IPO for health care companies? May be not a good strategy

The global pandemic since early 2020 has provided great opportunities for healthcare service providers and companies. We have discussed these topics when the pandemic began. Now that some health care companies have grown their revenues and expanded the business, is it a good strategy for them to go initial public offerings in the post-pandemic era? Today, I will use the case of Moderna.INC to illustration this question.

Photo from Unsplash

Moderna Inc. staged one of the biggest initial public offerings for a biotechnology company in late 2018. Moderna sold 26.3 million of its shares at $23 a piece, in line with pricing expectations on the eve of its trading debut. The offering’s size was bigger than expected, raising $604.3 million and valuing the company at roughly $7.5 billion.

The listing was expected to be one of the last big IPOs in a year that has ushered in more than 200 new listings, raised more than $58 billion and is set to be the busiest since 2014. Though many investors are enthusiastic about Moderna company, they think there still have some stuff needs to prove out.

The COVID-19 pandemic did provide a chance for Moderna to soar as the biotech company attempts to distribute a coronavirus vaccine. However,

Chart obtained from Google Finance

as Moderna’s shares have skyrocketed since late 2020, whether the growing trend will continue in the long run remains a problem.

Critics worry that Moderna’s programs remain relatively unproven, which some of these still in the earlier stages of clinical testing. And they also think Moderna’s high cash-burn rate and lofty valuation amid recent choppiness in the broader stock market.

Photo from Unsplash

For example, Driehaus Capital Management’s fund manager, who has followed Moderna over the years, has decided not to participate in the IPO and will instead take a wait-and-see approach toward some of Moderna’s treatments before diving in.

As Gitman and Zutter mentioned in their book Principles of Managerial Finance, financial managers are ethically bound to only invest in projects that they expect to exceed the cost of capital. Though Moderna is an active health care company whose top-notch research in health care attracted many followers, investors still want to take a look first before making the budget to invest in Moderna’s stock.

Moderna’s research result may bring a huge return, but it still has a high risk. According to the capital asset pricing model (CAPM), the higher the non-diversifiable risk, the higher the rate of return investors will require to compensate them for bearing the risk.

Perhaps rationing investors estimate that the potential rate of return of Moderna’s stock cannot compensate for bearing the risk of investing in its stock. That is why even some long-term observers, such as Driehaus Capital, chose not to invest in Moderna’s stock.

I write about business, culture, travel, and anything interesting | Proud alumni of MacquarieU & M.St.Mary

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