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Money Stuff: It’s a Good Time to Raise Vaccine Money

May 19, 2020
Money Stuff
Bloomberg

Programming note: Money Stuff will be off tomorrow, back on Thursday.

Moderna

The basic idea of finance is that you come up with a good idea, and you need money to turn the idea into reality, and so you go to investors and ask them for money, and then you do the thing, and if it works and is good then you will get a lot of money and give some of it to the investors. There's a lot of other stuff encrusted on top of this, and certainly it doesn't always work out this way, but this is the basic idea.

If for instance you were a biotech company, and your idea was to develop a vaccine for Covid-19, and you had done some research and found a good candidate and done a Phase 1 trial and gotten pretty good results, but you needed a lot more money to build out capacity to manufacture that vaccine, you would go to the stock market and ask investors for money. And then they would line up to give it to you. Here is maybe the best-timed stock offering I have ever seen:

Moderna Inc. plans to raise as much as $1.3 billion through a sale of shares to fund manufacturing of a coronavirus vaccine seen as one of the frontrunners in the race for immunization against the widening pandemic.

The U.S. biotechnology firm will sell 17.6 million shares priced at $76 a piece, according to a statement Tuesday. The price represents a 5% discount to Monday's closing price. …

Shares jumped 20% on Monday after the company revealed positive early results from its experimental vaccine for Covid-19, capping off a 309% rally this year.

Here's the preliminary prospectus. The "Use of Proceeds" section says that they'll use the money "to fund working capital needs (raw materials, labor and capital equipment purchases) related to the manufacturing of mRNA-1273 for distribution in the United States and outside the United States, assuming necessary regulatory approvals are obtained"[1]; anything left over will go to develop other drugs, general corporate purposes, etc. If I were in their position I would have added something like "also $100 million will be earmarked to throw a party for our staff and executives if this works, and buy them all Lamborghinis, and construct a giant golden throne for our CEO on which he can receive your gifts of thanksgiving," but I guess they were going for subtlety.

Honestly, imagine a better stock-market pitch, really at any point in the history of the stock market, than "hi we have discovered a coronavirus vaccine and need money to manufacture it, would you like to give us some." Doesn't it make you feel good about capital markets? Don't you imagine everyone at the closing dinner, grinning and high-fiving (on Zoom, I mean, they don't have the vaccine yet) and saying "boy this is what it's all about, making the world a better place and getting rich in the process." 

Conversely if the vaccine ends up not working, in about two months look for Moderna in the "Everything is securities fraud" section of this column. If your stock is up 20% on the day that you announce good news on your Covid-19 vaccine trial, and you peel off a $1.3 billion stock offering that day, and then you say "never mind the vaccine doesn't work, oops," you will get extremely sued. This is not necessarily fair—this is an uncertain and urgent business, it makes sense for Moderna to raise money to prepare for production even before trials are complete, and obviously Moderna's offering document includes prominent warnings about how "the positive interim data from the ongoing Phase 1 study of mRNA-1273, our vaccine candidate for the treatment of SARS-CoV-2, may not be predictive of the results of later-stage clinical trials"—but it is a fact of life. (It doesn't help that Moderna's chief executive officer has been selling stock on the way up. Under an automatic 10b5-1 plan, but still; you can turn those off if you're actually bullish.[2])

U.S. stocks gained about $1 trillion of market capitalization yesterday, and while there are lots of reasons why any particular stock may have gone up or down, good news about a vaccine that might allow reopening of the economy seems like a common factor for a lot of stocks. "U.S. Stocks Surge as Hopes for Coronavirus Vaccine Build," was the Wall Street Journal's headline, citing the Moderna results. "Broader markets rose as well, with the S&P 500 gaining 3.1% as the confident tone on vaccine candidates from Moderna, the University of Oxford and China added to confidence that scientists have the tools to stop the virus," reported Bloomberg. It is almost fair to say that Moderna added $1 trillion of value to all the other stocks yesterday; why not take a little bit of that value for itself? 

Meanwhile here is a warning that it maybe can't:

The economics of a Covid-19 vaccine are highly uncertain and charging a high price for one seems far-fetched. … Moreover, there are dozens of drugs under evaluation as possible Covid-19 treatments or vaccines, so competition will be intense.

I guess. You know my theory on the matter. If you own some of the other stocks that were up $1 trillion yesterday, you might want to kick in a tenth of a penny for each dollar that you made as a thank-you gift for Moderna. Developing and commercializing a vaccine may or may not be lucrative for Moderna, or for Moderna's shareholders, but if it works it will be enormously, enormously, enormously lucrative for shareholders in general, and Moderna's shareholders are mostly also shareholders in general.

Guys Who Predicted the Virus

From approximately 2008 until, like, February, there was a class of investors who went on television a lot above chyrons saying "Guy Who Predicted the Financial Crisis Has Some Thoughts." Like if Michael Burry found his neighbor's front yard distasteful, he could go on TV for a segment like "'Big Short' Hedge Fund Manager Who Predicted Financial Crisis Warns Against Unkempt Lawns," that sort of thing. Being on the short, generally accepted list of people who made a lot of money betting against the mortgage industry before 2008 gave you an aura of universal competence and prescience; people wanted to hear whatever you had to say about whatever you wanted to talk about. 

Is there going to be a similar list of hedge fund managers who get a decade of attention for calling the coronavirus? Will Boaz Weinstein be on TV in 2031, like, "Hedge Fund Manager Who Predicted Coronavirus Urges President Swift to Negotiate With Martian Invaders"? Here is a Bloomberg Markets roundup of how "Eleven Hedge Fund Traders Scored Big During Worst of the Crisis," and one thing that makes it fascinating is how differently the 11 managers got to their winning coronavirus trades. Weinstein's Saba Capital made about 71% in the first quarter of 2020 on early bets against specific credits (Royal Caribbean Cruises Ltd., United Airlines Holdings Inc.) that were hit hard by the coronavirus. He runs a credit-focused fund, he predicted that the virus would have devastating effects, he pinpointed which companies would be hit hardest, and he bet against them early.

Meanwhile Bill Ackman's Pershing Square Capital Management was up about 11% in March, largely because Ackman put on a gigantic bet against corporate credit to hedge his normal exposure to stocks. Ackman didn't make careful accurate bets on the biggest losers; he just bet against credit generally. The reason he did well is that he sized the position aggressively and timed it exquisitely: He bought the credit protection near the market highs, owned it for less than a month, and cashed out at pretty much the bottom of the market. Weinstein's and Ackman's trades are both impressive, and both involve profiting from anticipating the coronavirus, but are otherwise pretty different in how they work and what they tell you about their funds' investing process.

And Mark Spitznagel is at the top of the list, since his Universa Investments returned 3,612% in March (and over 4,000% in the first quarter), but it is hard to say that he predicted the crisis at all. Universa is a "black swan" fund that insures against market crashes, a strategy that underperforms the market most of the time but does great in huge crashes. Spitznagel was positioned for the crash in March because he's positioned for a crash every month; you can't really classify this as "Guy Who Predicted the Coronavirus." Nonetheless here are real headlines about Spitznagel from this year: "Hedge Fund Star Behind 4,000% Coronavirus Return Peers Into Crystal Ball." "Investor whose 'explosive' strategy just returned 4,144% says a 'true crash' in stocks is still to come." "How to Hedge a Coronavirus." "How A Goat Farmer Built A Doomsday Machine That Just Booked A 4,144% Return." (That last one doesn't really support my point; it's just funny.[3]) Making money on the coronavirus, even by accident, is enough to qualify you as an oracle.

The list goes on. Haidar Capital's Jupiter Fund, a macro fund, made 53.5% in the first quarter "by betting on haven assets such as gold, Swiss francs, the yen, and bonds." Andurand Capital Management, an oil-focused fund, was up 63.5% in March by buying put options on oil. Odey Capital Management was short hard-hit stocks. Brevan Howard had good rate bets. Etc.

In the almost 12 years that the Guys Who Called the Crisis have been dining out on their prescience, there have been occasional worries that some of them might have been one-hit wonders and/or permabears, that they got lucky on a big bet against U.S. mortgages and were not, in fact, blessed with perfect foresight. Being right about one huge thing is good in itself, obviously—you can make a lot of money with a big correct bet on a big issue—and it is at least a good sign that you might have a robust repeatable process to be right about other things. But it is not an infallible sign; it could just mean that you got lucky, or that you're always betting on catastrophe and occasionally the catastrophe arrives.

Should index funds be illegal?

If you are a drug company with a patented brand-name drug, you want to sell as much of it as possible at the highest price you can get. If you are a generic drug company who can manufacture a competing generic drug without infringing on the brand-name drug's patent (say because it is invalid), you want to sell as much of it as possible at a lower price, to undercut the better-known brand-name drug. This might cause the brand-name manufacturer to lose market share and lower its prices to compete. So instead of Company A selling a 10 million pills at $100 each, or whatever, you end up with Company A selling 6 million pills at $80 each and Company B selling 6 million pills at $20 each.

This is worse for Company A, but better for Company B, insofar as it wasn't selling any pills before but now it is. It is also, though, worse for the two of them combined: Their total revenue in my hypothetical example is $600 million ($480 million for Company A, $120 million for Company B), versus Company A's revenue of $1 billion before Company B showed up. That is $400 million of revenue that has disappeared.

What if Company B showed up with its generic drug and Company A said "look we will just pay you $200 million not to market this drug"? Company A would be better off; it would have $800 million ($1 billion of revenue minus $200 million to pay off Company B) instead of $480 million. Company B would be better off; it would have $200 million instead of $120 million, plus it wouldn't have to do anything other than cash a check.

You might naively identify some problems with this approach. "Wait this seems super illegal under antitrust law," you might say, but in fact the way you structure it is that (1) Company A sues Company B for infringing on its patents, and (2) they enter a settlement in which Company B agrees to delay introducing its generic and Company A writes Company B a big settlement check. This works because there tends to be uncertainty about whether generics infringe on patents, or about whether the patents are valid; the maneuver is called a "reverse-payment settlement" or, more pejoratively, "pay-for-delay." "Wait in a competitive market this doesn't work because if Company A buys off Company B then Companies C and D will introduce generics and Company A can't buy them all off," you might say, but in fact the way U.S. drug licensing works is that the first authorized generic competitor of a branded drug gets its own exclusivity period, and if Company B is first and agrees to delay introducing its drug, that stops anyone else from introducing a generic drug, so buying off Company B is in fact sufficient. "Wait this is better for the drug companies but worse for patients, who get fewer drugs at higher prices," you might say, and, well, yes.

This is well-known stuff and it has made the U.S. Federal Trade Commission mad for a decade; it's been "one of the FTC's top priorities in recent years," according to the website the FTC made about how bad it is. (Here's a 2010 FTC staff study about it. Here's a Supreme Court case that the FTC won in 2013, giving it some ability to limit these settlements. Here's a 2019 FTC action against one of them.) 

This is a completely sufficient antitrust story on its own; this is just the Coase theorem; any drug-company CEO will have the same incentive to respond to generic competition this way. Still. When we talk about competition among public companies around here, we usually talk about how all of the public companies are owned by the same overlapping sets of big diversified institutional shareholders. If you are a big shareholder in Company A and Company B, you might especially want them to come to a settlement. Company A making $1 billion is better, for you, than Company A making $480 million and Company B making $120 million, and you are a big shareholder of Company B so you could theoretically call them up and say "knock it off." (Or, "sign that settlement.") It is just easier to reach a settlement if the two sides are aligned; you might expect them to fight less over how to allocate the benefits if they all end up with the same shareholders anyway. 

Here is "The Anticompetitive Effects of Common Ownership: The Case of Paragraph IV Generic Entry," by Jin Xie and Joseph Gerakos (full text here):

Brand-name pharmaceutical companies often file lawsuits against generic drug manufacturers that challenge the monopoly status of patent-protected drugs. Institutional horizontal shareholdings, measured by the generic shareholders' ownership in the brand-name company relative to their ownership in the generic manufacturer, are significantly positively associated with the likelihood that the two parties enter into a settlement agreement in which the brand pays the generic manufacturer to stay out of the market.

We have talked a few times recently about the effect of common ownership by big diversified shareholders on the drug industry. About how nice it can be, sometimes, when what is best for the world is for all the drug companies to work together as rapidly and selflessly as possible to find a cure for a global problem. But most of the time it is not an unmixed benefit for all the drug companies to work together. 

Sentiment

Here's a good quote:

Berkshire Hathaway Inc. sold 84% of its Goldman Sachs stock in the first quarter, marking a reversal for an investor who generally holds large stakes in the banking sector. … Buffett traces his relationship with Goldman Sachs back to a meeting with the bank's longtime head, Sidney Weinberg, in 1940. ...

"He has this historical relationship with Goldman, so maybe there's some sentimental value," said David Kass, a professor of finance at the University of Maryland's Robert H. Smith School of Business. "But of course, Buffett's primary concern is efficient allocation of capital."

Imagine getting sentimental value out of owning Goldman Sachs Group Inc. stock. (Disclosure, I used to work there, and liked it, and have fond memories and good friends from my time there. I am not entirely unsentimental about Goldman. But I also owned restricted stock for a few years after I left, had no sentimental attachment whatsoever to the stock, and sold it as soon as it became unrestricted.) I don't think of Warren Buffett as all that sentimental an investor, though I realize that he projects a certain old-time folksiness that can be read as sentimentality. I certainly don't think of Goldman Sachs as an object of sentimentality. It is just nice to think about the market as being ruled by sentiment and loyalty and childhood memories as well as, you know, efficient allocation of capital. In 20 years, when the stock market is just algorithms trading an infinite array of exchange-traded funds, I look forward to saying "Algorithm Zeta Twelve has been holding ETF XK3-119F for almost 19 seconds, it must have a deep sentimental attachment to that particular set of stock weightings."

"Jesus Christ was also misunderstood, Masayoshi Son tells investors."

I've got nothing to add to that, that is just a very good headline.

Things happen

Bond investors balk at use of 'ebitdac' to skirt debt restrictions. Distressed-Debt Funds Seek Billions to Profit from Coronavirus Carnage. America's Zombie Companies Are Multiplying and Fueling New Risks. Hedge funds: No market for small firms. Loaded With Cash, Real Estate Buyers Wait for Sellers to Crack. Nasdaq Set to Tighten Listing Rules, Impacting Chinese IPOs. SEC Charges Three Former KPMG Audit Partners for Exam Sharing Misconduct. Miracle Sudoku.

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[1] They won't use the money to fund the continuing research and testing of the vaccine, because they already have money for that. "In April, BARDA committed to fund up to $483 million to accelerate the clinical development and manufacturing process scale-up of mRNA-1273," says the prospectus. (BARDA is the Biomedical Advanced Research and Development Authority.) "Under the terms of the agreement, BARDA will fund the advancement of mRNA-1273 to FDA licensure and the scale-up of manufacturing processes. The agreement does not contemplate any product stockpiling. We expect to utilize the proceeds of this offering to fund working capital needs to begin manufacturing the vaccine ahead of a potential approval and launch of mRNA-1273. We believe the substantial majority of these investments will be used for raw material purchases and other operating expenses in connection with our mRNA-1273 program, which may result in up to approximately $1 billion of incremental investments in 2020."

[2] That is actually a famous method of *legal* insider trading, by the way. (Not legal advice!) You're the CEO of a biotech company, you set up a 10b5-1 plan to sell stock automatically every month. Then you do your job and learn all sorts of material nonpublic information about your drug trials. If there's no news, or bad news, you just let your stock be sold automatically. If there's great news you turn off the 10b5-1 plan before disclosing the news, so you don't miss out on the good news. 

[3] We have talked about his goats before. "Mark Spitznagel," I wrote in 2014, "who runs black-swan-protection hedge fund Universa with the advice of Nassim Taleb, is going to let loose a bunch of adorable baby goats (there are pictures) to graze in Detroit, where they will provide jobs for unemployed residents and keep the vacant lots from becoming too unkempt. Then, at the end of the summer, he's going to kill them. This will teach the goats about black-swan risk." 
 

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