In this episode of Industry Focus: Wildcard, Dylan Lewis chats with Motley Fool contributor Brian Feroldi about valuable lessons from a company working on a COVID-19 vaccine, the various clinical trial phases a drug has to undergo, how biotech companies generate revenues, how they are valued, and much more.

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This video was recorded on June 3, 2020.

Dylan Lewis: It's Wednesday, June 3rd, Wildcard Wednesday. We'll be talking about how one company working on a COVID vaccine is providing some awesome lessons to investors this week. I'm your host Dylan Lewis, and I'm joined by's completely undistinguished contributor, Brian Feroldi. Love that Brian writes his own title and manages to surprise me pretty much every time. Brian, how are you doing?

Brian Feroldi: Dylan, if I can get a smile out of you, I'm doing my job right. I'm doing great; how are you doing?

Lewis: [laughs] It's always a great start to the show, I think. I mean, for folks that are listening, I'm sure you can hear me smiling.

A lot of news, a lot of news going on, period, Brian, but I think you know obviously one of the big stories has been COVID and coronavirus and so many companies addressing the coronavirus epidemic or pandemic with different potential vaccines. And this is going to take us into a space that you are far more familiar with, I can kind of tread lightly.

And I'm so happy to have you on the show, because we're going to be talking about this company Moderna (NASDAQ:MRNA), who, a lot of people probably hadn't heard of up until maybe two months ago and that's really in large part due to COVID.

Feroldi: Yes. This company has been on fire in 2020. And we've seen exactly that with lots of companies that have been identified as coronavirus stocks. Basically, investors and Wall Street and speculators and whoever, can't get enough of so many of these businesses.

But, yeah, the company we're going to focus on today is Moderna, the ticker symbol there is MRNA. We'll get to what that means in a couple of seconds. But this company came public in December of 2018. They are a clinical stage biotechnology company, which means that they do not yet have a single product on the market, they have a pretty robust pipeline but none of their products have made it all the way through to FDA approval and are on the market yet.

That's pretty typical. We see lots of companies come public at that stage because they're burning through capital and they need cash infusions regularly to fund their clinical trials. And what makes this company, kind of, special is their drug development technology is based on messenger ribonucleic acid, or mRNA, hence the ticker. And mRNA plays a very fundamental role in human biology. It's a single-stranded molecule that carries genetic code from DNA in a cell's nucleus to ribosomes, and ribosomes are in cells and they're the protein-making machinery. So, the theory behind this company is that, by developing mRNA-based drugs and injecting them into a patient, you can instruct the patient's own cells to create proteins that then go on to prevent, treat or even in some cases, cure diseases.

And although this company, again, is in the clinical stage, it actually has a pretty impressive pipeline. 23 drugs, 23 different mRNA drugs are in development; they're at various stages. 13 of them are already in the clinic. And four of them are currently in Phase II, and they're being studied to treat a huge variety of diseases; vaccines for Zika, RSV, [Respiratory Syncytial Virus] influenza, cancer and, of course, COVID-19.

Lewis: Brian, I think you did a really good job there of dusting off the junior year biology Barbara McGuirk [laughs] class notes that I had somewhere in the back of my brain. You know, this stuff can get very heavy, very quickly for people that aren't familiar with the space. And the science is well beyond the scope of what I can explain, but I think for people that are not used to looking at these types of businesses, it's really worth emphasizing what clinical stage and zero products mean.

And to put some numbers to it, because you can say, oh, sure they don't have any products but they are a business. As of March 31st, 2020, they had $50 million in trailing 12-month sales, and even at what was a lower valuation prior to the COVID explosion that caused them to really balloon, they were around $8 billion. That puts them at a valuation of 160X sales. So, when you are looking at a company that is biotech clinical stage, and doesn't have any products, it's a very different investment style than a lot of the stuff that we tend to focus on, especially on the tech show where we're looking for easy wins, companies that have consistent, recurring revenue. The story is totally different with these kinds of businesses.

Feroldi: And you really, in a very real way, cannot use many of the metrics that we talk about all this time on the show to attempt to value these companies. You certainly brought up the price-to-sales ratio, and listeners might be confused about how a clinical stage company has revenue in the first place, and they get those through partnership agreements, milestone payments with a few of their partners, they have a partnership in place with Merck, for example. So, it's fairly typical that when they strike these partnerships up, as the drugs make their way through the pipeline, their partners give them milestone payments along the way. And that does bring in some revenue.

But to your point, if you just looked at this company's price-to-sales ratio, you would see an absurd number that would make Zoom look like a bargain, basically. But you can't look at it that way, because oftentimes, once a company goes and actually gets a drug from the clinic into the market, the sales growth is just obscene. I mean, it's obscene, it's not impossible for a company to go from basically $0 to $1 billion in sales in a very short period of time. So, I would just say, you have to keep that in mind when you're talking about these. Oftentimes they are valued based on what's known as peak sales potential, like, what is the peak sales of a drug in the pipeline, so. And it's a revenue multiple of that number. So, valuation is always tricky in general, it's 1000X trickier when it comes to clinical stage biotech.

Lewis: Yeah, we often say that the market is forward-looking, right? And we are trying to understand what a business could blossom into, and that's particularly true in this space. Because you have a pipeline of drugs, you hope, if you're a shareholder of one of these businesses, that they are able to make it through all the necessary trials in order to ultimately hit the market, all the necessary stages, to ultimately hit the market. And then there's some approximation of the likelihood of that happening and the market opportunity and that's where you get this huge multibillion dollar valuation for a company that has pretty much nothing, it's basically a rounding error in sales and it isn't due to any of their actual drug sales, like you said before, it's due to those milestones.

So, it already, I think, to an outside investor would have looked "expensive." And then all of the coronavirus news hit, Brian, and the story changed very dramatically. You know, there's always excitement about the biotech space, because it's a little bit more speculative, but that really ramped up when you look at March, [laughs] basically, for this business.

Feroldi: Yeah. So, this is a company that, again, when it came public in 2018, basically traded sideways for the following 18 months, floating somewhere between a valuation of $5 billion and $8 billion, which by the way, those are big numbers, that's a pretty sizable company that's just in the clinical stage. However, at the start of this year and coronavirus really just took over everything, this company was identified as a coronavirus stock and it has just been a rocket ship. The company is currently up 200%, more than 200% since the start of the year. Just a few weeks ago that number was over 300% year-to-date. This company currently sports a market cap that is worth $22 billion. That's big, that's really big. In fact, it's actually bigger than many biotechs that have been on the market far longer periods of time and are producing revenue. Companies like BioMarin, Neurocrine Biosciences, Ionis Pharmaceuticals, Exelixis, Sarepta, those companies are trading in the multibillion valuations, but they actually have made it through to the clinic. So, that number, more than anything, tells me that there is a lots of excitement and hype built into this company right now.

Lewis: A big part of that excitement and hype, Brian, is because the company put out some releases showing that there are some positive signs when it comes to some of their developed drugs possibly being a COVID vaccine.

Feroldi: Yeah, exactly. So, they have a COVID-19 vaccine in development, the drug is called mRNA-127, it was in a Phase I study; again, the very first phase study. And the company did release some very encouraging results a few weeks ago from this study. So, they announced that this Phase I study had three cohorts of patients, each cohort had 15 patients in it each. And they were given different dosages of these drugs, so either 25 micrograms, a 100 micrograms or 250 micrograms. And the exciting thing here is the company issued a press release that said that of the first eight patients to release this, all of them were shown to have antibody levels in their body that was similar to those seen from patients who recovered from COVID-19 and the drug was also shown to be safe and well-tolerated.

Moderna took that info and they have kicked off a Phase II clinical trial that is going to be a 600-patient trial, but when they release that news information this stock explodes higher. And it actually was so exciting, [laughs] it literally took the entire stock market up with it. So, this got a ton of news.

Lewis: Yeah, and I can understand why, I think that people are generally looking for good news. And folks that have been following the COVID story, whether they're hardcore investors or not, have been wondering, you know, who is going to be the company that comes out and really gives us some form of treatment for this thing? What we need to remind folks is this is Phase I, and we're entering Phase II, but you know what, there's more beyond that too, and there has to be that kind of probabilistic analysis to every level of all of this. The excitement was, kind of, lightning in a bottle, given everything [laughs] that's going on in the world.

Feroldi: Yeah, completely. And you understand why the world focused on this and investors rallied, the entire market rallied because of this, because we're so desperate for treatment options and a vaccine for this disease; it's just been terrible. But the company could be in a little bit of hot water based on that results, because some people are accusing them of overhyping their results and making too big a deal out of it, the results that were released on May 18th.

And just to let listeners know, just within a few hours after releasing that results, this company did a secondary offering and they sold 20 million shares to the public at $76, which added $1.34 billion into their pockets. Now, that makes sense. You definitely want to take [laughs] advantage of a very high-priced stock. This company is going to be losing money for many years as it invests in its pipeline down the road, but also there was when we learned that the CEO and several other executives were also selling stock after that huge rally, and they netted themselves somewhere in the neighborhood of $30 million. And then, Moderna's largest shareholder, which is a VC firm called Flagship Pioneering, also sold 1 million shares of stock. And that VC firm was actually a venture fund that was founded by the Co-Founder and Chairman of Moderna. So, there are some out there that are questioning the timing of this result and accusing the company of overhyping results far too early.

Lewis: Yeah. And I think that the reason I want to talk about this today, Brian, was, not only is this a company that is, kind of, squarely in the focus of the entire business world, I think, right now with really what they're working on and, kind of, being seen as this pureplay vaccine for something that has basically held the entire world in this, kind of, altered state.

But also, there are so many interesting lessons for investors that come from this and it's such a great onramp into so many different parts of how companies are funded, how executives sell shares, all of these things. And so, it would be very easy to look at those executive share sales and say, "Whoa, boy! That's pretty fishy." And what you learn after doing some reading is these were scheduled sales, and it's a really important thing to unpack when you are looking at insider sales, whether these are things that are part of a scheduled program or not. Because if it's part of a scheduled program, you don't have to worry nearly as much. And the SEC has actually created a specific system for insiders to do this.

Feroldi: Yeah, it's called a 10b5-1 Plan which is just an awesome, super-intuitive name. But these are preset plans where insiders can sit up to sell their stares on a set schedule ahead of time, so that way it minimizes their ability to do exactly what this company is being blamed for, which is pumping-and-dumping. So, that mechanism is in place and we've seen tons of executives use these. I know that Bill Gates has been using this for years to steadily unload his Microsoft position, the Founders of Google [Alphabet] have been doing this for years to unload their position. And the CEO of Moderna has actually been doing that prior to this recent run-up. In fact, he actually sold a big chunk of stock in January prior to the huge run-up. So, I think that is their saving grace at this point.

Although, it is still a little -- you know, it does strike a chord that they seem to have rushed this press release out to market and then the very next day or within the next couple of days, that's when these 10b5-1 plans were set to a sell. So, while the transactions were made way ahead of time, the company had complete control of when that press release went out. So, the optics here still aren't perfect.

Lewis: Yeah. And I think that that's a really good point. Because when we're talking those 10b5-1 plans, which is as much of a mouthful as some of these drug names, Brian, [laughs] you know, it is easy to say it's the set plan, but, you know, management does control when this information comes out and that can sometimes be lost in these conversations.

The other interesting part of this is the company's decision to raise money. And we talk about this all the time with IPOs, but if you're a business and you're giving away equity, we see this on Shark Tank even, right, you are trying to maximize the value of the equity that you're giving away, so that you can -- if you're giving away control of your business, which is kind of what you're doing in a sense with equity, or you're diluting existing shareholders, you want to be doing that at the highest valuation that you can. And in this case, they came pretty darn close to doing it at the [laughs] highest valuation that they could.

Feroldi: Yeah. And again, they had complete control over the release of that press release. And they also got some flak for that, because again, even in the press release that was sent out, there was just data for eight patients, and as a reminder this study had 45 in it. So, it was nowhere close to a full dataset. In the company's defense, they did say, we're trying to get this information out there, it was so exciting. And clearly, the world wants information like this to be out there as soon as possible. But there have been several people in the medical community that have pushed back and said, why would you release this so early without giving us the full data set? It was "practically unheard of" to do this at this time. And it's also worth pointing that this company wasn't exactly, I mean, they're burning through capital, but they weren't exactly short on cash. As of the end of March, they had about $1.2 billion in cash and equivalents on their book and zero long-term debt. Yes, they are setting fire to tons of capital at a huge pace. So, there's also that to consider. And management did say, oh, we were thinking about raising capital in March and it just got accelerated due to the share price going parabolic.

So, on the one hand, if you are a shareholder, yes, you want this company to be adding cash to its balance sheet at advantageous prices, which it definitely did. On the flip side, again, the optics here are not great.

Lewis: Yeah. And there's, kind of, that difference between the incentives for people that are current shareholders and the incentives for people that would be shareholders, right? And we see this massive run up, we see all this great news. And perhaps, it's a little bit of an incomplete story, you know, I saw a lot of press in the medical community looking at this and saying, well, we're seeing a lot more language here than we are numbers when it comes to this stuff, and this is, to your point earlier, a little unusual. And you could argue that that was done intentionally.

But current shareholders, people who owned the stock before their announcement, are probably thrilled. People who saw what was happening bought into the hype train on this are probably pretty disappointed, because shares have come back down to earth as we've started to sift through the data and really see that it's pretty limited.

Feroldi: Yeah. And it's also worth pointing out that it's not like Moderna is the only stock that is going absolutely bonkers here because of the COVID-19, we've seen tons of companies from across the healthcare spectrum just go absolutely bonkers this year based on saying, hey, we have a COVID-19 vaccine too or, hey, we're developing a test or, hey, we have a treatment for it.

Just to throw out some other companies; Novavax, which has been a biotech that has been under huge pressure for a long, long time, focused on vaccines, that stock is up over 1,100% since the start of the year. Inovio, up 334%. Vir Biotechnology, up 196%. And when you get down to the small and penny cap land the percentage gains are even larger. So, that just shows me that there is an incredible amount of speculation interest in these types of businesses right now.

Lewis: And what's unfortunate for me is, you know, when people are beginning their investing journey, they look at stuff like what are the highest gainers year-to-date, and [laughs] that's, you know, where a lot of research will start. And we talked before about just how this is a totally different investing world than most companies. The classic valuation metrics don't really work. The product pipeline is totally different. And the news that these businesses trade on is totally different. And so, what I think is unfortunate is very novice investors might get lured into this with very little idea of what's really going on, whether it's the business fundamentals or the reality of the share price and valuation and how stable that is, because it's so news-driven.

Feroldi: Hmm-mmm. And, Dylan, we're on Fool TV right now, this whole live thing we have going on for basically since the start of this pandemic. And one of our viewers, a couple of days ago shared with me this great Google trends map which showed the google search for the word "stock trading" over time and how it basically held steady, and then in March it just went straight up. So, people are sitting at home and they're deciding, "Hey, it's a good time for me to learn about investing," and unfortunately, they're going right for the trading aspect of things which is something that, obviously, we rail against.

But to your point, the hype cycle that we've seen over and over again in the markets; I mean, just within the last couple of years we've seen massive interest in things, like, cryptocurrencies, marijuana stocks, a few years before that there was 3D printing stocks were all the rage, a couple years before that when there was worries about hyperinflation galore, gold and silver stocks were in the middle of the hype cycle. To me, there's no doubt that so many of these coronavirus stocks are exactly in the middle of that. And typically, when you see the hype like that, it doesn't end well.

Lewis: Yeah. And I mean, there are very legitimate industries with cash flow producing businesses that also go through that same hype cycle. And I think that that's why, and we talk so much about the idea of dollar-cost averaging with positions, not having your cost basis tied to any one point in time. This is a big part of that, because you can own a really great business that happens to have gotten caught at a period where expectations were way out of hand, the news was just too positive. And if that's your only position in that business, you're going to be waiting a long time for that to be a positive position for you. If over time you're able to buy-in at several different points, smooth it out, you are far more likely to enjoy the long-term gains and benefits of this business, because it can take several years for businesses to wind up going back to where they peaked when expectations were really high.

Feroldi: Yeah, exactly. And when I first got started investing and didn't know anything, I guarantee you, if I was starting today, I would be investing in coronavirus stocks. Because when you know nothing you want to go where things are hot and where you think making 10% returns per day is what you should be going for, none of that 10% per year garbage, you want 10% returns per day. And how do you do that? Well, when I first started, I thought you do that by buying unprofitable, speculative penny stocks. And right now, we're just in a time in our history when there's huge demand for those kinds of things. So, no surprise to see that there's lots of companies out there that are hyping that they are also a COVID-19 stock and they're seeing their share prices go up because of it. So, I have an unfortunate feeling that many new investors are setting themselves up to learn a lesson, all I can say is, I learned that same lesson [laughs] myself 15 years ago.

Lewis: Yeah. I looked at a lot of my, kind of, early investing decisions, a lot of my early stock purchases as tuition payments. And you know, if you do it right and you're long-term oriented, those tuition payments don't wind up being a cost, they actually wind up being something that grows for you. But very often if you are buying penny stocks, they wind up truly being an expense and it can be a quick and expensive lesson to learn. But the temptation is there, when you don't have a lot of money and you see low share prices, I can see why people get caught up in all of that stuff.

Brian, I think to recap all of this and, kind of, just hammer home the investing lessons from this Moderna thing, when it comes to insider buys and sells don't overweight your expectations to simply seeing them, understand that some of these things are scheduled. And the more important thing with this one is, the timing of the other news [laughs] that the company is choosing to release, less so the sale itself. We saw the selling that management was already, kind of, doing throughout the year. And then I think also, the biggest thing is, for me, like, I don't know the space well enough to invest in it, even having spent a lot of time [laughs] researching this company in order to do the show with you, I feel like I'm barely holding water having this conversation with someone who knows healthcare a lot better. And while it's so tempting to hop into these megatrends, you got to know your circle of competence and you got to know how big it is and where the boundary is.

Feroldi: Yep, that's exactly right. And biotechnology is its own special beast, and boy, is it hard, because companies can have near-flawless Phase II data and the drug could look like the next wonder drug. And then when they enter Phase III, it just crashes and burns. I've seen that so many times. So, investing in general is difficult but when you [laughs] go for biotech, the difficulty factor gets exponentially harder.

And just to circle back on something you said about insider buying and selling, we get asked questions about that all the time, and so the insider is selling should I be concerned? And sometimes the media also catches on to things and really inflates them up. I remember seeing a couple weeks ago, Mark Zuckerberg sold $500 million of Facebook's stock. And if that's the only thing you knew, you'd be like, wow! He must be willing to get out. And then you realize, oh, he also has probably $30 billion [laughs] still riding on Facebook. So, context is everything.

But an insider sells for a huge number of reasons, you never know what the reason is, why they're selling. Maybe they're getting divorced, maybe they're building a house, maybe they have an enormous tax bill that they're trying to pay, maybe they want to diversify their investments into other things. So, always try and put these things in context when you see huge insider selling or insider buying. Ask yourself, was it done automatically ahead of time or was it done to take advantage of a stock price? And stay focused on whether [laughs] or not you believe in the long-term potential of the business. Because insiders, even though they're selling, they can sometimes get that wrong and the stock can continue to rally from there.

Lewis: For the folks that are newer to the biotech space, you're going to be able to follow Moderna and basically go through Phase I, II and III, and see exactly what that process looks like for a business in a very high-profile way. We mentioned Phase II clinical trials starting with 600 patients. If all goes well there, there might be some amendments to the process just given that there is a very large public need for this to be out there, if results are promising, but you can bet there's probably going to be a Phase III somewhere too. And if you're new, this is a great story to track because it's going to give you a very well-reported example too, of what the biotech process looks like, what the drug pipeline process looks like. And very often you, kind of, have to follow inside industry mags to really get that coverage consistently.

Feroldi: Yep. And the other thing, I will throw out there, Dylan, is, it's not like Moderna is the only company working on a COVID-19 vaccine. At last count, I think we had 28 different companies that were working on vaccines of their own. 21 of them are publicly traded and in different size scales here. So, while this drug is certainly exciting, it's one of the leaders, we're all rooting for it, just like we're rooting for basically every COVID-19 drug to come out. Picking the winner, picking which drug is going to come to market first is incredibly hard. I mean, it is a dice roll of a dice roll, it is truly gambling at this stage of the game.

So, just keep that in mind, don't focus your attention or don't make a huge bet based on one drug, just because of the results that you see now, just realize that there is so much interest in this and there is so much R&D going after this, it's impossible to say which company is going to win the race.

Lewis: I love that as a final takeaway. Brian, thanks so much for hopping on today's show.

Feroldi: Dylan, thanks for having me back, man.

Lewis: [laughs] Listeners, that's going to do it for this episode of Industry Focus. If you have any questions, you want to reach out and say "Hey!" shoot us an email over at or tweet us @MFIndustryFocus. If you want more stuff, subscribe on iTunes or wherever you get your podcasts.

As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against stocks mentioned, so don't buy or sell something based solely on what you hear.

Thanks to Austin Morgan for all his work behind the glass today. For Brian Feroldi, I'm Dylan Lewis, thanks for listening and Fool on!