Practically everything is going right for Moderna (NASDAQ:MRNA) these days. The biotech announced surprisingly positive efficacy results for its COVID-19 vaccine candidate mRNA-1273, and it has filed for Emergency Use Authorization (EUA) in the U.S. and approval in Europe. Moderna's shares have understandably skyrocketed.
The reality is setting in that Moderna appears to be on track to launch its coronavirus vaccine before the end of the year. Some investors might be wondering if they should apply the old adage about buying the rumor and selling the news with the biotech stock.
One major Moderna investor appears to like that idea. Merck (NYSE:MRK) just sold off its Moderna shares for a huge gain. Should you?
Why Merck sold
Merck executives might have had the old Steve Miller Band song Take the Money and Run on their minds in recent weeks. The big drugmaker invested $50 million in Moderna in 2015 and raised its stake in 2018 by $125 million.
In its statement announcing the sale of its Moderna stock, Merck noted that it had "achieved a substantial gain" on the investment. In particular, the pharma company referenced the big jump in Moderna's stock price in 2020. Merck's management team apparently thought it had made a sufficient return and that the time was right to cash out.
But it didn't totally cut the strings with Moderna. The company has made investments in venture funds that own stakes in Moderna, giving Merck indirect exposure to the biotech.
The two drugmakers also continue to work together to develop personalized cancer vaccines and are currently evaluating mRNA-4157 in a phase 2 clinical study. In addition, Merck and Moderna are collaborating on mRNA-5671, an early-stage cancer vaccine candidate targeting several forms of the disease caused by KRAS gene mutations.
Two competing philosophies
It could be tempting for investors to follow Merck's lead without hesitation. But it's important to first compare two competing philosophies.
There's one school of thought that encourages taking profits off the table, which is exactly what Merck did. The idea is to lock in gains in case they might evaporate in the future. One twist to this strategy is to sell much of your stake but not all of it, thereby making a big profit but still allowing you to participate in further upside potential. Merck is doing this in a way through its indirect exposure to Moderna.
Another well-known approach, though, is to buy and hold for the long term. Investors who subscribe to this strategy believe that the future for a stock will be even better than its present. They're less concerned about their current gains dwindling away than they are about missing out on greater gains down the road.
Which philosophy is better in this case? It depends on what Moderna's actual growth prospects are.
To be sure, much of the potential for mRNA-1273 is already baked into Moderna's share price. That could cause some investors to think that selling the biotech stock now, as Merck has done, makes sense.
But my view is that selling Moderna could be shortsighted. Why? The company will likely soon receive billions of dollars thanks to supply agreements for mRNA-1273. CEO Stephane Bancel has already said the biotech will invest much of this money into dramatically expanding its pipeline. He expects that the company could advance as many as 50 messenger RNA (mRNA) programs into clinical testing.
Success for the mRNA approach in preventing infection by the coronavirus that causes COVID-19 should bode well for Moderna's other mRNA candidates. I don't think the company's market cap, as high as it is, reflects the full potential of Moderna's mRNA platform.
Selling a stock too soon is often the worst mistake that investors can mistake. And it's a mistake that Merck just made, by the way. The big pharmaceutical company announced that it sold its stake in Moderna "in the first half of the fourth quarter." Since Nov. 15 -- after Merck divested its shares of Moderna -- the stock has soared more than 60%.
Follow Merck's lead? I don't think so.