Alternative Vaccine Manufacturers: Novavax and Ibio

Includes: IBIO, NVAX
by: Steven Breazzano

Vaccines have been one of the major breakthroughs of modern medicine, preventing millions of deaths worldwide. Medical professionals have long recognized both the health and cost benefits of preventative medicine, and some have pegged this cost/benefit ratio of disease prevention versus treatment at >10:1.

While some investors may be wary to invest in vaccines, an area which has seen more than its fair share of controversy in recent years with autism and litigation risk, the medical community has hopefully put these unfounded fears to rest once and for all with the doctor who started the whole controversy being exposed as a fraud. Historically, vaccines have been a low margin, commodity business characterized by high fixed costs and significant capital investment. This has led to approximately 85% (by sales, but not by volume) of the market being dominated by a few major players: Pfizer (NYSE:PFE) (from its acquisition of Wyeth), Merck (NYSE:MRK), Sanofi-Pasteur (NYSE:SNY), Novartis (NYSE:NVS), and GlaxoSmithKline (NYSE:GSK).

While high margin, blockbuster vaccines products, notably Prevnar (by Wyeth, for the immunization of infants against invasive pneumococcal disease) and Gardasil (by Merck, for the immunization of women against HPV which causes cervical cancer) are beginning to change the long-held attitudes towards vaccine R&D, they do not address the fundamental issues behind vaccine production. This is best highlighted by the seasonal and pandemic influenza market. In 2009 during the H1N1 scare, not nearly enough vaccines were ready for use, and these considerable shortages (>100 MM doses) highlighted the deficiencies of the current production system.

Recently, alternative vaccine developers have entered the mix, promising to change the current business model with their new technology. Additionally, two of these companies (Ibio and Novavax) have received attention on numerous financial websites. An in-depth, head to head comparison of these companies reveals important similarities and differences. Utilizing their proprietary technology, both are working towards capturing significant share of the estimated $5-8 BB market for seasonal flu vaccine. Leveraging their purported advantages (as shown below), they both plan on addressing the pandemic flu market as well.

Current Production Method – Currently, vaccines are produced mostly by one method: egg-based cell cultures. While this has gotten the job done for approximately 50 years, it suffers from two main drawbacks: cost and development time. With roughly a 6 month lead time from final sequencing of the seasonal/pandemic virus to production, the virus has already done significant damage. Furthermore, with high initial investment (approximately $150 MM), capacity is not easy to bring online rapidly. Recently however, Novartis brought a mammalian cell-culture facility online developed with government funds ($487 MM). The Novartis plant will produce flu vaccines in dog kidney cells instead of chicken's eggs, shaving around one month off the roughly six months needed to create vaccines using eggs. According to Novartis, the plant will be able to crank out 50 million doses of seasonal flu vaccine and 150 million doses of pandemic vaccine for the US within six months of the declaration of a pandemic. While this represents a step forward in lead time, it represents a step backward in terms of initial cost, requiring upwards of $600 MM. And, as Genzyme (GENZ) investors are aware, they are prone to infection (thereby shutting down the entire plant).

Ibio, Inc. (NYSEMKT:IBIO) is a plant-based vaccine developer whose proprietary technology does not depend on special lines or bioreactors. In the iBioLaunch platform, the DNA sequence to be produced (protein, antibody, vaccine, etc.) is inserted into the leaves via specially designed vectors (DNA plasmids) and the new DNA expressed independently from the plants own chromosomes (the plant is not transgenic). This ultimately leads to large quantities of biomass producing large amounts of the desired protein (hundred milligram quantities of protein per 1 kg of biomass) that are subsequently purified by standard techniques to give the desired therapeutic in high yield.

The initial startup cost is low, and the manufacturing facility can be readily tailored to produce multiple products. Furthermore, IBIO claims production costs (COGS) at 10-20% (depending on adjuvants) of current vaccines with the benefit of “surge capacity” and short development times (< 4 weeks). If one requires more doses, simply infect (with the DNA-containing vectors) additional plants. Furthermore, the novel platform offers diversification from the standard biotechnology model (massive spending on 1 clinical program, series of binary events), including the production of standard recombinant proteins (IBIO has orphan drug designation for Fabry disease).

With large amounts of non-dilutive funding from the Gates Foundation, DARPA (for defense department applications such as anthrax), Fiocruz/Bio-Manguinhos, and backing from the Fraunhofer USA institute (as well as an inexpensive cheap source of R&D), this has minimized the cash-burn (~$4.5 MM, and per the 10k – enough cash to last for 2011) and resulted in a favorable capital structure with only 40 MM shares fully diluted. Investors are currently awaiting the results of two phase 1 trials for H1N1 and H5N1, with seasonal flu vaccines deferred for the time being as the company continues to move forward with its non-vaccine applications. I believe that because of fellow plant-based vaccine developer Medicago’s promising phase 1 and interim phase 2 data that this will result in similar results for IBIO. Furthermore, while investors at this point may question the plant-based cell expression system given that Protalix received a CRL in February, I believe the FDA has no concerns with a plant based expression system and will objectively decide approval of these candidates based on safety and efficacy as demonstrated in clinical trials.

Novavax, Inc. (NASDAQ:NVAX) – is the larger (by market cap) of the two, and is currently in more advanced stages of clinical trials. Utilizing virus-like particles (VLPs) to infect insect cells lines (NVAX uses Sf9), NVAX is able, like IBIO, to shorten development times. For a quick summary of VLPs see: here. Some of the major advantages of VLPs include their simplicity and non-pathogenic nature (they contain no viral RNA). However, an important distinction is that NVAX’s VLPs contain 3 surface antigens (HA, NA, and M1) allowing the body’s immune system to develop broader, more effective antibodies against disease, rather than just the HA antibodies present in most vaccines.

As a result, NVAX believes that their vaccine will be able to prevent hospitalization and complications arising from influenza, an unmet medical need. A good summary of the multiple vaccine clinical trial results is in the company’s 10-k filed with the SEC. In short, the results were favorable with strong immune response and the treatment well tolerated across thousands of patients in all doses. NVAX is able to prepare the first doses approximately 11 weeks after the receipt of the sequence.

With the capability to produce approximately 100 MM doses with a plant cost of ~$40 MM, NVAX has clear advantages. However, NVAX’s COGS is roughly competitive with egg-based in terms of variable cost, but this appears to be improving as increases in yield are realized. For now, the main advantage is the superior ramp-up time, larger capacity, and improved fixed costs (including utilities). As diversification from the influenza market, NVAX has initiated a phase 1 clinical trial in RSV (respiratory syncytial virus), for which there is no vaccine on the market (possibly affording higher margins). Data is expected later in 2011.

NVAX has entered into a joint venture with Cadila Pharmaceuticals in India, in which Cadila is committed to contributing $8 MM over 3 years. They have also partnered with LG Life Sciences for use of the VLP technology to develop and commercially sell influenza vaccines in South Korea and certain other emerging-market countries. NVAX will receive double-digit royalties and is not responsible for costs incurred along the way.

Financially, NVAX’s significant cash burn (~$35 MM last year) will now be considerably reduced with the receipt of a large BARDA contract that will cover both direct and certain indirect costs, which provides $97 MM to fund a phase 3 trial for seasonal flu, and will fund a phase 1 clinical trial in pandemic flu. This contract provides an option for an additional $82 MM. NVAX currently has an at the market equity offering with approximately 14 MM shares to issue, which could result in an additional $35 MM at today’s prices. As of December 31, 2010, NVAX had approximately $31 MM in cash and short-term equivalents and management expects this, coupled with the at the market offering to suffice for the next 12 months.

Recent Analyst Activity

4/20 Piper Jaffray maintains overweight, price target $4.00

4/20 McNicoll Lewis & Vlak maintains buy, price target $11.00

4/5 Wedbush maintains outperform, price target $6.00

Dawson James Securities, Inc. and Lazard Capital Markets offer coverage as well.


3/31 Noble Financial Group maintains buy, price target $8.00

Conclusions – Both companies provide many reasons for investors to purchase their shares, and there are many similarities between them. These include a disruptive technology partnered with larger players to access funding, considerably lower capital investment, and significant surge capacity. However, there are notable differences.

Novavax is significantly further along in clinical development, with a large phase 2 study already complete in seasonal flu, and has already begun to diversify its pipeline with a planned initiation of a phase 1 trial in RSV. Globally, because of its more advanced status in the clinic and the previous clinical validation of VLPs (Merck’s Gardasil uses VLP technology), NVAX is arguably less risky. Consequently it trades at a higher valuation, sporting a market cap of approximately $280 MM (43% institutional ownership) vs. IBIO’s $95 MM market cap. Going forward however, Ibio sports potentially lower COGS and quicker development times, with a more diverse expression system.

Both have diversified their platforms by initiating other clinical and preclinical programs. Globally, both firms possess disruptive technology that is poised to radically change the vaccine market, as well as recombinant proteins in general. This will benefit patients in both developing and developed nations alike, along with investors.

Disclosure: I am long IBIO.