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Investment Thesis
It’s not the product, it’s the execution. When I last covered Novavax (NASDAQ:NVAX) six weeks ago in mid July, the vaccine maker’s sub unit protein COVID vaccine had just been awarded Emergency Use Authorization (“EUA”) by the FDA.
It may have been 18 months too late for Novavax to claim a share of a COVID vaccine market that exceeded $50bn in revenues in 2021, and will do so again in 2022, thanks primarily to Moderna’s (MRNA) SpikeVax and Pfizer (PFE) / BioNTech’s (BNTX) Comirnaty, the messenger-RNA vaccines that received EUAs in December 2020, but it did allow management to forecast for revenues of $4 – $5bn this year – a small slice of the mass-vaccination pie, before the likely emergence of a private market.
As I discussed in my last note – when Novavax’ share price traded at $54, giving the company a market cap valuation of ~$4.2bn – the forward price to sales ratio worked out at <1x based on guidance, which is generally an indicator that a company is undervalued – Moderna and BioNTech’s forward P/S ratios are ~3x, and ~2.5x, for example.
Given the high gross and net margins driven by Moderna, BioNTech, and Pfizer from SpikeVax and Comirnaty, Novavax investors could reasonably have assumed that Novavax would show similar profitability. The company had been awarded ~$1.8bn of funding from Operation Warp Speed in 2020, enabling it – theoretically at least – to build out the necessary infrastructure for global distribution and logistics.
That’s why I gave Novavax a bullish rating in my last note, but alas, where this company is concerned, every step forward is usually followed by a step back.
Novavax announced Q222 earnings on Aug. 8, the headline news being a downgrade of FY22 guidance by more than half, from $4 – $5bn, to $2 – $2.3bn. As CEO Stanley Erck discussed it on the company’s earnings call:
Our revenue for the quarter came in well below anyone’s projections. And with respect to all of 2022, we’re expecting to fall short of our earlier projections. For the quarter, revenue was $186 million, a significant shortfall from both the first quarter results and, as I said, from our expectations.
The shortfall was a result of a couple of issues, one of which is short term, the timing of our shipments to Europe. The other is a broader issue and will take some time to work through, and this is our changes in expectations from two major markets, the U.S. and the COVAX Facility.
Novavax’ share price had risen to as high as $62 prior to the earnings release, but the lowered guidance triggered an immediate sell-off, and today Novavax stock trades at $37 – its lowest level since May 2020.
I have been consistently bullish about Novavax primarily due to the fact the company has a clinically-proven product that stands comparison with the MRNA vaccines in terms of safety and efficacy, and even presents some advantages, such as room temperature storage, but this latest setback represents yet another test of investors’ patience.
With its differentiated sub unit vaccine approach, Novavax was amongst the frontrunners for a first ever COVID vaccine approval back in 2020, but ultimately could not keep pace with the MRNA vaccine developers, despite its OWS funding.
Novavax simply couldn’t get the product over the line in time, and administrative, supply and distribution issues continue to dog the company. Is there any hope for Novavax investors going forward, or a case to be made for opening a position at current lows?
In this post I will provide an overview of the latest developments at the company, and speculate on where the share price is likely to move next, and over the longer term, while highlighting the level of risk involved in buying Novavax shares.
No More Sales From COVAX or US In 2022
CEO Erck discussed the company and its two biggest potential clients in more detail on the earnings call, explaining that COVAX experienced a supply glut at the same time as it faced difficulties delivering product to low and middle income countries, which “limited the need for them to order contracted product from us and other vaccine manufacturers.”
In the case of the US government, Erck candidly stated that “I believe we were late to the market, and U.S. vaccination was driven by what was available and shown to work, mRNA vaccines.”
Another issue is that the Novavax COVID vaccine is not yet approved for adolescents, or for use as a booster shot, two key markets given that most adults have already received the two-dose MRNA vaccine regimen of either Pfizer or Moderna.
As such, Erck and his management team do not now expect to receive any further revenues from these two sources in 2022, despite previous guidance stating it would sell COVAX and the US 110m and 350m doses, respectively.
Besides these two clients, Novavax also revealed its supply agreement with the UK had been amended, to 1m doses guaranteed and up to 15m more, contingent upon approval by the UK’s policymaking body, the Joint Committee on Vaccination and Immunisation (“JCVI”). In Europe, Novavax expects to deliver 65m doses as part of its current order, in the second half of 2022 and 2023.
Novavax’s Cash Resources Draining Away
It seems that the vast amount of Novavax’s revenues will be derived from the European contract, which will be worth ~$1.6bn in revenues if Novavax charges a price per dose of ~$18, by my calculation. That seems like a tall order, however, when we consider that Novavax’ reported earnings in Q222 were just $186m – down from $298m in Q221 – only $55m of which was derived from actual product sales of 3m doses.
Novavax says it entered 2022 with $800m of its total $1.8m of OWS funding remaining and $400m of this will likely be recorded as revenues in H222, Chief Financial Officer Jim Kelly told analysts on the earnings call.
Worryingly, the net loss in Q222 was $510m, and the company ended the period with $1.4bn in cash – at this level of cash burn the company would need additional funding by the middle of 2023, and it’s safe to say such funding would be hard to come by, given the OWS money has disappeared. Moderna also received OWS funding, but reported current assets of $13.5bn as of Q222m and revenues of $4.5bn.
Novavax undoubtedly faced a tricky task when being awarded such a huge government grant, which was precipitated by the urgent requirement to bring a COVID vaccine to market, but compared to its MRNA rival, the company hasn’t handled the logistical side well. A factory in the Czech Republic acquired in 2020 is yet to come on line, clinical trials have dragged and dragged, and regulatory filings have been subject to continual delays.
Looking Ahead – Is There Any Hope In NVAX?
As bad as Q222 performance was, as disappointing as the revised guidance is, and as poor as execution looks in light of the success of Moderna and Pfizer / BioNTech, Novavax does have opportunities to change the narrative. Erck was able to report that orders scheduled for Q222 but moved into Q322 had generated $400m in revenue already in Q3, although this is presumably already included in the downgraded guidance.
COVID vaccination has moved on from the days of mass vaccination against the original COVID-19 strains, and the latest race is to produce an optimal booster vaccine, as well as vaccines that are more effective against the Omicron and other variant strains.
Once again, Novavax’ NVX-CoV2373 seems to have tested well in studies as a booster shot, with high levels of immunogenicity detected against current variants in the PREVENT-19 trial, and a noticeable spike in antibodies after the first and second booster observed.
Once again, however, Novavax has struggled to get booster approvals in time to service the market, and it’s the same story with its Omicron shot, which had been expected by August, but has now been put back to after October, at the earliest, according to CEO Erck. There’s even confusion as to which shot should be used for which indication, as Erck discussed:
And in the U.S. we’re having a discussion as to whether we should be shipping – whether they should be buying our 2373 for boosting in the United States. It’s all up in the air. This is August. It’s something that one would hope would be solved by now, resolved by now, but it’s not. And so we’re in the mix of that discussion.
Nevertheless, having missed out on the one of the most lucrative periods for vaccine makers in history, twice, arguably, there remains a need for COVID vaccines, not in a public market, but in a private one from 2023. Could Novavax finally have everything ready for the emergence of this new market?
John Trizzino, Novavax’ Chief Business Officer, told analysts on the earnings call that he viewed the private COVID market as potentially being 25% – 50% larger than the current flu market, which some online research tells me is worth in the region of $7bn – $10bn. Let’s be generous and say there is a $15bn per annum market up for grabs. Trizzino then told analysts:
And I think as we get through 2023 and get the peak non-pandemic, but peak commercial revenue, we should expect to have an expectation in the 20% to 25% market share of that commercial market going forward. Again, all of this is very speculative in nature, but based upon our analysis of the market to date and what we expect the total COVID vaccine marketplace to look like going forward.
A 20%-25% chunk of a premium priced, $15bn per annum private market is worth ~$3.4bn per annum at the midpoint, and Trizzino is arguably right to point out that logistically Novavax is inching toward a scenario where it’s ready to compete with the likes of Moderna and Pfizer, with its Czech factory coming on line, and the company steadily gaining the necessary booster, adolescent, and Omicron variant approvals necessary around the world.
Is a 20%-25% share of the market realistic however? Even Trizzino stated these estimates are speculative in nature, but I would say significantly more so in terms of Novavax’ share of it. Global vaccine giants such as Sanofi (SNY) and GlaxoSmithKline are eyeing the private market, having missed out on the public one, and represent powerful rivals to Moderna and Pfizer, let alone Novavax.
A 5% share strikes me as realistic, which translates to revenues of $750m per annum – not enough to drive Novavax’ current market cap valuation of $2.9bn upward in my view, and quite possibly not enough to make Novavax profitable either.
Conclusion – After $2bn Novavax Is Now A Commercial Company With A Shot At Success – Bit It’s Likely Too Little, Too Late
I have regularly banged the drum for Novavax in several previous articles on the company, going back all the way to mid 2020 and the original COVID vaccine race.
Unfortunately, despite a near $2bn funding injection, and a product that’s clinically proven to do the job asked of it, namely protecting people against infection from COVID-19, management simply could not meet the deadlines necessary to achieve success, logistically, clinically, financially, or operationally.
Although several of the issues that have dogged the company could be resolved in 2023, by then, Novavax will be competing for sales in a private market worth perhaps $20bn at peak, against many more competitors than it would have done if its EUA has been secured back in 2020, as seemed potentially likely at the time.
Investors who held Novavax stock when it traded at ~$4, back in early 2020 have still been handsomely rewarded, and in that respect you can argue that Novavax, despite its failing, has made significant progress – just not at the pace of its rivals.
From being a company that did not have a product approved in its entire 30-plus year history – Novavax had come close with both an RSV vaccine and Influenza vaccine – to finally succeeding with it COVID vaccine, courtesy of a $2bn cash injection, is an achievement of sorts, and the subunit vaccine approach is worth having on the market, in my view, based on its efficacy and safety record to date.
It’s too little, too late, however, to reward investors who believed Novavax’ vaccine could compete with SpikeVax and Comirnaty – as I did – for revenues and market share.
I do not necessarily think the company is overvalued, nor that it cannot be in some way competitive in a private market. But with that said, I can’t see Novavax matching its downgraded guidance for 2022 in any year between now and the end of the decade. Plus ca change, as they say.
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