The biggest biotech IPO on record is coming soon, and the $7 billion price tag isn’t as crazy as it sounds.

Moderna Therapeutics, one of the most closely watched biotechs, filed a registration statement with the Securities and Exchange Commission last week to raise up to $500 million. Moderna is valued at about $7 billion based on its last fundraising. The offering is likely to take place before the end of the year.

The company’s high price is driven by its promising approach to developing medicines based on custom-built strands of a cellular component known as messenger RNA, or mRNA. The treatments are designed to trigger cells to make proteins that will prevent or fight disease. In theory, this technology could be used to create dozens of drugs and vaccines to fight or prevent everything from cancer to the Zika virus to heart disease. The company’s valuation gets a further boost from Moderna’s blue-chip investors, including AstraZeneca, Merck & Co. and Vertex Pharmaceuticals.

The valuation could certainly go awry. A reality of biotech investing is that most drug candidates in development never reach the market. Just 10 of Moderna’s 21 programs have entered clinical trials. Most of those 10 are in early stages, so any product sales are likely years away and may never materialize.

Moderna spent nearly $360 million on operating expenses in the first nine months of the year, and that need for cash could intensify as clinical programs progress. Meanwhile, investor enthusiasm for the sector is starting to waver. The S&P Biotechnology Select Sector Index has sold off more than 20% since late August.

Still, Moderna’s finances are strong, despite those heavy operating expenses. The company had $1.2 billion in cash and no debt as of September 30, and revenue from collaboration partners and research grants helps soften the research bill: total revenue approached $100 million in the first nine months of 2018, or more than a quarter of total expenses.

That should help keep the focus on the potential upside. A new platform for medicines and vaccines, if successful, could be worth many multiples of today’s $7 billion figure.

It is possible that Moderna stock could pay off before any drugs reach the market. Growth-challenged drugmakers are willing to write large checks for speculative biotech projects. Since August 2017, three U.S. biotech companies with little or no revenue have been bought in deals each valued at more than $8 billion.

Investors shouldn’t dismiss the obvious risks of owning a stock like Moderna. But there is big opportunity for those who are willing to accept them.

{"email":"Email address invalid","url":"Website address invalid","required":"Required field missing"}

This website uses cookies to improve your experience. We'll assume you're ok with this, but you can opt-out if you wish.