So far in 2020, Inovio Pharmaceuticals (NASDAQ:INO) stock has rallied nearly 700%. The reason for the gain is simple.
Investors are betting that Inovio will successfully develop a vaccine for Covid-19, the virus that triggered the global pandemic.
The optimism admittedly makes some sense. Inovio’s INO-4800 was one of 14 candidates selected by the U.S. federal government for Operation Warp Speed. Early results appear promising.
But Inovio still has a long way to go. And both the company’s history and its competition provide some cause for skepticism. As INO stock keeps soaring, too many investors seem to be ignoring the risks.
A Checkered History
One simple cause for concern: Inovio has never had a product approved for sale.
On its own, that’s truly not that big a deal. Early-stage biotechnology companies need time. But Inovio was founded in 1979. It’s been more than four decades and the company’s only revenue has come from research agreements.
The lack of success hasn’t come from lack of trying. The company finished 2019 with an accumulated deficit of $740 million. Rather, Inovio simply hasn’t been successful. And, as Citron Research pointed out in its bearish take on the stock in late April, major partners AstraZeneca (NYSE:AZN) and Roche (OTCMKTS:RHHBY) both have walked away from past collaborations.
Inovio’s past efforts include initiatives to tackle past pandemics. The company tested candidates for both the Zika virus and MERS (Middle East Respiratory Syndrome).
But after publicizing solid initial results, both efforts appear to have fizzled. Results from the Zika study were supposed to be released last year, but Inovio has been quiet on that front. Phase 2a results for the MERS vaccine haven’t been released, either.
The worry is that INO-4800 will be much of the same. Inovio is talking up early progress, including positive results in mice. But investors have heard this story before. In the past, at least, the company wasn’t able to deliver. It’s fair to wonder if this time will be different.
Competition Is On the Way for INO Stock
Meanwhile, Inovio doesn’t have to just develop a vaccine. It needs to do so quickly.
Again, 13 other candidates have received federal government funding. Dozens more are in development.
To be fair, the market is acting as if there’s room for more than one winner. INO is the ninth-best stock in the market so far in 2020. The top five are all Covid-19 plays, with Vaxart (NASDAQ:VXRT) leading the way with an almost comical 4,200% return.
But I’m not sure those rallies are necessarily good news for INO stock. It’s possible, and maybe likely, that investors are buying any Covid-19 play with little regard for its history or potential. Put another way, the space looks a little bubbly.
That aside, there’s still the question of how much profit will be made from a vaccine. Developers are going to be under intense pressure to provide doses for little or no cost. If multiple vaccines arrive on the market, competition could pressure pricing as well.
To be sure, with a market capitalization just shy of $4 billion, Inovio almost certainly can profit enough to drive upside in its stock if it succeeds. But that remains a big “if.” The smaller the rewards, the smaller the risk investors should take on. There’s nothing small about the risk here.
An INO Stock Short?
This is not to say, necessarily, that INO stock is a short. The rallies in INO and other Covid-19 plays on the whole have some logic. There likely will be billions of dollars in vaccine profits to be made and some of these stocks will be winners.
Inovio might well be one of those winners. And that’s probably enough to keep the stock from being a short right now, particularly with admittedly positive early data.
But what worries me about the stock, and the group, is that investors are treating all of these companies as potential winners. Inovio has added more than $3 billion in market value so far this year. Vaxart has picked up more than $6 billion, and Moderna $30 billion.
There may not be enough profits to go around for everyone, and not every company is going to be in position to harvest those profits. And so, the companies that win have already priced in some success, and the ones that lose have a long way down. It leaves INO stock, particularly given its history, with a questionable risk/reward profile.
Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets. He has no positions in any securities mentioned.