- NVAX genetically engineers vaccines to prevent diseases which have a great impact on the public health.
- NVAX has a technology platform for the development of multiple vaccines, a robust R&D budget, growing revenue, its own manufacturing capability, and trial results published in NEJM.
- NVAX financial performance is improving but the stock is not cheap at a P/S of 33.
The most successful biotech companies have a unique technology platform for efficient development of multiple, novel drugs. Development of a deep pipeline requires a robust R&D budget which, in turn, requires revenue. Having at least one product on the market will help grow the revenue. Manufacturing capability contributes to a biotech company's intellectual and economic moat. This should all seem intuitive except perhaps the manufacturing capability, but that seemed to be one of the common denominators of small biotechs that grow earnings enough to become profitable. I also have anecdotal evidence that publication of drug trial results in peer-reviewed journals often presages FDA approval of a new molecular entity. These are characteristics I look for in a small biotech.
I recently increased my stake in Novavax (NASDAQ:NVAX) after considering how it measured up to the above criteria which is the subject of this article.
Technology platform. On the 1st page of the NVAX 10K for 2013 the platform is described as an insect cell culture based "proprietary recombinant nanoparticle vaccine technology that includes both virus-like particles (VLPs) and protein nanoparticle vaccine candidates. Our vaccine candidates are genetically engineered three-dimensional nanostructures that incorporate immunologically important proteins." The platform is described in much more detail on pages 6-9 of the 10K. NVAX believes its platform allows faster development of new vaccine than the 50-year old egg-based platform used by most other companies.
Pipeline. NVAX product pipeline "targets a variety of infectious diseases with candidates currently in clinical development for respiratory syncytial virus (RSV), seasonal influenza, and pandemic influenza. Further, CPL Biologics Private Limited (CPLB), our joint venture company in India, is actively developing a number of vaccine candidates that were genetically engineered by Novavax. These include its seasonal and pandemic influenza vaccine candidates that have completed Phase 1/2 clinical trials in India in 2012, and its rabies vaccine that began a Phase 1/2 clinical trial in India in early 2014." Source: page 1 of the NVAX 10K for 2013.
R&D budget. This will be a stumbling block for value investors. NVAX R&D budget exceeds revenue yearly and is growing rapidly. As long as the R&D is productive, which I trust it to be, the R&D budget is a plus for NVAX in my opinion - see R&D-adjusted ROC in the graph below. At the end of 2013, NVAX had $119M cash and $145K in current assets on its balance sheet. Total 2013 expenses were $74M. Net current asset value was $112M up from $28.3 in 2012. According to the NVAX 2014Q2 earnings release, total assets, current assets, and working capital are higher than at 2013 year's end.
Revenue. NVAX revenue grew from $0 in 2010 to $14.7M in 2011 to $22.1M in 2012 to $20.9M in 2013; for the 1st half of 2014 revenue has grown further to $15.7M.
Product on the market. None.
Manufacturing capability. On page 36 of the 10K for 2013, NVAX lists manufacturing facilities in Rockville and Gaithersburg, Maryland, and in Upsala Sweden. NVAX has also joint ventured with pharmaceutical firm Cadila which manufactures vaccines in India. I consider manufacturing capacity a valuable asset for reasons mentioned in the introduction above. NVAX also considers organic manufacturing - as opposed to outsourcing - a way to reduce the time to get a new vaccine to market, which is particularly important when there are new epidemics.
Economic performance and valuation. As shown in this ychart, NVAX revenue has been trending upward over the last 3 years, and its P/S ratio is upper middle range, so it is not particularly cheap.
NVAX return on invested capital is erratic and still negative, but trending upward over the past 5 years as shown in this ychart.
Biotech companies that spend all their revenue and more on R&D to advance their pipeline should not be judged on the basis of unadjusted ROIC - unless you just don't want to invest in small biotech. Damodaran has made a compelling case for adjusting return on capital for R&D expenses by capitalizing them. The chart below shows my calculations for NVAX using a 10-year amortization of R&D expenses, the unamortized portion of which becomes an asset - i.e. capital - in the denominator of ROC.
Risks. Anyone interested in investing in NVAX should read the 'Risks Related To Our Business' paragraph beginning on page 15. This is not the usual template stuff found in most 10Ks because NVAX is so dependent on HHS BARDA. Some may consider this a government subsidy, but this funding source doesn't worry me.
Summary. Except for not having a product already on the market, NVAX meets my criteria for identifying a biotech that will grow earnings enough to become profitable over the next few years, and is thus a good choice for me as a risk-tolerant investor. I admit that vaccines are not as exciting as some of the new molecular targeted cancer treatments, nor does NVAX have a major trial published in a peer-reviewed journal such as NEJM. I suggest SA readers compare other companies to NVAX on the following criteria:
1) a technology platform that will act as a force multiplier to produce...
2) a pipeline of multiple, novel drugs supported by a ...
3) robust R&D budget and...
4) revenue growth to support the R&D,
5) drug trial results published in peer-reviewed medical journals, and preferably, although this is rare,
6) manufacturing capability so it can be independent of a contract manufacturer and keep its intellectual property secret.
Buy the company that best meets these criteria, that has rising returns on capital - even if still negative - and is reasonably priced.