Inovio can be a finding with probability analysis

<p>Inovio Pharmaceuticals (NASDAQ: INO) is a biotechnology company whose stocks have soared. The hope is that INO shares will benefit from a COVID-19 virus vaccine. If it does, it may take off again.

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Inovio’s share price has risen to the point in recent weeks where it has a market value of $ 1 billion. It achieved this even though it is actually a start-up company with almost no revenue.

The market hopes that its vaccine candidate can provide real results that would be used worldwide continuously. In that case, INO shares may actually look like a bargain.

Of course, this would be due to overcoming a number of obstacles, as well as being highly dependent on vaccine prices. But there is a scenario where, despite the risks of the stock‘s large gains already, this company can be considered a speculative purchase.

INO stock hangs on its COVID-19 vaccine candidate

Inovio has a technology called SynCon® that creates optimized plasmids. Plasmids are strands of DNA that create antigens. Antigens help a person’s immune system recognize and destroy cancer cells or virus-infected cells.

Inovio has developed a COVID-19 vaccine called INO-4800. It uses a DNA approach to help cells use their immune system to fight the virus and is currently in a phase 1 trial. The trial is underway in China, in collaboration with a Chinese company called Beijing Advaccine Biotechnology Co.

In addition, Inovio conducts phase 1 trials in the United States. It received an initial grant of up to $ 9 million from the Coalition for Epidemic Preparedness Innovations (CEPI).

One issue is that other companies, particularly Gilead (NASDAQ: GILD), with Remdesivir appear to be longer.

The implicit business model at the current valuation

Let’s just assume that the INO-4800 will be effective and get all the approvals. What is the business model and is the valuation of 1 billion dollars reasonable today?

For example, if 1 million took the vaccine, such as a figure of $ 100 per vaccine, the company’s revenue would be $ 100 million annually. At today’s market value of $ 1 billion for INO shares, it seems that ten times the revenue is a reasonable, if not an expensive valuation.

But if 100 million people took the vaccine and the price dropped to $ 10 per vaccine, Inovio’s annual revenue would be $ 1 billion (ie 100 million times $ 10 = $ 1 billion). This means that the expected income is traded only once.

So you can see that with that assumption, the stock is actually trading at a very cheap price. In that situation, the company’s market value would probably be 10 to 20 times the current price.

How do we assess the valuation of the INO share?

One way to do this is to use a simple probability analysis. For example, let’s assume that the probability of INO-4800 being a success is 50-50. But if successful, chances are it will be used globally worth $ 20 billion.

Here’s how the implied valuation works: 50% time a zero valuation (if it fails) plus 50% times a $ 20 billion valuation equals: $ 0 + $ 10 billion or $ 10 billion.

So that means INO shares are a bargain at the current valuation of $ 1 billion.

In fact, here is another way to look at its current valuation. There may be up to a 95% chance that the INO-4800 will fail, along with a 5% chance that it will succeed with a potential valuation of $ 20 billion.

The result would be a valuation of 1 billion dollars (ie 0 dollars time 0.95 plus 0.05 times 20 billion dollars = 1 billion dollars). This is equal to the current market value.

The conclusion with INO

So if 100 to 200 million people worldwide take the potential vaccine at $ 10 per shot annually, the INO stock would be worth $ 10 to $ 20 billion. If there is only a 5% chance that this will happen, the stock is valued fairly.

However, if there is more than a 5% chance of its vaccine succeeding, the stock is probably undervalued. In fact, if you think that over 100 million to 200 million would take the vaccine, it can be extremely undervalued.

So basically, Inovio is a speculative game. But if you are a non-defensive investor, a kind of game with an edge investor, you may be biting on the INO stock.

You put the probability that it will be successful and decide what it is worth. If it is higher than the current price, Inovio is a purchase for you.

At the time of writing, Mark Hake, CFA holds no position in any of the above securities. Mark Hake runs the Total Yield Value Guide which you can review here. The guide focuses on high total return values.