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Novavax Inc. (NVAX) is a clinical stage biotechnology company specializing in the development of scientifically advanced vaccine formulations. With a market-cap of $303.4m and poised to enter into several FDA Phase II trials in the year ahead, Novavax makes for a compelling long-term investment opportunity. Additionally, Novavax will be advancing its own blockbuster candidate for respiratory syncytial virus, or RSV into late stage phase trials and onto a commercial stage it will occupy alone.

Complete results for RSV in the elderly population will be available in October of this year. The Phase IIa in women of child-bearing age will be completed later this month at least in terms of reaching its primary endpoints.

With more than 12 million cases in major markets every year, RSV remains a significant unmet medical need with no prophylaxis currently available. There are approximately 300,000 hospitalizations of elderly and infant patients costing about $3bn annually in care.


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It's clear to see in the graphic above [provided with permission] that Novavax is far ahead of the competition in developing an effective vaccine and it stands to profit enormously because of it.

Another important development, in addition to the advancement of its clinical pipeline is the offer to acquire Swedish adjuvant maker Isconova for $29.6mm. This transaction, if and when completed will provide Novavax with many advantages moving forward including but not limited to quality control of the production process from beginning to end and the ability to produce more vaccine with less side-effects.

Before we get started, I grabbed this self-description of Novavax from a recent press release:

Novavax, Inc. is a clinical-stage biopharmaceutical company creating vaccines to address a broad range of infectious diseases worldwide. Using innovative recombinant nanoparticle technology, as well as new and efficient manufacturing approaches, the company produces vaccine candidates to combat diseases, with the goal of allowing countries to better prepare for and more effectively respond to rapidly spreading infections. Novavax is committed to using its technology platform to create geographic-specific vaccine solutions and is therefore involved in several international partnerships, including collaborations with Cadila Pharmaceuticals of India, LG Life Sciences of Korea and PATH. Together, these organizations support Novavax' worldwide commercialization strategy and have the global reach to create real and lasting change in the biopharmaceutical field.


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The last time I wrote about Novavax was on November 14, 2012. On that day, the stock closed at $1.63 per share. On April 11, 2013, the stock reached an intraday high of $2.74, an increase of 68%.

I'm sometimes asked if I still think Novavax is a good investment as opposed to a good trading vehicle. To which I respond: "Yes!" It's a good investment and a good trading vehicle.

Most biotechnology companies with a pipeline of drug candidates evincing positive clinical data, large market opportunities, and no debt meet my criteria for inclusion in both categories.

Now take a look at the Novavax chart over the past year and you'll see a climbing pattern of appreciation with alternating periods of retreat and consolidation. You'll also see that the stock has reached a new level of support at around $1.90 a share.


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As further evidence of this new baseline, on June 20, 2013 when the market took a 300-point tumble with an average loss across all indices of -2.33%, Novavax actually went up a quarter of a percentage point. Why is this significant? Because of the 44 biotechnology stocks on my watch list, only three managed to edge into positive territory and the average loss was -2.34%.

The Power of VLP Technology

In my previous article on Novavax from November of 2012, I spoke extensively about its Virus Like Particles [VLP] technology and how it revolutionizes the way vaccines are produced.

The graphic below demonstrates this well. A process that once took 180 days from initial analysis of a viral strain by the World Health Organization to a finished vaccine product now takes about half that time.

Novavax VLP Technology
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In the area of pandemic influenza, every moment counts. So speeding up the development process is of paramount importance. But what if your vaccine isn't effective enough? It's great to have it fast, but it has to work too.

From the Clinical Stage Pipeline page of the Novavax Website you'll find this statement regarding the quality of its product.

Novavax has shown in human studies that its H5N1 VLP vaccine was well tolerated, produced no vaccine-related serious adverse events and induced neutralizing antibodies that were cross-reactive with different avian H5N1 influenza viruses. This is the only report of an unadjuvanted vaccine inducing cross-reactive neutralizing antibodies against multiple clades of H5N1 influenza virus and demonstrates the significant potential of the VLP technology.

And Novavax has been busy recently flexing its vaccine making muscle with first to preclinical trials of a vaccine against China's H7N9 influenza and Middle Eastern Respiratory Syndrome Coronavirus or [MERS-CoV]. The latter has infected 64 persons as of June 17th killing 38 of them.

China's H7N9 scourge was closely followed by major news organizations like CNN who reported on April 26th these chilling words from Keiji Fukuda, of the World Health Organization:

This is definitely one of the most lethal influenza viruses that we have seen so far. We think this virus is more easily transmitted from poultry to humans than H5N1 that claimed 332 lives.

It's important to realize that these kinds of viral threats are becoming commonplace and that our response to them needs to be timely and effective.

Please read the company's press release dated May 10, 2013 regarding the H7N9 outbreak:

Novavax began work on the strain in early April. Analysis and optimization of the gene sequences for the key viral hemagglutinin [HA] and neuraminindase proteins, synthesis of the genes, construction of a recombinant baculorvirus vector, infection of insect cells, purification of the first batches of VLP vaccine, and administration to animals were all completed in 28 days.

To suggest that this is impressive is to understate the case. Novavax is demonstrating on the world stage the power of its platform and signaling clearly to would be partners abroad that it is ready to be their vaccine maker of choice in the near future.

It's important to remember that in the case of pandemic vaccines, they're stockpiled by nation states. The fresher and more powerful the vaccine is in protecting against mutant strains of the virus, the more attractive it is to potential buyers. Therefore, Novavax will be selling lots of pandemic vaccine.

Two Novas Are Better Than One

On June 3, 2013 Novavax announced an offer to acquire Swedish adjuvant maker Isconova for $29.6mm in shares of Novavax stock. The offer period is expected to begin July 8th and to be completed by July 29th.

Adjuvants are an important part of most vaccine formulations and ought not to be taken for granted. They help to enhance the work of the antigen by intensifying, prolonging and accelerating its effect. Adjuvants can also be problematic in that they are sometimes poorly manufactured and can present undesirable side-effects.

Despite the fact that Novavax's operations are well funded through 2014, primarily as a result of the BARDA contract worth $179mm, I was still surprised to read of this all-stock tender.

Why Isconova?

Isconova specializes in the making of adjuvants for vaccine production in both animals and humans. And Novavax is entering a period of critical clinical phase trials where they're going to need a lot of vaccine making materials.

Additionally, Isconova's Matrix Platform of saponin-based adjuvants derived from the tree bark of Quillaga Saponaria trees is nearly as revolutionary as Novavax's own technology, providing numerous benefits over the most common adjuvants derived from aluminum salts used in 90% of adjuvant enhanced vaccines.

Isconova's human iteration of Matrix adjuvant - Matrix M has completed two Phase I influenza trials and is presently in three ongoing Phase I trials for HSV, malaria and rabies.

From Isconova's Website, we can find four major benefits to using Matrix Technology and they are as follows.

  • Matrix displays improved chemical stability having a shelf-life of several years in aqueous solutions at +2-8 degrees Centigrade.
  • Matrix particles are simply mixed with the vaccine antigen post-manufacturing, giving great flexibility in vaccine design as well as significant production advantages.
  • Matrix adjuvant is highly efficient providing exceptionally balanced and long-lasting immune response
  • And finally, Matrix M produces a strong immune response and the opportunity to reduce the antigen dose thereby significantly reducing production cost.

Bear in mind that Novavax is still a clinical stage start-up with only two production facilities. Isconova goes on to say this about their Matrix M adjuvant.

Isconova's Matrix M can be of immense value when faced with inadequate vaccine manufacturing capacity and an emerging threat such as an influenza pandemic.

Isconova - The Company Is The Perfect Fit In Four More Ways

  1. Novavax will instantly become an international company with an important branch location in Northern Europe. This will enable them to begin the process of licensing a production facility in Sweden thereby being able to sell vaccine without the tedious import requirements and retesting often associated with such transactions.
  2. Novavax will immediately become an income producing company. Isconova sells its adjuvant products throughout the world in a network of partnerships in both human and animal fields making a gross profit of $11.59mm in 2012.
  3. Novavax has now added to their business the expertise of adjuvant specialists in the vaccine creation process.
  4. Novavax will effectively be able to manufacture its own vaccines in-house with complete control over the finished product.

What Are The Concerns To Novavax Shareholders Relative To This Deal?

This is actually more of a complex question than one might surmise upon first asking it. There are of course the obvious concerns relating to the issuance of 15.7 million shares of Novavax stock to complete the deal, which is dilutive to existing shareholders.

And while the largest current shareholder of Isconova has agreed to a 3-month lock up of his shares, there's no guarantee that others have. This doesn't necessarily mean that insiders will immediately liquidate their shares, but they could.

And then there's the matter of the burn rate. Sure Isconova makes money but they go through $5.5mm annually with a projected burn rate in 2013 of about $5mm. Since most of its 23 current employees will be retained, at least according to official statements, the accretive loss becomes Novavax's to suffer.

A Hidden Agenda?

By acquiring Isconova, is Novavax perhaps hinting at trouble in its own production process? RSV is arguably Novavax's biggest cash pot moving forward and positive Phase II results in women of child bearing age were recently reported but included the following cryptic safety message according to RTTNews:

The company said that the participants reported mild to moderate headache, fatigue and muscle ache and added that it shall continue to evaluate safety over a total period of six months and immunogenicity for four months respectively.

These symptoms are not uncommon when using aluminum phosphate, which is known to cause various side effects including localized events such as swelling and tenderness but also more generalized events such as minor inflammation in the brain.

The problem is that the next set of phase trials for RSV in women of child bearing age will be in women actually bearing children. It's one thing to convince a woman who is not pregnant to run the risk of an adverse event but one who is might think twice - especially because immunogenicity and side-effects are passed in utero to the baby.

Utilizing Matrix M adjuvant with its notable safety profile and diminished side effects could be the ideal solution to this problem, but will the FDA allow it? Making a change this late in the RSV game - at least as it pertains to women of child bearing age may not be without consequence to the data culled, how it's interpreted and if it ultimately results in approval of the product.

Another concern of mine is the Phase 1 trial of RSV in the elderly. This fragile segment of the population would be more likely still to suffer adverse effects from the standard aluminum phosphate adjuvant. Top-line results are due in October of this year and I'll be watching carefully.

A third concern of mine revolves around the novelty of this new Matrix adjuvant.

Beware The Fate of Dynavax's Heplisav

Beyond concerns already addressed in this article, there is an issue recently brought to light by the FDA's rejection of Heplisav, Dynavax's (DVAX) Hepatitis B vaccine. The problem? Use of a novel adjuvant in the vaccine formula.

In relation to its complete response letter [CRL] issued by the FDA on June 10, 2013 regarding its Biologic License Application [BLA], Melinda Wharton, member of the Vaccines and Related Biological Products Advisory Committee said the following.

Having a hepatitis B vaccine which is more immunogenic in populations that don't respond optimally to current vaccines is a good thing. I'm glad to see this work being done. That said, I don't think the safety database is sufficiently large to support a recommendation for use in the general adult population, given that this vaccine contains a new adjuvant.

Therefore, intelligently integrating Isconova's Matrix vaccine into the Novavax pipeline ought to be management's number one concern moving forward.

Fortunately for Novavax, Isconova has their Matrix adjuvant in clinical vaccine development at this time. Working with the FDA will be vitally important however in the process of porting this novel adjuvant over into Novavax's present clinical stage candidates.


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Executive Compensation

One of the criticisms I received in my last article was that executive compensation was too high. Since I didn't know at the time how to research this allegation, I simply chose to ignore it. Not today!

Chief Executive Officer Stanley Erck presently receives $1.24mm in salary and stock options. The median expected salary for a typical United States CEO is $750k. However, there is nothing typical about running a biotechnology firm, where a mixed skill set of technical expertise is required.

If for instance you're a lawyer working in a law firm which specializes in real estate, you can expect to make considerably less than a similarly qualified professional plying their craft at the intellectual property realm of law. Comprehending and manipulating scientific information is paid for at a premium to common knowledge transactions.

Additionally, Mr. Erck has an extensive background of leadership in both start up and established companies like Genzyme and Baxter (BAX).

I find his salary to be in-line with his skill set and successful management style. Other members of the team, though compensated well, are not receiving pay disproportionate to their abilities or experience.

This Could Be A Sign Of Things To Come

Novavax has experienced a rash of insider buying recently at a rate of slightly more than three to one over sales in the past six months.

Insider Buying In This Month Alone

Date Name Position Shares Price/Value
6/6 Gregory Glenn CSO 1,000 $2.01 - $2,010
6/6 Gregory Glenn CSO 1,000 $1.83 - $1,830
6/6 James Young Director 100,000 $1.91 - $191k
6/10 Timothy Hahn VP Product Dev 21,000 $1.88 - $39.48k
6/12 Richard Douglass Director 50,000 $1.90 - $95k

In Conclusion

I remain bullish on Novavax and for many good reasons. Positive top-line results for RSV in the elderly population would only add to my enthusiasm. However, negative safety data would diminish it considerably.

The acquisition of Isconova is timely and beneficial to Novavax for all the reasons stated in this article. And perhaps my premonition regarding tolerance and safety issues is just foolish and unwarranted speculation.

Regardless, I'll be waiting till after top-line data results from RSV in the elderly population are revealed before adding to my position. Once received, and if positive, I'll add considerably more shares moving forward.

Source: Novavax Elevating To The Power Of 2