The six-month uptrend in Moderna (NASDAQ:MRNA) ended on Feb. 12 when the company priced a secondary offering of its stock at $19. That 15% discount in the stock fills the balance sheet with plenty of additional cash, ensuring the company will have the resources it needs to develop therapeutics and vaccines. Plus, now that it is in the limelight for its work on the new coronavirus from China, the timing of the sale benefits Moderna stock in the long haul.
Moderna offered over 26 million common shares at $19. The nearly $500 million in gross proceeds is a double-edged sword for Moderna stock. Existing shareholders face a 9%-10% dilution (based on the 285 million shares outstanding).
But when the stock traded in the $20-$24 range in the last few weeks, investors must wonder if Goldman Sachs and Morgan Stanley are short-changing the company. The sum left on the table is a trade-off compared to making sure that demand is strong enough to sell all the shares.
Moderna Developing Coronavirus Vaccine
On Jan. 23, Moderna gained the market’s attention when the Coalition for Epidemic Preparedness Innovations (CEPI) said that it would finance Moderna. CEPI will fund the manufacturing of an mRNA vaccine candidate against the new coronavirus. China has reported over 73,000 confirmed cases and at least 1,800 deaths. It also reported more than 10,000 cases where patients have recovered.
The country needs vaccine development to contain its spread. Even as infections eventually peak and fall, China needs to immunize its citizens to prevent further deaths. Moderna’s mRNA approach is one of many potential cures under development. Regeneron (NASDAQ:REGN), Gilead Sciences (NASDAQ:GILD), AbbVie (NYSE:ABBV), and Inovio (NASDAQ:INO) are also working on vaccines and treatments.
Moderna announced that it advanced its cytomegalovirus (CMV) study. It now expects CMV vaccine Phase 2 to start in 2020’s third quarter. Moderna also expanded investment in this space with three new vaccine candidates for infectious diseases. It said that the three new infectious disease vaccine candidates complement “two autoimmune development candidates, PD-L1 (mRNA-6231) and IL-2 (mRNA-6981), in the Company’s other core modality, systemic secreted & cell surface therapeutics.”
The mRNA-1647 CMV vaccine is the first mRNA vaccine for an infectious disease to enter a Phase 2 study and is ahead of schedule. The next part of the study will involve 252 healthy adults who will take three different doses. If the company reports good safety and immunogenicity results, the stock may rebound.
To highlight, mRNA-1189 is a vaccine study against the Epstein-Barr virus, mRNA-1345 studies the respiratory syncytial virus in children and mRNA-1273 is for the new coronavirus. Moderna has 24 mRNA development candidates underway, while 12 are in clinical studies. The studies involve over 1,500 participants.
Six analysts who offer a price target on Moderna stock have an average target of $31.20, 64% above its recent $19 closing price. Individual investors who prefer to crunch their own numbers may use a 10-year discounted cash flow revenue exit model. This uses a revenue exit multiple to calculate terminal value.
Assuming a step discount rate and the following below, the downside fair value on Moderna stock is $18.28.
|Terminal Revenue Multiple||10.6x-11.6x||11.1x|
Source: finbox.io (click on this link to change your assumptions)
Sentiment on Moderna stock is negative, compared to the industry and the S&P 500.
Investors who missed the last run-up may want to let the selling pressure end before starting a new position. The share dilution is a near-term headwind for now. But in a few months, positive clinical results will help lift the stock.
As such, buying the stock if it dips toward the $15-$18 range may offer the biggest margin of safety.
As of this writing, Chris Lau did not hold a position in any of the aforementioned securities.