Moderna launches biggest biotech IPO ever, but shares immediately crash. Is this a buying opportunity?

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The News:

Moderna Therapeutics Inc. (Cambridge MA) watched its share price nosedive within hours of pulling off the biggest initial public offering in biotech history, a sign the company and its underwriters might have over-estimated demand for the richly valued company. Moderna priced its offering at $23 per share but is now trading around $16.50 as of Tuesday (December 19, 2018) morning, leaving IPO buyers instantly underwater.

The IPO, which raised $604 million, was widely viewed as a bellwether for a biotech industry that saw a banner year for new listings gradually dry up in the winter months, STAT reports. Moderna, now valued at $5.41 billion, is the 57th biotech to go public in 2018, and investors are tracking the company’s performance to gauge the market’s appetite for future IPOs.

Moderna’s massive $2.16 billion market value drop on the Nasdaq has sparked some rebukes, says Fortune. But the more important longer-term question is: Can Moderna follow through on its ambitious drug development plans, given that it has no products on the market? It’s certainly not rare for American biotech companies to go public before having a commercialized product on hand. In fact, money raised in public offerings is often seen as essential by the industry to fund expensive R&D and clinical trials which, admittedly, may end in failure. It’s classic high-risk, high-reward.

Moderna’s pipeline is based on “mRNA” technology. Simply put, this kind of approach could essentially turn the body’s very cells into drugmaking factories that can then tackle a number of diseases, including cancer, infectious diseases like Zika, the flu, heart disease, and multiple other conditions. Moderna has a backlog of more than 20 experimental candidates in its pipeline, with the most advanced one in Phase 2 clinical trials and the others in Phase 1. That means one catastrophic failure doesn’t necessarily mean the party’s over; other products can make up for a miss–if the underlying technology platform (in Moderna’s case, mRNA therapies), actually bears fruit.

Steve’s Take:

Gigantic healthcare IPOs have suddenly become almost commonplace. Last week, completing an aggressive plan for a dual listing in Shanghai and Hong Kong in just seven months, WuXi AppTec Co. Ltd. debuted on the HKEX, and are is trading today (Dec. 18) just pennies under its IPO price of HK$68. Net proceeds will register at $967 million (HK$7.55B), the Shanghai-based company said in a statement.

The proceeds derive from the sale of some 116 million shares for $8.71 (HK$68) each, in an IPO that, (according to Reuters) values the CRO powerhouse at $10.2 billion. The final price fell squarely in the middle of the range. As previously reported by Endpoints, the proceeds will go toward enhancing WuXi’s capabilities–from bioanalysis and manufacturing to R&D and AI–as well as acquiring companies and nurturing startups in the broader healthcare space.

But getting back to the Moderna IPO explosion (or implosion in the minds of many), there’s more to the Wall Street greenhorn than the action in the biotechnology company’s stock, says CNBC’s Jim Cramer. I agree with the television personality, former hedge fund manager and best-selling author. The development-stage biotech has some “major” positive drivers that make its stock prime for speculation, the “Mad Money” host argues. But until Moderna’s quiet period ends in about three weeks, investors won’t have a good sense of how Wall Street feels about the company, Cramer noted.

Moderna is in the early stages of creating medicine using messenger RNA, which transports genetic information from DNA to a body’s cells so they can produce the proper proteins to express those genes. Moderna’s idea is to engineer messenger RNA in patients with genetic diseases to tell their cells to produce different, potentially life-changing proteins.

Granted, the broader market disintegration recently has pushed everything down, with Moderna now 28% lower than its IPO price.

But if investors view the stock “purely as speculation, Moderna has “a few major things going for it,” Cramer said. It’s recession-proof at a time when many investors are now worried about a slowdown. It’s got an exciting concept; you can argue that messenger-RNA-based medicine could revolutionize health care. So while it might not be the right play for people investing for retirement, investors with some cash to spare might find Moderna to be an interesting bet if they believe in the story.

What sets Moderna apart? While other companies including Ionis Pharmaceuticals Inc. (Carlsbad CA) are working on similar treatments, Moderna’s focus on delivery and manufacturing technologies puts it in a class above its rivals, Cramer argued. In short, Moderna has developed technology that makes it easier for its messenger RNA to reach the correct place in a patient’s body without running into the immune system, which can degrade the new RNA. Moderna is also working on manufacturing technology that will allow it to mass-produce its treatments once it gets federal approval, though that is still years away.

The company has struck high-profile partnerships with Big Pharma giants Merck & Co. (Kenilworth NJ) and AstraZeneca PLC (London), which is also Moderna’s fourth-largest shareholder. Those deals, which manifest themselves in the form of “milestone payments” as Moderna’s drugs reach various thresholds of success, speak to the legitimacy of the company’s mission, Cramer said.

“The industry clearly believes the technology is worth betting on,” he said. “These companies understand the potential of messenger-RNA-based medicine.”

Bottom Line:

Moderna’s case is rather unique–the company had raised a massive $1.8B in private equity before the IPO–and we’ll be unlikely to see American IPOs as big as this, let alone in Europe. Other companies in the field still have to prove they have an edge.

“Interest in the field has increased over the last few years, though investors–especially those in biotech–consider each investment opportunity on a standalone basis,” warns CureVac’s CEO, Dan Menichella.

Cramer acknowledged why investors might be wary of buying shares in Moderna: The company has no earnings or sales yet and spends vast sums on its 21 development programs, 10 of which are in the early stages of clinical trials. But the corporate investments have allowed the company to maintain a clean balance sheet, which now boasts $1.8 billion in cash to spare thanks to the IPO, he said.

“Early-stage biotechs like this one don’t trade on the numbers, they trade on belief,” Cramer explained. “In about [three weeks], Moderna’s quiet period ends, and the analysts will start rolling out their coverage. If they tell a bullish story, and I think they probably will, this stock can rally.”

So even though Moderna’s stock has lost nearly [$2.16] billion in value since its IPO, investors would be better off judging the biotech on whether they think its promising treatments can succeed than on the stock’s capricious action, Cramer said.

If you’re trying to save for retirement, Moderna is not the stock for you. However, if you want to take a chance with a super risky bet in that portion of your portfolio, this name resembles a rational bet and not a purely speculative gamble. And the entry point probably won’t be too much lower anytime soon.

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