Shares of Novavax (NVAX) have been on a nice run since the company announced it would be releasing topline results for its RSV (respiratory syncytial virus) candidate vaccine for women of childbearing age. Specifically, NVAX is up more than 30% since its 4th Quarter conference call on March 1st, 2013, and is presently up another 8% in after-hours trading after releasing the anticipated clinical trial results yesterday. With such a rapid rise in PPS, the question investors must ask themselves now is whether or not this will be a so-called "sell the news" event. Keeping with this theme, investors that got in early should be considering if it is time to take profits, and for those on the sidelines like myself, whether there is still room for NVAX to run. In this article, I discuss the bull vs. bear case for investors itching to get in on the NVAX action.
The bear case for NVAX is fairly straightforward. Technically, the stock is in deep overbought territory with an RSI over 90 at this point, trading 25% higher than its SMA, and up greater than 80% year-over-year. Moreover, the call options appear to be extremely overbought, with many in-the-money strikes sitting at approximately 30% of the actual share price. While this isn't exactly a quantitative metric of overbought vs. oversold conditions, it does indicate, to my mind at least, that the bull-run on NVAX has been overdone -- as options no longer offer substantial leverage versus their inherent risk. To put this into a proper context, there are numerous Apple (AAPL) in-the-money call options that are running about 5% of the actual share price. Taken together, there is compelling evidence that the bears are ready to pounce on NVAX, and investors should either take profits or go short.
The bull case for NVAX truly centers around the RSV vaccine trial results. While NVAX does have an intriguing drug candidate pipeline that is developing nicely, the short-term value driver for NVAX will undoubtedly be the ability of RSV to eventually reach the commercialization phase of its lifecycle, and the latent market opportunity this vaccine represents. To understand the bull case fully, I will provide a brief overview of RSV, Novavax's vaccine, and the potential market size.
Respiratory syncytial virus infects the lungs and breathing passages, with the vast majority of children contracting the virus before two years of age. While healthy people tend to recover from RSV infection within 1 to 2 weeks, the virus does pose a life-threatening risk to preterm infants, the elderly, and individuals with compromised immune systems. Presently, a prophylactic medication (Palivizumab) exists for preterm babies born before 35 weeks, but no vaccine is available for any demographic to date. As such, there is a substantial unmet medical need in terms of treatment options for RSV.
Novavax's F nanoparticle antigen works by generating antibodies directed at neutralizing the F protein in RSV. For those not versed in virology, the F protein is critical in terms of allowing the virus to fuse to the cellular membrane and subsequently enter the cytoplasm. By neutralizing the F protein, the virus should no longer be able to infect patients.
So the question is, how impressive are the Phase II results just announced by Novavax? According to the company's press release, Anti-F IgG antibodies rose 6 to 16 fold across dosing levels (60 & 90 ug) by day 56 after patients received the initial dose of the vaccine. Given that this was a fairly large Phase II trial (330 enrolled women), this result is quite impressive from a scientific standpoint. In effect, I highly doubt the functional outcome (i.e., effective immunogenicity against RSV) for an even larger, double-blind Phase III trial will differ significantly from these initial results. Simply put, the vaccine appears to be a safe and effective treatment for RSV, and will eventually reach the commercialization stage of its lifecycle. Moreover, the rapid nature of these type of clinical trials means that this vaccine could be approved by the FDA within the next 2-3 years.
Turning to the potential market opportunity of Novavax's putative RSV vaccine, I believe this vaccine will be an absolute blockbuster of a drug. Backing this claim, Palivizumab has generated more than $1 B in peak sales since coming on the market, and this drug is only indicated for use in a small portion of the potential RSV market. To be clear, the potential market in the U.S. alone is, well, all women of child-bearing age, and the elderly. Instead of speculating about hard numbers for a vaccine that is still only in Phase II, I think it is safe to say that peak sales for this vaccine, if approved by the FDA, will easily top a billion per year. While I think a truly quantitative valuation for Novavax's RSV vaccine is speculative at best at this point, it is important to think about in terms of how much higher (or lower) Mr. Market may want to value NVAX over the next few months. At present, the market cap of Novavax is approximately $350 M. Interestingly enough, Acadia Pharmaceuticals (ACAD) wasn't that far off in terms of market cap prior to announcing topline results for Pimavanserin, and now the market cap for ACAD sits at over $600 M, despite the fact that Pimavanserin still requires a second Phase III trial prior to filing an NDA with the FDA.
From a pure technical perspective, NVAX appears to have exhausted itself, and should be ready for a slight correction in the near term. Yet, I would caution investors from selling their entire position, or even worse, going short NVAX. This vaccine is on the fast track to FDA approval, and peak sales should be somewhere in the multi-billion dollar range. As such, I believe that NVAX is still undervalued at current levels. I personally plan on watching for any signs of weakness to initiate a position over the next few trading sessions. Yet, I would caution investors from jumping in during the initial post-news run-up tomorrow, as it's far too difficult to tell what will happen in the next trading session. Nevertheless, I am of the belief that NVAX will be in the $4-$5 dollar range within 12 months' time, making it an excellent long-term hold. In sum, NVAX is still a strong buy in my opinion, but investors that missed the run-up should carefully pick their spots to initiate a position, as the stock could be quite volatile in the near-term.