Is The Novavax 'New Paradigm' Worth A Second Look?

May. 4.12 | About: Novavax, Inc. (NVAX)

Novavax (NASDAQ:NVAX): the name is notorious even among biotechs. It has provided traders with a roller-coaster ride, ranging in twelve years between $0.71 and $14. It is now trading toward the low end of a chart that looks like the jagged peaks of the Himalayas.

Against this background, the recent spate of insider buying is intriguing.

In mid-April, when shares were trading at just under $1.20, we called attention to some of buying and while shares have been rising since, our research was-- to say the least-- incomplete. There has been plenty of speculation and we've started to see enough buying that the downward technical trend appears to not only be broken, but shares are now trading above the fifty day moving average.

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Now, if you're interested at all, you may want to download this poster presentation. Don't scratch your head over it; we'll get to it later and tie in why it is likely related to that insider buying.

Novavax has been around since 1987. In the early days, the name implied one thing, while the company's actual products involved estrogen supplementation. But someone in the early days must have had a hot idea, literally. The story begins, unbelievably, in Yellowstone National Park, near the Great Fountain Geysers, where Thomas D. Brock and Hudson Freeze discovered a strange bacterium that lives in superheated water. The little bug makes Taq, the indispensable enzyme. Without Taq, I wouldn't be writing this story. But thankfully, Cetus developed Taq, and sold it to Hofmann LaRoche for $330M. Taq makes it possible to replicate DNA with a machine that fits on a tabletop; as much as you want, when you want. Taq made it possible to conceive of tinkering with life as never before; in fact, making life itself. But the Novavax goal was more modest: use this ability to easily manufacture DNA to make new vaccines, faster, more pure, and more effective than existing methods could provide.

The skepticism that a little company like Novavax could produce a new flu vaccine has abated since the spectacular Mexico trials and the BARDA contract, but since flu has been the visible driver since about 2004, it's worth a look. The first vaccines were made with the use of whole, live animals, which were sacrificed, but flu vaccines have traditionally been made using eggs.

DNA is not a vaccine; it is a blueprint for structures of living things. To make a vaccine, we need a biochemical machine, a living cell that can be hijacked, and repurposed to make the essential ingredients of a vaccine. The first vaccines, in the 19th century, involved sacrifice of live animals. The traditional flu virus "factory" has been the chicken egg. The initial season of H1N1 in the U.S. required about 100 million eggs, each inoculated between the ninth and twelfth day after laying. Not to mention all those roosters who are kept very busy doing their thing with the hens.

This is the way it's supposed to work. After six months, and billions of eggs worldwide, the vaccination campaign begins. But with H1N1, the eggs produced only 30% as much virus as normal. The virus was killing the eggs, quickly. Even when the yield is good, the length of time required to make the flu jab has interfered with a good night's sleep at CDC and NIH for years. And here's why. The 1918 flu was so severe that a young, healthy man would get sick in the morning, and die in the afternoon, drowned in his own fluids. It could happen again. It can happen again, at any time, because flu is a fragile RNA virus that is constantly changing and recombining with other strains. This is why every season, the flu is different, and this is why catastrophe lurks in every roll of the RNA dice.

With the estrogen patch biz up front, Robin E. Robinson, who came onboard Novavax in 1992, worked in the back room with colleagues developing IP for potential vaccines, against diseases like malaria, human papilloma, hepatitis, prostate, melanoma, and cervical cancers and, of course, the flu. Not ready for the clinic, these have been tested "in the dish", or in animals.

Lack of focus? No! Instead of a single do-or-die blockbuster drug, the goal was A New Way of Making Vaccines. Close book on eggs. Novavax is about a New Paradigm. Of course, a new paradigm could also create a blockbuster. Is the insider buying related to this? Yeah. Hold your horses. We'll get to it. This is the New Paradigm:

1. Obtain a sample of the virus.

2. Extract the DNA or the RNA, and make a large amount of DNA by PCR, using the marvelous Taq that came from Yellowstone's geysers. This can be done on a tabletop.

3. Clean your lab and get rid of the nasty live virus. It's not needed anymore. As we shall see, this is a big advantage.

4. Using chemical scissors called restriction enzymes (valuable IP of Novavax), cut up the DNA to get the desired pieces. Candidates are any parts of the outer shell of the virus that might be used to immunize a person.

5. Purify the cut-up pieces you want. Left behind is the interior viral machinery that infects and destroys human cells.

6. The desired pieces of DNA are just a blueprint. A biological machine, some kind of living cell, is required to manufacture from the blueprint. Caterpillar cells work really well. Complete cookbook systems, like Invitrogen's Bac-to-Bac®, make cloning an easy, 5 minute procedure. Check it out.

7. Caterpillar cells make so much of the desired "stuff", so fast, that it takes only three months to complete a manufacturing cycle. And there's no waiting for hens to lay their eggs. A lot of roosters are going to get laid off … or worse.

From this point on, the New Paradigm is incredibly safe. Insect viruses infect only insects. The target virus is represented only as a genetic code. But making a vaccine is still a challenge. A traditional vaccine factory looks like a brewery, and it is very hard to get something that big absolutely sterile. This is a problem with both eggs and with cell cultures, which are grown in large bioreactors. Possible examples are the 1976 swine flu campaign, the 2004 Wyeth flu vaccine, and Baxter's Preflucel recall in 10/11.

Go into a modern biotech lab, and you'll see that practically every container, for both liquids and cultures is made of plastic, and disposable. While microbes can be killed with heat, DNA is very, very tough. To clean all the DNA out of a cell culture factory takes lots of very toxic, hard to handle chemicals, and it doesn't always work. So Novavax invented the Disposable Vaccine Factory. Every time the factory gears up for another run, the bioreactors are thrown out, and replaced with new. Because they are presterile, and have never been exposed to DNA, the chances of contamination are very much reduced. Because the parts and cultures are replaceable at reasonable cost, there is no need to sell the company, which is what Wyeth was faced with in 2004. The startup costs are less, too; Novavax claims only 40% that of a traditional plant.

Does the Novavax "New Paradigm" make it sound too easy? Maybe.

Now that we have a complete system for reliably making "stuff", what do we make? This is the big question. Conspiracies aside, some trial vaccines have actually made the disease worse. This happened with an RSV vaccine in the 60's and it is a concern with dengue fever. The human immune system is far from completely understood. But now we can discuss why RSV may be the motivation for insider buying, and why execs at Big Pharma are looking closely at the results of the Novavax Phase I Trial.

Vaccines are not found with scattergun approaches. They are designed from the beginning to train the immune system to respond to something on the "bug." To prove a vaccine safe and effective, it has to go through Phase II and Phase III trials. Because trials are by far the most expensive part of vaccine creation, every biotechie or exec wants a good gut feel as to why a vaccine candidate should actually succeed, and why it should not have side effects. It is a remarkable and curious fact that the Novavax RSV candidate causes the human body to secrete a substance that is almost identical to a drug already approved for treatment of RSV.

The drug is Medimmune's Synagis, given by injection to high risk infants. The Phase I trials indicated that a person exposed to RSV secreted a substance almost identical to Palivizumab, the active ingredient of Synagis. Palivizumab is a monoclonal antibody, which makes Synagis a very expensive drug, which is why it is administered only to high risk infants, even though RSV infection is almost universal. This is highly suggestive that Novavax's RSV candidate will be found safe and effective.

The dollar signs are lighting up in the eyes of Big Pharma because of the size of the market, estimated by Rahul Singhvi in 2010 at $1B annually. Why so big? Because RSV is a big, hidden problem. By some estimates, 25% of winter excess mortality, those people who died of flu or winter colds, young, old, all ages - 25% of what is mainly blamed on the flu, is actually due to RSV. There is no "rapid test" for doctors' offices, so most adult infections are never diagnosed.

There may likely come a time when RSV vaccination is widely recommended for all age groups. And executives at Big Pharma, who are by nature risk-averse, may start asking themselves questions like: "Shouldn't we negotiate a tie-up with these people?" Or perhaps, "I wonder if we should buy the company."

Until then, there is much ground to cover and with some key upcoming catalysts listed in our FDA Calendar, this may be one to watch.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.