Moderna, Inc. (MRNA) FY 2022 MD&A

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and related notes and other financial information appearing elsewhere in this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in “Part I, Item 1A - Risk Factors” section of this Annual Report on Form 10-K, our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Overview

We are a biotechnology company pioneering a new class of medicines made of messenger RNA (mRNA). mRNA medicines are designed to direct the body’s cells to produce intracellular, membrane, or secreted proteins that have a therapeutic or preventive benefit with the potential to address a broad spectrum of diseases. Our platform builds on continuous advances in basic and applied mRNA science, delivery technology and manufacturing, providing us the capability to pursue in parallel a robust pipeline of new development candidates. We are developing therapeutics and vaccines for infectious diseases, immuno-oncology, rare diseases, autoimmune diseases and cardiovascular diseases, independently and with our strategic collaborators.

Since our founding in 2010, we have transformed from a research-stage company advancing programs in the field of mRNA to a commercial enterprise with a diverse clinical portfolio of vaccines and therapeutics across seven modalities, a broad intellectual property portfolio and integrated manufacturing capabilities that allow for rapid clinical and commercial production at scale. We have a diverse and extensive development pipeline of 45 development candidates across our 48 development programs, of which 38 are in clinical studies currently.

We have three authorized marketed products: (1) Spikevax, the Moderna COVID-19 vaccine (mRNA-1273), (2) our bivalent vaccine targeting the BA.1 Omicron variant, combined with Spikevax (mRNA-1273.214), and (3) our bivalent vaccine targeting the BA.4/BA.5 Omicron variants combined with Spikevax (mRNA-1273.222).

2022 Business Highlights

Moderna COVID-19 Vaccines

In January 2022, the U.S. Food and Drug Administration (FDA) approved the Biologics License Application (BLA) for our COVID-19 vaccine, Spikevax. Prior to that approval, our COVID-19 Vaccine was marketed in the U.S. subject to an Emergency Use Authorization (EUA) that was first granted in December 2020 and similar authorizations in other markets. Spikevax is our first product to achieve licensure in the U.S., and it has been authorized for use or approved by regulators in more than 70 countries.

In August 2022, we received an EUA from the FDA for our Omicron BA.4/BA.5 targeting bivalent booster vaccine, mRNA-1273.222, for individuals 18 years and older, followed later by adolescent and pediatric approvals. mRNA-1273.222 has been authorized as a booster vaccine for individuals 18 years and older in key markets, including the European Union, Canada and Japan, with the European Union, Japan and several other countries also authorizing boosters for adolescent populations.

During the third quarter of 2022, we also received authorizations for the use of our Omicron BA.1 targeting bivalent COVID-19 booster vaccine, mRNA-1273.214, in the European Union, Japan, United Kingdom, Canada, Australia, and other markets globally.

For the year ended 2022, we recognized product sales of $18.4 billion from sales of our COVID-19 vaccines, compared to $17.7 billion and $200 million for the years ended 2021 and 2020, respectively.

Program Development

Respiratory Vaccines

As we build our respiratory franchise, we are applying our experience and using our mRNA platform to develop medicines that can help prevent hospitalizations and deaths from those respiratory viruses that impose the greatest burden on patients and healthcare systems. By pursuing combination products to protect against a range of diseases, we can potentially help decrease morbidity and mortality from respiratory disease, lower healthcare costs and increase health security globally.

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Our late-stage respiratory vaccine pipeline continues to progress. The Phase 3 study of our respiratory syncytial virus (RSV) vaccine candidate (mRNA-1345) in adults 60 years of age and older is fully enrolled, with more than 36,000 trial participants. In January 2023, we announced that the Phase 3 study for our RSV vaccine candidate met its primary efficacy endpoints, including vaccine efficacy of 83.7% (95.88% CI: 66.1%, 92.2%; p0.0001) against RSV-associated lower respiratory tract disease (RSV-LRTD) as defined by two or more symptoms. Based on this positive topline data, the FDA granted mRNA-1345 Breakthrough Therapy Designation for the prevention of RSV-LRTD in adults 60 years or older. We intend to submit our RSV vaccine candidate for regulatory approval by the FDA in the first half of 2023. Since RSV also imposes a significant disease burden on children, we are studying our RSV vaccine candidate in an ongoing Phase 1 trial in pediatric populations.

In February 2023, we announced interim results from the Phase 3 immunogenicity and safety study in the Southern Hemisphere of mRNA-1010, our quadrivalent seasonal influenza vaccine candidate. Interim results indicate that mRNA-1010 achieved superiority on seroconversion rates for influenza A/H3N2 and A/H1N1, as well as superiority on geometric mean titer ratios for A/H3N2 and non-inferiority on geometric mean titer ratios for A/H1N1. Non-inferiority was not met for either endpoint for the influenza B/Victoria- or B/Yamagata-lineage strains. mRNA-1010 showed an acceptable safety and tolerability profile.

We are also conducting a Phase 3 efficacy trial of mRNA-1010 in the Northern Hemisphere to test the vaccine’s efficacy compared to a currently licensed seasonal influenza vaccine.

We are also progressing several combination respiratory vaccine candidates. A Phase 1/2 study of our combination vaccine candidate targeting SARS-CoV-2 and influenza is fully enrolled and ongoing. We further initiated a clinical trial for a combination vaccine candidate targeting SARS-CoV-2, influenza, and RSV in the beginning of 2023.

Cancer

PCVs target an individual patient’s unique tumor mutations to selectively treat their cancer. Our PCV program is being developed in collaboration with Merck and is designed to stimulate an immune response by boosting T cells, which are believed to be necessary for recurrence-free survival. Primary data from our Phase 2 study of mRNA-4157, which were released in December 2022, showed that the investigational personalized cancer vaccine in combination with KEYTRUDA® (pembrolizumab) can improve recurrence-free survival in patients with resected melanoma at high risk of recurrence, compared to KEYTRUDA alone. Adjuvant treatment with mRNA-4157 in combination with KEYTRUDA reduced the risk of recurrence or death by 44%. These results represent the first demonstration of the potential for mRNA to have an impact on outcomes in a randomized clinical trial in melanoma. We expect to initiate a Phase 3 study in adjuvant melanoma in 2023 and rapidly expand to additional tumor types, including non-small cell lung cancer (NSCLC). In February 2023, mRNA-4157 received a Breakthrough Therapy Designation from the FDA.

Latent Vaccines

Once a human is infected by a latent virus, the virus remains in the body and can lead to lifelong medical complications. We are committed to developing a portfolio of vaccine and therapeutic candidates against latent viruses, including cytomegalovirus (CMV), Epstein-Barr virus (EBV), human immunodeficiency virus (HIV) and varicella-zoster virus (VZV). To date, we have enrolled over 40% of anticipated participants in the Phase 3 study of our CMV vaccine candidate (mRNA-1647) and enrollment is ongoing in the U.S. and internationally. We are enrolling in Phase 1 trials for our EBV vaccine candidate (to prevent infectious mononucleosis) (mRNA-1189) and our HIV vaccine candidates (mRNA-1644 & mRNA-1574). We have also initiated a Phase 1/2 head-to-head study of our VZV vaccine candidate (mRNA-1468) against standard of care Shingrix.

Rare Diseases

The Phase 1/2 Paramount study of our propionic acidemia (PA) program is ongoing and the first two groups of patients are fully enrolled. Encouraging early data have shown a decrease in the number of metabolic decompensation events (MDEs) among participants and initial discussions with regulators are supportive of MDE as a primary endpoint for a pivotal study. We will continue to enroll additional cohorts and escalate dose, identify optimal dose for expansion and continue to engage with regulators on the registration path. The Phase 1/2 study of our methylmalonic acidemia candidate is ongoing and we are recruiting participants in the United Kingdom, Canada, and the U.S.

We are also evaluating the safety, tolerability and pharmacology of a single IV dose of our therapeutic candidate for glycogen storage disease 1a (GSD1a) in adult participants in a Phase 1 study. Enrollment is ongoing.

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Cardiovascular

We are developing novel mRNA medicines to address the significant unmet medical needs of heart failure patients. In December 2022, we dosed the first patient in our relaxin Phase 1B clinical trial, which we view as an important step in advancing a potential new treatment for cardiovascular disease. Our drug candidate is designed to produce the naturally occurring cardioprotective hormone relaxin and uses similar technology as our investigational treatment for propionic acidemia. Longer duration relaxin and repeated infusions could allow for improved outcomes with a treatment that matches the time course of the pathophysiology of heart failure, which large pharmaceutical companies have been unable to show in previous trials.

Inhaled Pulmonary

At the end of 2021, we announced our first program in a new modality with inhaled pulmonary therapeutics. We are collaborating with Vertex on our cystic fibrosis (CF) candidate, VX-522, our first inhaled mRNA candidate. In December 2022, the FDA cleared the Investigational New Drug application for VX-522. In January 2023, Vertex announced that it has initiated a Phase 1, single ascending dose clinical trial for VX-522, and the FDA has granted VX-522 Fast Track designation. The trial is active and enrolling patients.

Other Business Updates

During 2022, we executed and finalized strategic partnership agreements with the Australian Federal Government, the Government of Canada and the United Kingdom Government, respectively, to establish a state-of-the-art mRNA vaccine manufacturing facility in each of these countries. Each facility, when constructed, is expected to provide people in the country with access to a domestically manufactured portfolio of mRNA vaccines against respiratory viruses, including SARS-CoV-2, seasonal influenza, RSV, and other potential respiratory viruses, pending licensure. As part of these strategic collaborations, we expect to support expanded research and development programs in each of these countries.

We have committed to returning capital to our shareholders via share repurchase programs. During 2022, we repurchased approximately 23 million shares of common stock for $3.3 billion.

In December 2022, we purchased a Priority Review Voucher (PRV), which allows us to apply for expedited FDA review of a licensing application for one of our drug candidates. We were previously granted a PRV for mRNA-1273 and intend to use both PRVs to accelerate review of two expected BLA filings from our pipeline.

Financial Operations Overview

Revenue

The following table summarizes revenue for the periods presented (in millions):

We began to record product sales for our COVID-19 vaccines subsequent to its authorization for emergency use by the FDA and Health Canada in December 2020. For the years ended December 31, 2022, 2021, and 2020, we recognized $18.4 billion, $17.7 billion, and $200 million, respectively, of product sales from sales of our COVID-19 vaccines.

As of December 31, 2022, we had deferred revenue of $2.6 billion associated with customer deposits received or billable under supply agreements of which we expect $2.0 billion of our COVID-19 vaccines to be delivered in 2023. We believe that the SARS-CoV-2 virus is likely evolving to an endemic phase and as a result, we expect that COVID-19 vaccine market will likely shift to an endemic seasonal market and our product sales will decline in 2023 compared to 2022.

Other than product sales, our revenue in 2022, 2021, and 2020 was derived from government-sponsored and private organizations including BARDA, DARPA and the Bill & Melinda Gates Foundation and from strategic alliances with AstraZeneca, Merck and Vertex to discover, develop, and commercialize potential mRNA medicines.

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The following table summarizes grant revenue for the periods presented (in millions):

The following table summarizes collaboration revenue for the periods presented (in millions):

In the third quarter of 2022, AstraZeneca elected to terminate our collaborations, effective on November 21, 2022. As a result of the termination, we recognized the remaining deferred revenue of $76 million as collaboration revenue during the third quarter of 2022.

In September 2022, Merck exercised its option for PCVs, including mRNA-4157, pursuant to the terms of the PCV/SAV Agreement. In the fourth quarter of 2022, in accordance with the PCV/SAV Agreement, we granted a worldwide license to Merck for future development and commercialization, upon receipt of the participation payment of $250 million from Merck, and recognized collaboration revenue of $250 million. Please refer to Note 5 to our consolidated financial statements.

As of December 31, 2022, the remaining available funding, net of revenue earned was $137 million under the BARDA contract. To the extent that existing or potential future products generate revenue, our revenue may vary due to many uncertainties in future product demand, the development of our mRNA medicines and other factors.

Cost of sales

Cost of sales includes raw materials, personnel and facility and other costs associated with manufacturing our commercial products. These costs include production materials, production costs at our manufacturing facilities, third-party manufacturing costs, and final formulation and packaging costs. Cost of sales also includes shipping costs, indirect overhead costs associated with our product sales during the period, third-party royalties on net sales of our products, and charges for inventory valuation and losses on firm purchase commitments.

Research and development expenses

The nature of our business and primary focus of our activities generate a significant amount of research and development costs.

Research and development expenses represent costs incurred by us for the following:

•cost to develop our platform;

•discovery efforts leading to development candidates;

•preclinical, nonclinical, and clinical development costs for our programs;

•cost to develop our manufacturing technology and infrastructure; and

•digital infrastructure costs related to our drug discovery efforts and clinical trials.

The costs above comprise the following categories:

•personnel-related expenses, including salaries, benefits, and stock-based compensation expense;

•expenses incurred under agreements with third parties, such as consultants, investigative sites, contract research organizations, or CROs, that conduct our preclinical studies and clinical trials, and in-licensing arrangements;

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•expenses associated with developing manufacturing capabilities and acquiring materials for preclinical studies, clinical trials and pre-launch inventory, including both internal manufacturing and third-party contract manufacturing organizations, or CMOs;

•expenses incurred for the procurement of materials, laboratory supplies, and non-capital equipment used in the research and development process;

•upfront fees and milestones paid to third-parties for licenses and technologies that had not reached technological feasibility and did not have an alternative future use; and

•facilities, depreciation, and amortization, and other direct and allocated expenses incurred as a result of research and development activities.

We use our employee and infrastructure resources for the advancement of our platform, and for discovering and developing programs. Due to the number of ongoing programs and our ability to use resources across several projects, indirect or shared operating costs incurred for our research and development programs are generally not recorded or maintained on a program- or modality-specific basis.

The following table reflects our research and development expenses, including direct program specific expenses summarized by modality and indirect or shared operating costs summarized under other research and development expenses during the years ended December 31, 2022, 2021, and 2020 (in millions):

__________

(1)Includes a total of 45 development candidates at December 31, 2022, 37 development candidates at December 31, 2021, and 21 development candidates at December 31, 2020. Program-specific expenses are reflected as of the beginning of the period in which the program was internally advanced to development or removed if development was ceased.

A “modality” refers to a group of programs with common product features and the associated combination of enabling mRNA technologies, delivery technologies, and manufacturing processes. The program-specific expenses by modality summarized in the table above include expenses we directly attribute to our programs, which consist primarily of external costs, such as fees paid to outside consultants, central laboratories, investigative sites, and CROs in connection with our preclinical studies and clinical trials, CMOs, and allocated manufacturing costs of pre-launch inventory, mRNA supply and consumables. Costs to acquire and manufacture pre-launch inventory, mRNA supply for preclinical studies and clinical trials are recognized and included in unallocated manufacturing expenses when incurred, and subsequently allocated to program-specific manufacturing costs after completion of the program-specific production. The timing of allocating manufacturing costs to the specific program varies depending on the program development and production schedule. We generally do not allocate personnel-related costs, including stock-based compensation, costs associated with our general platform research, technical development, and other shared costs on a program-specific basis. These costs were therefore excluded from the summary of program-specific expenses by modality.

Discovery program expenses are costs associated with research activities for our programs in the preclinical discovery stage, and primarily consist of external costs for CROs and lab services, and allocated manufacturing cost of preclinical mRNA supply and consumables.

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Platform research expenses are mainly costs to develop technical advances in mRNA science, delivery science, and manufacturing process design. These costs include personnel-related costs, computer equipment, facilities, preclinical mRNA supply and consumables, and other administrative costs to support our platform research. Technology development and unallocated manufacturing expenses are primarily related to non-program-specific manufacturing process development and manufacturing costs.

Shared discovery and development expenses are research and development costs such as personnel-related costs and other costs, which are not otherwise included in development programs, discovery programs, platform research, technical development, certain collaborative and licensing arrangements, and unallocated manufacturing expenses, stock-based compensation, and other expenses.

The largest component of our total operating expenses has historically been our investment in research and development activities, including development of our platform, mRNA technologies, and manufacturing technologies. We expense research and development costs as incurred and cannot reasonably estimate the nature, timing, and estimated costs required to complete the development of the development candidates and investigational medicines we are currently developing or may develop in the future.

Changes in expectations or outcomes of any of the known or unknown risks and uncertainties may materially impact our expected research and development expenditures. Continued research and development is central to the ongoing activities of our business. Investigational medicines in later stages of clinical development, such as our RSV vaccine, seasonal flu vaccine, CMV vaccine and our COVID-19 vaccines, generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. We expect our research and development costs to continue to increase for the foreseeable future as our investigational medicines progress through the development phases and as we identify and develop additional programs. There are numerous factors associated with the successful commercialization of any of our investigational medicines, including future trial design and various regulatory requirements, many of which cannot be determined with accuracy at this time due to the early stage of development of many of our investigational medicines. Moreover, future commercial and regulatory factors beyond our control will impact our clinical development programs and plans.

Selling, general and administrative expenses

We started to incur sales and marketing expenses in the fourth quarter of 2020 to prepare for commercial operations in connection with the sale of our COVID-19 vaccines, and these expenses increased throughout the course of 2021 and 2022. Selling, general and administrative expenses consist primarily of personnel-related costs, including stock-based compensation, for executives, finance, legal, human resources, business development and other administrative and operational functions, professional fees, accounting and legal services, information technology and facility-related costs, and expenses associated with obtaining and maintaining intellectual property, or IP. These costs relate to the operation of the business, unrelated to the research and development function, or any individual program.

We anticipate selling, general and administrative expenses will increase as we continue to expand the number of programs in development and prepare for the establishment of commercial activities both within and outside the United States. We have already incurred additional expenses related to building out a regulatory, sales and marketing team to support the sale, marketing and distribution of our COVID-19 vaccines and the expansion of our footprint across the globe, with active subsidiaries in more than 17 countries. If we obtain regulatory approval for additional investigational medicines, and do not enter into one or more third-party commercialization collaboration and manufacturing arrangements, we will incur significant additional expenses related to building out these functions.

We have a broad IP portfolio covering our development and commercialization of mRNA vaccine and therapeutic programs, including those related to mRNA design, formulation, and manufacturing platform technologies. We regularly file patent applications to protect innovations arising from our research and development. We also hold trademarks and trademark applications in the United States and foreign jurisdictions. Costs to secure and defend our IP are expensed as incurred, and are classified as selling, general and administrative expenses.

Interest income

Interest income consists of interest generated from our investments in cash and cash equivalents, money market funds, and high-quality fixed income securities.

Other expense, net

Other expense, net consists of interest expense, gains (losses) from the sale of investments in marketable securities, gains (losses) related to changes in fair value of investments in equity securities, and other income and expense unrelated to our core operations.

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Interest expense is primarily derived from our finance leases related to our Moderna Technology Center and certain contract manufacturing service agreements.

Critical accounting policies and significant judgments and estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these consolidated financial statements requires us to make judgments and estimates that affect the reported amounts of assets, liabilities, revenues, and expenses and the disclosure of contingent assets and liabilities in our consolidated financial statements. We base our estimates on historical experience, known trends and events, and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. On an ongoing basis, we evaluate our judgments and estimates in light of changes in circumstances, facts, and experience. The effects of material revisions in estimates, if any, are reflected in the consolidated financial statements prospectively from the date of change in estimates.

While our significant accounting policies are described in more detail in the notes to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K, we believe the following accounting policies used in the preparation of our

consolidated financial statements require the most significant judgments and estimates.

Income taxes

We account for income taxes based on an asset and liability approach. We recognize deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. We determine our deferred tax assets and liabilities based on differences between financial reporting and tax bases of assets and liabilities, which are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Significant management judgment is required in assessing the realizability of our deferred tax assets. In performing this assessment, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. In making this determination, we consider the scheduled reversal of deferred tax liabilities, projected future taxable income and the effects of tax planning strategies in assessing the need for a valuation allowance. In the event that actual results differ from our estimates, we adjust our estimates in future periods and we may need to establish a valuation allowance, which could materially impact our financial position and results of operations. Changes in these estimates may result in significant increases or decreases to our tax provision in a period in which such estimates are changed, which in turn would affect net income or loss. As of December 31, 2022, we maintained a valuation allowance against a portion of the state deferred tax assets based on management’s evaluation of all available evidence.

We account for uncertain tax positions using a “more-likely-than-not” threshold for recognizing and resolving uncertain tax positions. The nature of uncertain tax positions is subject to significant judgment by management and subject to change, which may be substantial. We evaluate uncertain tax positions on a quarterly basis and consider various factors, that include, but are not limited to, changes in tax law, the measurement of tax positions taken or expected to be taken in tax returns, the effective settlement of matters subject to audit, information obtained during in process audit activities and changes in facts or circumstances related to a tax position. We adjust the level of the liability to reflect any subsequent changes in the relevant facts surrounding the uncertain positions in the period when these changes are determined. Our liabilities for uncertain tax positions can be relieved only if the contingency becomes legally extinguished through either payment to the taxing authority or the expiration of the statute of limitations, the recognition of the benefits associated with the position meet the “more-likely-than-not” threshold or the liability becomes effectively settled through the examination process. We consider matters to be effectively settled once the taxing authority has completed all of its required or expected examination procedures, including all appeals and administrative reviews, we have no plans to appeal or litigate any aspect of the tax position, and we believe that it is highly unlikely that the taxing authority would examine or re-examine the related tax position. We also accrue for potential interest and penalties related to unrecognized tax benefits in income tax expense.

Recently issued accounting pronouncements

We have reviewed all recently issued standards and have determined that such standards will not have a material impact on our financial statements or do not otherwise apply to our operations.

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Results of operations

A discussion regarding our results of operations for the year ended December 31, 2022 compared to 2021 is presented below. A discussion regarding our results of operations for the year ended December 31, 2021 compared to 2020 can be found under Part II -Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2021, which was filed with the Securities and Exchange Commission (SEC) on February 25, 2022.

The following tables summarize our consolidated statements of operations for the periods presented (in millions):

Revenue

Total revenue increased by $792 million, or 4%, in 2022, primarily due to an increase in product sales. Product sales increased by $760 million, or 4%, in 2022 from sales of our COVID-19 vaccines to domestic and international government customers and organizations, largely attributable to a higher average selling price and customer mix. Grant revenue decreased by $347 million, or 47%, in 2022, mainly due to a decrease in grant revenue from BARDA related to our COVID-19 vaccine development in 2022. Collaboration revenue increased by $379 million, or 621%, in 2022, mainly attributable to the recognition of Merck's participation payment of $250 million related to our PCV collaboration, and the recognition of deferred revenue of $76 million in connection with the termination of our collaborations with AstraZeneca.

Operating expenses

Cost of sales

Our cost of sales was $5.4 billion, or 29% of our product sales, in 2022, including third-party royalties of $1.1 billion. Our cost of sales was $2.6 billion, or 15% of our product sales, in 2021, including third-party royalties of $641 million. A portion of the inventory costs associated with our product sales for the year ended 2021 was expensed previously. If inventory sold for the year ended 2021 was valued at cost, including what was expensed as pre-launch inventory, our cost of sales for the period would have been $2.8 billion, or 16% of our product sales. We utilized all of our pre-launch inventory during 2021.

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Cost of sales for 2022 increased by $2.8 billion, or 107%, compared to 2021. Cost of sales as a percentage of product sales for 2022 increased 14 percentage points to 29% from 15% in 2021. These increases were mainly due to write-downs for excess and obsolete inventory related to our COVID-19 vaccines, unutilized manufacturing capacity and losses on firm purchase commitments of raw materials, driven by a shift in product demand, as well as a catch-up royalty payment of $400 million to the National Institute of Allergy and Infectious Diseases, an Institute or Center of the National Institutes of Health (please refer to Note 12 to our consolidated financial statements). We expect our cost of sales as a percentage of product sales to increase in 2023 as we likely move from a pandemic to an endemic seasonal market environment for our COVID-19 vaccines.

Research and development expenses

Research and development expenses increased by $1.3 billion, or 65%, in 2022. The increase was primarily attributable to an increase in clinical trial expenses of $690 million, an increase in clinical manufacturing expenses of $173 million, an increase in personnel-related costs of $156 million, acquisition of a Priority Review Voucher for $101 million, and an increase in consulting and outside services of $71 million. The increase in 2022 was largely attributable to the late-stage clinical development associated with our RSV, seasonal flu and CMV vaccine programs. The increase in personnel-related costs was primarily driven by an increase in the number of employees supporting our increased research and development programs and activities.

We expect that research and development expenses will increase in 2023 as we continue to progress our Phase 3 studies for our RSV, seasonal flu and CMV vaccine programs, and continue to develop our pipeline and advance our product candidates into later-stage development.

Selling, general and administrative expenses

Selling, general and administrative expenses increased by $565 million, or 100%, in 2022. The increase was mainly due to an increase in consulting and outside services of $169 million, an increase in personnel-related costs of $108 million, an increase in marketing expense of $89 million, an increase in technology- and facilities-related costs of $51 million, and an endowment to the Moderna Charitable Foundation of $50 million. The increase in 2022 was primarily related to our corporate expansion, particular in the commercial area and to a lesser extent, in support functions.

We expect that selling, general and administrative expenses will increase in 2023, as we continue to build out our global commercial, regulatory, sales and marketing infrastructure, and continue to expand the number of programs and our business operations.

Interest income

Interest income generated from our investments in marketable securities increased by $182 million in 2022, mainly attributable to an overall higher interest rate environment and increased investment balances.

Other expense, net

The following table summarizes other expense, net for the periods presented (in millions):

Total other expense, net increased by $16 million, or 55%, in 2022. The increase was primarily due to a net realized loss on available-for-sale debt securities as well as an increase in interest expense, partially offset by a gain on equity securities and a net gain related to our foreign currency balance sheet hedging activities, foreign currency transactions, and remeasurements. Our interest expense is primarily related to our finance leases. The increase in interest expense was driven by new finance leases that commenced in 2022. Please refer to Note 11 to our consolidated financial statements.

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Provision for income taxes

Provision for income taxes increased by $130 million, or 12%, in 2022, primarily due to the tax benefit recorded in 2021 related to the release of the valuation allowance on the majority of our deferred tax assets. Our effective tax rate for the year ended December 31, 2022 was 12.7%, which included tax benefits related to foreign-derived intangible income deductions and stock-based compensation. Our effective tax rate for the year ended December 31, 2021 was 8.1%, which included tax benefits related to the release of the valuation allowance on most of our deferred tax assets, foreign-derived intangible income deduction and stock based compensation.

Liquidity and capital resources

The following table summarizes our cash, cash equivalents, investments and working capital for each period presented (in millions):

Our cash, cash equivalents and investments are invested in accordance with our investment policy, primarily with a view to liquidity and capital preservation. Our investments, consisting primarily of government and corporate debt securities, are stated at fair value. Cash, cash equivalents and investments as of December 31, 2022 increased by $650 million, or 4%, compared to December 31, 2021. For the year ended December 31, 2022, we generated cash from operations of $5.0 billion, partially offset by repurchases of our common stock of $3.3 billion; purchases of property, plant and equipment of $400 million; and unrealized losses on available-for-sale debt securities of $412 million.

Working capital, which is current assets less current liabilities, as of December 31, 2022 increased by $1.6 billion, or 23%, compared to December 31, 2021, primarily due to a decrease in short-term deferred revenue of $4.2 billion, mainly driven by revenue recognized from deferred revenue in excess of customer deposits received, and a decrease in income taxes payable of $828 million. This was partially offset by a decrease in accounts receivable of $1.8 billion, a decrease in cash, cash equivalents and short-term investments of $825 million, primarily due to purchases of long-term marketable securities, repurchases of our common stock, and income tax payments, and a decrease in inventory of $492 million.

Cash flow

The following table summarizes the primary sources and uses of cash for the periods presented (in millions):

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Operating activities

We derive cash flows from operations primarily from cash collected from customer deposits related to our COVID-19 vaccine supply agreements as well as certain government-sponsored and private organizations and strategic alliances. Our cash flows from operating activities are significantly affected by our use of cash for operating expenses and working capital to support the business. Beginning in the third quarter of 2020, we entered into supply agreements with the U.S. Government, other international governments and organizations for the supply of our COVID-19 vaccines and received upfront deposits. As of December 31, 2022, we had $2.6 billion in deferred revenue related to customer deposits received or billable.

Net cash provided by operating activities in 2022 was $5.0 billion and consisted of net income of $8.4 billion and non-cash adjustments of $74 million, plus a net change in assets and liabilities of $3.5 billion. Non-cash items primarily included deferred income taxes of $559 million, depreciation and amortization of $348 million, stock-based compensation of $226 million, and amortization of investment premiums and discounts of $31 million. The net change in assets and liabilities was primarily due to a decrease in deferred revenue of $4.2 billion, an increase in prepaid expenses and other assets of $1.7 billion, and a decrease in income taxes payable of $828 million, partially offset by a decrease in accounts receivable of $1.8 billion, an increase in accrued liabilities of $612 million, a decrease in inventory of $492 million, and an increase in accounts payable of $240 million.

Net cash provided by operating activities in 2021 was $13.6 billion and consisted of net income of $12.2 billion and non-cash adjustments of $110 million, plus a net change in assets and liabilities of $1.3 billion. Non-cash items primarily included deferred income taxes of $318 million, depreciation and amortization of $232 million, stock-based compensation of $142 million, and amortization of investment premiums and discounts of $54 million. The net change in assets and liabilities was primarily due to an increase in deferred revenue of $2.8 billion, an increase in accrued liabilities of $989 million, an increase in income taxes payable of $876 million, and an increase in accounts payable of $204 million, partially offset by an increase in accounts receivable of $1.8 billion, an increase in inventory of $1.4 billion, and an increase in prepaid expenses and other assets of $489 million.

Net cash provided by operating activities in 2020 was $2.0 billion and consisted of net loss of $747 million and non-cash adjustments of $196 million, plus a net change in assets and liabilities of $2.6 billion. Non-cash items primarily included stock-based compensation of $93 million, leased assets expensed of $62 million, depreciation and amortization of $31 million, and amortization of investment premiums and discounts of $10 million. The net change in assets and liabilities was primarily due to an increase in deferred revenue of $3.8 billion, an increase in accrued liabilities of $388 million, an increase in accounts payable of $12 million, and an increase in operating lease liabilities of $12 million, partially offset by an increase in in accounts receivable of $1.4 billion, an increase in prepaid expenses and other assets of $241 million, an increase in inventory of $47 million, and an increase in operating lease right-of-use assets of $11 million.

Investing activities

Our primary investing activities consist of purchases, sales, and maturities of our investments and capital expenditures for land, leasehold improvements, manufacturing, laboratory, computer equipment, and software.

Net cash used in investing activities in 2022 was $5.2 billion, which included purchases of marketable securities of $11.4 billion, purchases of property, plant and equipment of $400 million, and investment in convertible notes and equity securities of $40 million, partially offset by proceeds from sales of marketable securities of $3.5 billion and proceeds from maturities of marketable securities of $3.2 billion.

Net cash used in investing activities in 2021 was $8.5 billion, which included purchases of marketable securities of $12.7 billion, purchases of property, plant and equipment of $284 million, and investment in convertible notes of $30 million, partially offset by proceeds from sales of marketable securities of $3.1 billion and proceeds from maturities of marketable securities of $1.3 billion.

Net cash used in investing activities in 2020 was $1.7 billion, which included purchases of marketable securities of $3.0 billion and purchases of property, plant and equipment of $68 million, partially offset by proceeds from maturities of marketable securities of $1.1 billion and proceeds from sales of marketable securities of $215 million.

Financing activities

Our primary financing activities consist of repurchases of common stock, issuance of common stock related to our equity plans and finance leases.

Net cash used in financing activities in 2022 was $3.4 billion, primarily from repurchases of common stock of $3.3 billion and changes in financing lease liabilities of $184 million, partially offset by net proceeds from the issuance of common stock in connection with the exercise of stock options and employee stock purchases under our equity plans of $65 million.

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Net cash used in financing activities in 2021 was $873 million, primarily from repurchases of common stock of $857 million and changes in financing lease liabilities of $140 million, partially offset by net proceeds from the issuance of common stock in connection with the exercise of stock options and employee stock purchases under our equity plans of $124 million.

Net cash provided by financing activities in 2020 was $2.0 billion, primarily from net proceeds from equity offerings of $1.9 billion and employee stock purchases under our equity plans of $186 million.

Operation and funding requirements

Our principal sources of funding as of December 31, 2022 consisted of cash and cash equivalents, investments, and cash we expect to generate from operations. We generated net income of $8.4 billion for the year ended December 31, 2022. We generated net income of $12.2 billion for the year ended 2021, following the authorization of our first commercial product in December 2020. From our inception to the end of 2020, prior to the authorization of our first commercial product in December 2020, we incurred significant losses from operations due to our significant research and development expenses. We have retained earnings of $18.3 billion as of December 31, 2022.

We have significant future capital requirements including expected operating expenses to conduct research and development activities, operate our organization, meet capital expenditure needs, and fund our share repurchase program. We expect our expenses to increase in connection with our ongoing activities, particularly as we continue research and development of our development candidates and clinical activities for our investigational medicines. We also expect our expenses to increase associated with manufacturing costs, including our arrangements with our international supply and manufacturing partners. Our ongoing work on our RSV, seasonal flu, CMV vaccine candidates, and COVID-19 vaccines, including development of any new generations of boosters and vaccines against variants of SARS-CoV-2, late-stage clinical development, and buildout of global commercial, regulatory, sales and marketing infrastructure will require significant cash outflows, most of which may not be reimbursed or otherwise paid for by our partners or collaborators. In addition, we have substantial facility, lease and purchase obligations. We have also entered into certain collaboration agreements with third parties that include the funding of certain research and development activities and potential future milestone and royalty payments by us.

We believe that our cash, cash equivalents, and investments as of December 31, 2022, will be sufficient to enable us to fund our projected operations, capital expenditures and share repurchases through at least the next 12 months from the issuance of the financial statements included in this Annual Report on Form 10-K. We are subject to all the risks related to the development and commercialization of novel medicines, and we may encounter unforeseen expenses, difficulties, complications, delays, and other unknown factors, which may adversely affect our business. Our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement and involves risks and uncertainties, and actual results could vary as a result of a number of factors. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect.

Contractual obligations and commitments

The following table summarizes our contractual obligations as of December 31, 2022 and the effects that such obligations are expected to have on our liquidity and cash flows in future periods (in millions):

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(1)The amounts in the table include a total payment of $662 million associated with our MTC leases for the optional lease extension periods. For accounting purposes, a lease term is the non-cancelable period of the lease and includes options to extend or terminate the lease when it is reasonably certain that an option will be exercised. Please refer to Note 11 to our consolidated financial statements.

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(2)We entered into a lease agreement in 2021 for approximately 462,000 square feet in Cambridge, Massachusetts (Moderna Science Center) and are currently undergoing an approximately two-year building project. Following the building project, the lease term is 15 years, subject to our right to extend the lease for up to two additional seven-year terms. The rent will commence on the Commencement date defined in the lease agreement that is currently estimated to be the fourth quarter of 2023.

(3)The amounts represent non-cancelable fixed payment obligations related to purchases of raw materials, contract manufacturing services, clinical services and other goods or services in the normal course of business. As of December 31, 2022, $268 million of the purchase commitments related to raw materials was recorded as an accrued liability for loss on future firm purchase commitments.

We have agreements with certain vendors for various services, including services related to clinical operations, and support and contract manufacturing, which we are not contractually able to terminate for convenience. Certain agreements provide for termination rights subject to termination fees or wind down costs. Under such agreements, we are contractually obligated to make certain payments to vendors, mainly to reimburse them for their unrecoverable outlays incurred prior to cancellation. The exact amounts of such obligations are dependent on the timing of termination, and the exact terms of the relevant agreement and cannot be reasonably estimated. At December 31, 2022, we had cancelable open purchase orders of $2.5 billion in total under such agreements for our clinical operations and support and contract manufacturing. These amounts represent only our estimate of those items for which we had a contractual commitment to pay at December 31, 2022, assuming we would not cancel these agreements. The actual amounts we pay in the future to the vendors under such agreements may differ from the cancelable open purchase order amounts of $2.5 billion.

In addition to the above obligations, we enter into a variety of agreements and financial commitments in the normal course of business. The terms generally allow us the option to cancel, reschedule, and adjust our requirements based on our business needs, prior to the delivery of goods or performance of services. It is not possible to predict the maximum potential amount of future payments under these agreements due to the conditional nature of our obligations and the unique facts and circumstances involved in each particular agreement.

As of December 31, 2022, we did not have any off-balance sheet arrangements that were material or reasonably likely to become material to our financial condition or results of operations.