Moderna (MRNA 4.14%) has been developing new drugs for 10 years without a late-stage clinical trial success and a growing number of intrepid short sellers betting the company's dry spell will continue through the end of 2020. The number of Moderna shares sold short passed 28 million on June 15, a 26% increase from the amount sold short at the end of May.
Short-selling is an asymmetrical bet with potentially unlimited losses and gains capped at 100% if a stock goes to zero. Even if your investment thesis is correct, it's important to remember markets can remain irrational much longer than you can remain solvent.
At last glance, around 9.8% of all Moderna shares were held in risky positions that only reap rewards if the company's coronavirus vaccine candidate, mRNA-1273 doesn't succeed in a phase 3 trial that's already been delayed once. Here are four reasons they're so confident.
1. Vaccine development isn't easy
An industry trade organization analysis found that during the 10-year period ending 2015, new vaccine candidates that succeed in phase 1 go on to earn FDA approval 16.2% of the time, and vaccine candidates that succeed in phase 2 go on to earn approval 24.4% of the time.
Moderna recently completed enrollment of a phase 2 trial with mRNA-1273, but still hasn't shown us enough data from the trial to call it a success. If we consider Moderna's new drug candidate selection process average, mRNA-1273 is still five times more likely to flop than succeed. Unfortunately, we need to assume mRNA-1273's chance for success is less than the average new vaccine candidate.
2. Moderna's technology is unproven
Instead of injecting patients with therapeutic proteins, all of Moderna's new drug candidates deliver messenger RNA (mRNA) or genetic blueprints for therapeutic proteins. This idea is decades old, but drug candidates that use this approach have never succeeded in a late-stage clinical trial.
Injections of Moderna's SARS-CoV-2 vaccine candidate have been shown to lead to the production of antibodies that glom onto the coronavirus and prevent it from entering host cells. This only seems like a big deal if you've never paid much attention to new vaccine development. Sadly, new vaccine candidates that lead to the production of antibodies don't always protect volunteers from infection as well as hoped.
3. The market has big expectations for Moderna
The stock market hasn't priced Moderna like a company that may or may not succeed. If mRNA-1273's phase 3 trial is anything less than an unequivocal success, investors will quickly lose faith in Moderna's approach to drug development and the stock will tank.
In order for Moderna stock to provide market-beating gains over the long run, investors need mRNA-1273 to do more than just succeed. The FDA is only willing to approve vaccine candidates proven to reduce the risk of infection by 50% or better, a threshold that most flu vaccines would have trouble reaching.
4. Moderna's track record is troubling
Moderna's been trying to develop mRNA drugs since 2010 and despite a decade of trying mRNA-1273 will be its first candidate to begin a phase 3 clinical trial. It isn't unusual for new drugmakers to go an entire decade before a pivotal trial success, but Moderna hasn't advanced anything past mid-stage testing yet.
It's not as if the company hasn't had the resources to move new drug candidates forward at a reasonable pace. All the way back in 2013, AstraZeneca paid Moderna $240 million upfront for rights to cardiovascular candidates that fizzled out in midstage trials. In February 2018, the company raised $500 million in a private offering before raising another $600 million later that year in the most successful initial public offering for a biotechnology company to date.
It could work
The odds of success for mRNA-1273 are so slim that buying the stock at its recent price just doesn't make sense regardless of your risk tolerance. That said, betting against Moderna or any biotech stock can be hazardous to your portfolio's health.
A decade without a big success doesn't necessarily mean mRNA-1273 won't be Moderna's first. Even if it eventually flops, following short-sellers into a bet against this company has proved disastrous in the past and misguided enthusiasm could make it happen again.