September has been a rough month for Novavax, Inc. (NASDAQ:NVAX) and its shareholders. A couple of other SA authors have delved into the company's failures already, so I won't spend too much time on the detail. Those looking for a detailed breakdown, and one on each side of the story, should check out these two articles - here and here. By way of a quick introduction, however, Novavax has spent the better part of the last half decade in the mid to late stage development of its lead vaccine candidate, RSV-F. The vaccine is targeting, as its name suggests, the RSV virus, which is a pretty common seasonal disease that causes respiratory symptoms in people of all ages, but of the highest severity in young children and the elderly.
While physiologically it's very different, readers can think of it as a sort of flu with no current vaccine.
There's a big market - analysts put the 2024 figure at around $2.3 billion globally, with the US accounting for more than $1 billion of these available revenues - but as yet, an FDA approved vaccine has failed to materialize. Novavax supporters believed this was about to change. A Phase II demonstrated what seemed to be compelling evidence (although maybe compelling is a bit of a strong word here) of efficacy for the company's vaccine candidate, and on the back of the Phase II data, Novavax, kicked off a large scale pivotal.
Things didn't quite go to plan, however. The pivotal pitched RSV-F against placebo, and the latter arm actually outperformed the former. Management has suggested that the discrepancy between Phase II and Phase III derives from a supposed weak RSV season (that is, a low infection rate), but I'm of the opinion that this argument holds very little water. Regardless, Novavax is pitching to redo the Phase III during the upcoming season (winter) and see if it can eek out some degree of efficacy in a subset of patients.
There's an actionable takeaway here, but for me, it's got nothing to do with Novavax. Well, not directly. My takeaway is rooted in the fact that the Novavax affair has proven there is considerable market interest in a company that can bring an RSV vaccine to market, and the latest Novavax strike out has freed up a big chunk of investor demand; demand that is now seeking alternative allocation.
Before Novavax announced its failure, the company held a market cap of a little over $2.2 billion. Post-announcement, it's valued at $640 million. That's $1.6 billion that was previously banking on an RSV success looking for a home, and for me, there's an obvious opportunity to get in to another RSV exposure in anticipation of this reallocation.
The company is VBI Vaccines, Inc. - Ordinary Shares (NASDAQ:VBIV).
VBI is the result of a merger agreement signed back at the end of last year that saw two companies, VBI and SciVac, join forces to develop vaccines built using what's called the eVLP platform, or envelope virus like particles platform. The company's primary development efforts are in cytomegalovirus (CMV) right now, and brain cancer by way of a GBM candidate, but it's also working on an RSV vaccine and there's a reason why it's so interesting.
The reason is rooted in the historical development pathway of RSV vaccines. Specifically, a trial conducted back in the 1960s in infants, investigating a then first generation vaccine in the condition. The trial went wrong, two babies died and many got sick, and this has put off many potential developers from working on an updated version of the failed candidate.
The important thing here is why the vaccines caused death and sickness. The first vaccines, many of which are still used today in poorer countries, although less and less so as time passes, are just weak versions of an active virus designed to elicit an immune response, so that when a stronger version comes along the antibodies that can deal with the issue already exist. Many of the vaccines readers received in school, and as children, will have been this sort of vaccine. This, or a slightly updated version (generation 2), sees the virus trimmed down to reduce the potential for infection. This can make things safer, but it also reduces immunogenicity, so the vaccine is safer but less effective.
There have been numerous efforts at a generation 3 vaccine that balances high immunogenicity (efficacy, in this instance) and high safety, but up until fairly recently there's not been the technology to allow for the production of these types of vaccines.
Essentially, no company has wanted to try out generation 1 or 2 vaccines in babies, for fear of replicating the disastrous situation seen back in the 1960s.
So what made Novavax different?
Well, the company's vaccines were based on its own version of VBI's VLP technology. Basically, it's a type of vaccine that has no infectious genetic material (removing completely the potential for sickness and death) that expresses the same antigen as the RSV virus. This way, it should theoretically be able to retain the immunogenicity while being totally safe.
VBI's version is the same as Novavax's in the sense that it expresses no infectious genetic material, but it is a newer generation of the vaccine. It expresses a higher number of surface antigens, meaning it mimics the natural virus to a higher degree than Novavax's RSV-F was able to do.
This sounds like a negligible difference, but it's not. The higher the similarity, the higher the immune response, and in turn, the faster and longer lasting the onset of the immunogenicity of a vaccine. VBI has a large body of data that supports this hypothesis is both clinical studies and existing markets (the company already sells a vaccine based on this type of technology in the Hep B space).
It's very early days, of course, and there are a number of other options available. AstraZeneca plc (ADR) (NYSE:AZN), by way of MedImmune, is working on its own candidate. Bavarian Nordic (OTCPK:BVNRY) and GlaxoSmithKline (NYSE:GSK) are doing the same. Supporting data is very slim for these exposures, however, and so the chances of success are very difficult to judge. VBI already has reams of data supporting the concept, and the technology, in other indication viruses - it's just a case of applying it to RSV.
The company picked up some funding to do exactly this at the end of last year, and is now working with the Canadian government to bring its RSV technology into the clinic.
Because the company formed as part of a merger that closed earlier this year, exact cash position is difficult to pinpoint, but it's going to play a key role in the investment thesis going forward, so it's worth attempting to clarify. We know the consolidated first quarter numbers, by way of this filing, and that VBI and SciVac closed out 2015 with $20 million cash on hand. Based on burn rates rooted in then-current operations, probably had $10 million on hand at the end of the second quarter of this year, perhaps a little less. A $13.6 million financing in August will likely have translated to an end third-quarter cash position of somewhere in the region of $20 million.
These numbers are estimates, of course, but the important thing to note is that VBI doesn't have enough cash to carry its pipeline through to commercialization for any one of the individual assets (HBV in the US, GMB, CMV or RSV) and that - as a result - dilution is inevitable going forward. Raising the capital that creates the dilution shouldn't be an issue (VBI has some established backers - ARCH, Perceptive and more - that took part in the latest raise and will likely be on hand to do the same as things progress), but shareholder dilution of course will be.
It's going to be all about whether the company can mitigate this value decay by way of pipeline advances, and the upside these serve up from a market capitalization perspective.
I believe it can, and while this article focuses on RSV value, near term, I believe the dilution mitigating catalysts are rooted in the company's wider pipeline.
the above mentioned HBV virus is already sold in 15 countries, and VBI is pushing for approval in the US as we speak. It's a third generation virus with hundreds of thousands of administrations under its belt, and reams of safety data underpinning an FDA registration push. I think it's a matter of when, not if, and as the drug jumps through the FDA's hoops, speculative volume should drive market cap gains.
Beyond that, there's a CMV Phase I study that just completed enrollment in the US, and for which we should get an early ready out during the first quarter of next year. Read: another potential catalyst.
Further down the pipeline, there's a GBM cancer vaccine target rooted in an alternative application of the same science on which the CMV vaccine is based (it's not the focus of this discussion, but this science is pretty interesting for anyone looking for a good read) and a Zika vaccine ready to hit the clinic. The Zika vaccine is a long way off, but it's a hot space, and good for some publicity near term.
So what are the risks?
Well, the above mentioned capital raise risk is number one in my opinion. To reiterate, the funding shouldn't be an issue, but the impact on the value of current holdings will be. Secondary risk primarily lies in the FDA turning down the company's Hep B vaccine, which is unlikely given its current approval elsewhere, but which would have a rapid onset downside on VBI's market capitalization if it happens (20-30% dip is not unlikely in this instance).
The takeaway here is that it looks as if Novavax is done (or at best, very delayed) in its RSV efforts, and that opens up the potential for other companies to leapfrog on the path to market. Some big name alternatives are available, and these may serve as a relatively low risk allocation to the freed up investor demand based on the muted impact a failure in the space might have on the market capitalization of the companies in question. For a direct exposure, however, albeit one with considerably higher risk attached, VBI looks intriguing.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.