moderna’s wildly successful Covid vaccine to work. The lawsuit alleges that Moderna used the LNP system without licensing it or properly compensating Genevant and Arbutus.[4]
This puts Moderna in serious legal jeopardy. The U.S. Patent and Trademark Office validated the infringed-upon patents.[5] Genevant has licensed the LNP technology to other firms for mRNA applications, confirming that its patents are valuable and enforceable.[6] This month, a judge interpreted the scope of the patents in a way that bolstered Arbutus’ case.[7] Given these facts, Moderna could be liable for multi-billion-dollar damages. This should give even the most bullish investors pause.
Moderna has floated an exotic defense: It claims that even if it were guilty of infringement, an obscure World-War-I-era law called Section 1498 absolves it of liability, because the federal government contracted with it to supply vaccines.[8][9]
Section 1498 originated to make sure that patent disputes wouldn’t disrupt vital wartime production. It’s essentially a form of eminent domain, stipulating that the U.S. government will offer “reasonable and entire compensation” when a private company’s patents are infringed upon for inventions “used or manufactured by or for the United States without license of the owner.”[10] Basically, the government will compensate companies that have their patents nabbed in extreme crises.
But Section 1498 doesn’t legalize patent infringement. Moderna’s attempt to shoehorn its situation into this framework doesn’t seem to align with the law and the facts, in my opinion. The federal government did contract with Moderna to provide Covid vaccines, but Moderna didn’t make those shots “for” the government.
The company began developing its vaccine well before Operation Warp Speed, the government effort to rapidly procure Covid shots.[11][12] It sold hundreds of millions of doses privately for enormous profit, which is why its stock price closed at $484.47 per share on August 9, 2021.[13][14] Today it’s at $107.[15] Lest we need any further proof that this was not a Section 1498 situation, the contract between the government and Moderna declares that the company entered into the agreement “independently, and not as an agent of the USG [U.S. government].”[16]
Moreover, if the courts accept Moderna’s argument, they will upend basic expectations about intellectual property. In effect, as long as manufacturers sell some of their product to the government — from smart phones for employees to medicines for Medicare patients — they’d be free to violate competitors’ patents without consequence. No company, presumably even Moderna, wants that.
With all this in mind, it seems highly unlikely to me that Moderna will win its case — especially in light of this month’s finding on the scope of the patents. The market valued this single strike against Moderna at a nearly $2 billion loss.[17][18][19] True, some Wall Street analysts have dismissed legal risks.[20] But it’s plausible that there will be very large damages in this suit if Moderna loses, which could drive partners and shareholders away.
Indeed, the case could lead the courts to more rigorously police Moderna’s patents, which given the company’s reputation for co-opting ideas from smaller biotechs, could end in successive court battles.[21]
Investors aren’t fans of bad publicity and endless legal troubles. I believe that those still mesmerized by Moderna’s extraordinary vaccine profits could soon wake up to a harsh reality.
[1] Moderna jumps as vaccine shows benefit in head and neck cancer in early study
[2] Moderna shares fall after judge sides with Arbutus in patent fight
[3] Genevant Sciences and Arbutus Biopharma File Patent Infringement Lawsuit Against Moderna – Genevant Sciences Corporation
[4] https://fingfx.thomsonreuters.com/gfx/legaldocs/zgpomzkbzpd/IP%20MODERNA%20PATENTS%20complaint.pdf
[5] https://fingfx.thomsonreuters.com/gfx/legaldocs/zgpomzkbzpd/IP%20MODERNA%20PATENTS%20complaint.pdf
[6] Genevant Sciences to Collaborate with Novo Nordisk to Develop Gene Editing Treatment for Hemophilia A – Genevant Sciences Corporation, Genevant Sciences to Collaborate with Tome Biosciences to Develop Gene Editing Therapeutic for Rare Liver Disorder – Genevant Sciences Corporation, Gritstone bio and Genevant Sciences Announce Option and License Agreement – Genevant Sciences Corporation
[7] https://www.fiercepharma.com/pharma/arbutus-and-genevant-gain-edge-covid-patent-scrap-moderna-claim-construction-ruling
[8] Can Moderna get the Government to pay for its patent liability to Arbutus or Alnylam? – Markman Advisors
[9] Letter on march-in, TRIPS, 1498.docx
[10] 28 U.S. Code § 1498 – Patent and copyright cases
[11] How Moderna is racing to a coronavirus vaccine | MIT Sloan.
[12] Operation Warp Speed: Accelerated COVID-19 Vaccine Development Status and Efforts to Address Manufacturing Challenges.
[13] Moderna sees up to $4 billion in 2023 sales from private market for COVID shots.
[14] Moderna – 6 Year Stock Price History | MRNA
[15]Moderna – 6 Year Stock Price History | MRNA
[16] https://www.sec.gov/Archives/edgar/data/1682852/000168285220000023/exhibit103.htm, Can Moderna get the Government to pay for its patent liability to Arbutus or Alnylam? – Markman Advisors
[17] Moderna shares fall after judge sides with Arbutus in patent fight
[18] MRNA.O – | Stock Price & Latest News | Reuters
[19] https://www.marketwatch.com/investing/stock/mrna .04% * 40 billion
[20] https://seekingalpha.com/news/3938621-moderna-favored-morgan-stanley-us-support-arbutus-patent-case
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