Inovio Could Be a Bargain Using Probability Analysis

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Inovio Pharmaceuticals (NASDAQ:INO) is a biotechnology company whose stock has skyrocketed. The hope is that INO stock will benefit from a COVID-19 virus vaccine. If it does, then it could take off again.

INO Stock Is Caught up in the Coronavirus Gold Rush

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Inovio’s stock price has risen to the point in the last several weeks where it has a $1 billion market value. It accomplished this even though it effectively is a start-up company with almost no revenues.

The market is hoping that its vaccine candidate can produce real results that would be used worldwide on a continuing basis. In that case, INO stock might actually look like a bargain.

Of course, that would depend on overcoming a number of hurdles, as well as highly dependent on the vaccine pricing. But there is a scenario where, despite the risks of the stock’s huge gains already, this company might be considered a speculative buy.

INO Stock Hangs On Its Vaccine Candidate for COVID-19

Inovio has a technology called SynCon® that creates optimized plasmids. Plasmids are DNA strands that create antigens. Antigens help a person’s immune system to recognize and destroy cancerous or virally infected cells.

Inovio has developed a COVID-19 vaccine called INO-4800. It uses a DNA approach to help cells use their immune system to fight the virus, and currently is in a Phase 1 trial. The trial is in progress in China, in collaboration with a Chinese company called Beijing Advaccine Biotechnology Co.

In addition, Inovio is doing Phase 1 trials in the U.S. It received an initial grant of up to $9 million from the Coalition for Epidemic Preparedness Innovations (CEPI).

One issue is that other companies, especially Gilead (NASDAQ:GILD), with Remdesivir , appear to be further along.

The Implied Business Model at Its Present Valuation

Let’s just assume INO-4800 becomes effective and gets all the approvals. What is the business model and is the $1 billion valuation reasonable today?

For example, if 1 million took the vaccine, at say a $100 per vaccine sales figure, the company’s revenue would be $100 million annually. At today’s market value of $1 billion for INO stock, it seems like 10 times revenue is a reasonable, if not slightly expensive valuation.

However, if 100 million people took the vaccine, and the price fell to $10 per vaccine, Inovio’s annual revenue would be $1 billion (i.e. 100 million times $10 = $1 billion). That implies that it is trading at just one times the expected revenue.

So you can see that at that assumption, the stock is actually trading at a very cheap price. In that situation, the market value of the company would likely be 10 to 20 times the present price.

How Do We Assess The Valuation of INO Stock?

One way to do this is to use a simple probability analysis. For example, let’s assume that the probability that INO-4800 will be a success is 50-50. However, if it is successful, the chance that it will be used globally will be worth a $20 billion valuation.

Here is how the implied valuation works: 50% time a zero valuation (if unsuccessful) plus 50% times a $20 billion valuation is equal to: $0 + $10 billion, or $10 billion.

So that implies that INO stock is a bargain at its present $1 billion valuation.

In fact, here is another way to look at its present valuation. There can be up to a 95% chance that INO-4800 will be unsuccessful, along with a 5% chance that it will be successful with a potential $20 billion valuation.

The result would be a $1 billion valuation (i.e., $0 time 0.95 plus .05 times $20 billion = $1 billion). This is equal to its present market value.

Bottom Line with INO

So if 100 to 200 million people worldwide take the potential vaccine at $10 per shot annually, INO stock would be worth $10 billion to $20 billion. If there is only a 5% chance this occurs, the stock is fairly valued.

But if there is greater than 5% chance that its vaccine is successful, the stock is probably undervalued. In fact, if you believe that over 100 million to 200 million would take the vaccine, it could be extremely undervalued.

So, the bottom line is that Inovio is a speculative play. However, if you are a non-defensive investor, a kind of gambling with an edge investor, you might bite on INO stock.

You place a probability on the potential that it becomes successful and determine what that is worth. If that is greater than its present price, then Inovio is a buy for you.

As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. Mark Hake runs the Total Yield Value Guide which you can review hereThe Guide focuses on high total yield value stocks.

Mark Hake writes about personal finance on mrhake.medium.com, Newsbreak.com and Beehiiv.com.


Article printed from InvestorPlace Media, https://investorplace.com/2020/03/ino-stock-cheap-vaccine-probablity/.

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