Vir Biotechnology (VIR -5.89%) may not be a familiar name to many investors. This relatively young biotech went public last October. Backed by infamous investor SoftBank (of WeWork fame) among others, investors in Vir find themselves in a situation where they truly are betting on the jockey. The seasoned biotech veteran George Scangos helms the company following his prior leadership at Biogen and Exelixis. An experienced team surrounds him, supported by a board of directors filled with seasoned executives.  

Vir's mission to eradicate the world of infectious diseases makes it a natural candidate to enter the fray pursuing COVID-19 interventions. Companies are racing to be the first to develop a vaccine and a treatment to stymie the spread of the coronavirus, so investors should familiarize themselves with Vir. 

Map of world with red shading overlaid and the word coronavirus

Image Source: Getty Images.

A tumultuous ride for shareholders.

Following an IPO priced at $20 per share, Vir's stock stumbled and spent most of the fall in the $12 and $13 range. The stock took on a new life doubling in price in the second half of January. The stock retreated from this short-lived run above $26 back down to the high teens in the middle of February.

In the last week, the stock has gone parabolic. It closed above $60 per share this week and even broke $70 in pre-market trading on Friday. That's a more than four-fold increase from the start of the year and five times what it traded for most of last year.

Then, boom. Friday morning stock precipitously fell below $40 per share immediately after the market opened. Roughly $2 billion in valuation wiped out in minutes. Within hours, the stock gained back $1 billion in value only to lose it again. This tremendous volatility makes for a trader's playground but can wrack the nerves of fundamental investors.

Volatile stock chart

Image Source: Getty Images.

Is the valuation warranted?

My issue has less to do with the research and development per se and more with the valuation. Vir's market cap swelled to more than $6 billion at its peak. Personally, I felt its prior valuation in the $1 billion to $2 billion range was pricey for a company with two early-stage clinical candidates. However, the giant leap in valuation does not appear to be based on new data emerging from Vir's R&D efforts. It stems from an announcement on Feb. 25 that Vir teamed up with WuXi Biologics to develop antibodies to treat the spreading COVID-19 (the coronavirus 2019).

It seems like every few hours, news breaks of more confirmed coronavirus infections in new locales. The pandemonium continues to swell causing a backlash through the economy and eviscerating stock markets. I commend Vir and WuXi, one of the leading Chinese biotech companies, for allocating resources to tackle this growing challenge. The key will be whether the two drug developers can advance a meaningful therapy and do so in a fairly rapid timeframe.

A credible shot

The company maintains a certain degree of implied credibility because Vir is backed by marquee investors, including the Gates Foundation, it's led by seasoned drug developers, and it boasted a $1 billion-plus market cap prior to the COVID-19 news. It seems reasonable to believe that the company's platform technology can deliver COVID-19-specific antibodies for testing. The timing along with safety and potency remain big question marks for now. 

I highlight the credibility factor because some small and micro-cap biotechs are jumping on the COVID-19 bandwagon. Some of these smaller entities are well-intentioned while other unscrupulous groups will never undertake meaningful R&D efforts. This latter cohort aims to piggyback on the momentum of the situation. If the stocks spike, these companies usually raise capital to continue operations. The SEC issued a warning to investors to beware of coronavirus scams. The SEC even halted trading in one such penny stock last week.

I don't believe Vir falls into that category. I think the company will undertake a genuine effort and has lined up a reputable partner. However, in the absence of data, predicting if any product will emerge come from the R&D efforts remains challenging. Further, guessing the value of a COVID-19 treatment is difficult. Is it worth $1 billion in market cap, half of that, or multiples more? Nobody really knows. It will depend on how widespread the outbreak is at the time of commercialization, which countries are most in need, and what price the drug will ultimately command.

Biotech investing is not for the faint of heart. The volatility in Vir's stock and high valuation make me cautious. Additionally, Vir faces competition such as Gilead Sciences (GILD 3.62%), which kicked off two phase 3 clinical trials this week for its promising drug aimed at COVID-19. For now, I will watch Vir from the sidelines and wish the team well on developing a successful treatment.