MLLCF - Molecular Partners: Sellers Have Disappeared Enterprise Value Below Zero

2023-04-20 02:08:08 ET

Summary

• Molecular Partners is priced below its net enterprise value, meaning Wall Street is placing no real value on its drugs under development.
• Management believes it has enough capital on hand for drug trials plus R&D until 2026.
• The almost complete lack of sellers in the stock during March-April is rare and represents an interesting technical trading setup to purchase long.

A stock with a very interesting chart pattern, crossed with more cash on its balance sheet than the current equity market cap is Molecular Partners AG ( MOLN ). This ADR security is backed by an early-stage biotechnology business owning a number of promising drugs under development, with major Big Pharma companies as partners. A new class of custom-built protein drugs known as DARPin therapeutics are entering or currently in Phase I trials.

Originally, the company and Novartis AG ( NVS ) were rushing to develop a protein-based antiviral to fight the COVID pandemic. But, small-scale studies were not enough for the FDA, and the stock suffered mightily in April 2022 on this realization. Since then, Molecular Partners has traded "below" its tangible book value, mostly consisting of cash and short-term investments.

Cash Hoard

The company received $205 million in payments for partnerships from several large healthcare enterprises during 2022. Despite much success in early development studies, investors are basically giving the new drug ideas zero real-world value. Cash and short-term investments of US$269 million vs. just $29 million in total liabilities were part of the balance sheet in December. Today, the enterprise value number is negative, as $60-70 million in cash burn is projected each year between now and 2025.

So, the upside is truly extraordinary if one of the R&D projects turns into an FDA approved drug, with future milestone payments and royalties. This lowered risk, super-high reward potential is definitely a draw for me. The worst-case scenario is the stock incrementally drifts toward $0 for price into 2026, if positive trial results do not appear, and partners close down funding.

A bullish ownership decision is one trying to prepare for good news at some point, without predicting how or when. Often, biotechs come back to life with gains of hundreds of percent from a low-point like today, when few are paying attention to the bargain setup.

Business Background

Below are some summary slides of the operating business taken from the 2022 Q4 Earnings Presentation here .

What I like most are the cash stash, limited liabilities, some early trial successes, and the strong list of Big Pharma partners interested in Molecular Partner's technology and therapy angle. The financial data below is in Swiss francs, with 1 CHF franc converting to roughly $1.11 dollar equivalent.

Sellers Have Disappeared

The other draw for my investment dollars is the unique chart pattern outlined in March-April. Rarely can you find a stock supply/demand setup where it's clear sellers have moved on from the name. Essentially, no real selling pressure exists at a valuation below net cash. You can see this on the 9-month chart pictured below.

Since the stock went public in June 2021 around $21 a share, the weakest stretch of daily trading volume has occurred over the last month (boxed in green), on top of the slowest investor interest over any 3-month span (boxed in gold).

Low volume is not newsworthy by itself, but price has been outlining a long base pattern, with its all-time low of $5.50 in September still holding.

Shares have been hugging the 200-day moving average of price since late January and may be ready to bounce over both this indicator and its 50-day moving average in coming days.

The Accumulation/Distribution Line has been signaling a rather consistent trend of intraday buying since December. The 20-day Chaikin Money Flow reading has been steadily positive over the same span. Lastly, the 14-day Ease of Movement indicator has benefited from low volume buying, particularly in March (circled in blue). My read is any reason to buy could create a flood of buyers with no sellers in sight. To match trades, supply will likely only appear on a sharply higher stock quote incentive.

Final Thoughts

On the low-volume trading of late, the short interest "days to cover" ratio has spiked to 11x, despite only a minor short position of approximately 16,000 shares. So, even a minor short-covering episode could add considerable buying pressure on any good news from management. Such could help price to an oversized gain, sooner or later.

If the downside is $0, equal to a total loss of -100%, what's the upside potential? That's a great question and will depend on the science for MOLN's products. In the past, similarly small biotechs that find a winning research breakthrough can rise to billions of dollars in equity value. Such could mean an eventual 5x to 10x reward on your investment is possible.

In the end, I suggest owning a minor position in your portfolio, well under 1% of your net assets. This name is something of a lottery-ticket gamble. For sure, if a price spike to $10 or $12 takes place this year, a sound strategy would be to sell half your position, effectively locking in some sort of net gain on the trade. Your remaining shares would be the equivalent of playing with the house's money, in gambling terminology.

I am very curious how the chart pattern will play out, as the almost complete lack of sellers in April is a unique find in the stock market, especially for a company with a market-cap above $200 million. Also, be careful if attempting to buy a position, and only use a limit order with a stated price. A market order for even $10,000 worth of stock could send price higher by 5% to 10%.

This pick is another of a growing list of healthcare, pharma and biotech names I have discussed as possibly able to fight an approaching selloff on Wall Street generally. My previous article picks over the last six months include Pfizer ( PFE ), iShares Biotechnolgy ETF ( IBB ), GlycoMimetics ( GLYC ), Eton Pharmaceuticals ( ETON ), Zymeworks ( ZYME ), BioNTech SE ( BNTX ), and others. Healthcare stocks have proven to be strong outperformers and defensive names to hold during recessions and prolonged bear markets.

Thanks for reading. Please consider this article a first step in your due diligence process. Consulting with a registered and experienced investment advisor is recommended before making any trade.

For further details see: