The Wait On The ResVax Preliminary Data Is Nearly Over
A couple of months ago I wrote an article on Novavax (NVAX) detailing the upcoming catalysts set to hit in early 2019 stating the stock would remain in the $1.50-$2.50 price range as anticipation builds on the release of 2 main preliminary trial data updates. Since then the stock has traded as high as $2.48 and as low as $1.73. It now rests right around the middle of this range and this will likely be the last time it trades around this area for quite some time as phase III ResVax data could make or break the stock come the end of March (Figure 1) and going forward. Positive preliminary data news expected near the end of March could easily bring over 70% upside to the stock in a matter of weeks following the release of data as analysts estimate the drug to have upwards of a $2 billion+ market by 2025 if all goes well. I reached this estimate as a $2 billion increase to the company's current equity of a ~$1 billion enterprise value - $318 million in debt +~$144 million in total cash would come out to be an approximately 300% increase in value, but as it is only the preliminary trials even if all goes well that is still only half the battle of reaching FDA approval (x.5) and then factor in another ~-50% for the opportunity cost and you have the ~70% upside potential discussed (Table 1).
|Current Enterprise Value||~$1 billion|
|Total Debt||-$318 million|
|Total Cash||+~$144 million|
|Total Equity (Current Market Cap)||=~$850 million|
|Projected ResVax Market||+$2.4 billion|
|Preliminary Trials Part 1 of 2||x0.5|
|Total ResVax Potential||=~$600 million|
|Projected Market Cap With ResVax||~$1.45 million|
|Projected Value Increase||x1.7|
|Total Upside Potential||=~71%|
This may be a conservative number or slightly overstated based on the state of the macroeconomic factors at play at the time of the release of data as we have seen dramatic swings both up and down in the broader market over the last 4 months or so.
The company already delivered positive preliminary results on their NanoFlu flu vaccine for older adults earlier this month and will look to continue the trend with an update on a possible accelerated approval of the phase III process expected in the coming months as well. According to Seeking Alpha author Upside Research, "For the flu, 100% of the vaccines that made it through Phase 2 made it through Phase 3" which is good news for NVAX as they could get their vaccine into the rapidly growing flu market (Figure 2) by as early as January 2020. This positive news helped NVAX to outperform the broader market in December as many stocks found new lows Novavax was holding steady. I see NanoFlu supporting NVAX well as they continue to push through a broadening pipeline of drugs. NanoFlu will help reduce the risk of an investment in NVAX by being one of the first sources of real cash flow hopefully by next year as the company continues to push through larger drugs such as ResVax.
With plenty of catalysts expected in 2019, Novavax could see a lot of volatility in the coming months. Investors can use NVAX to profit off of this volatility with an option strangle strategy closer to the data release at the end of March. As discussed earlier I believe NVAX could move upwards as much as 70% on favorable ResVax news, and inversely I believe the stock could see similar declines upon negative news on the drug as ResVax is currently the company's leading candidate. The stock has outperformed small-cap biotech competitors over the last few months displaying strength with the release of NanoFlu data (Figure 3). This strength could continue at an accelerated rate if positive ResVax data is released as I see this as an opportunity for as much as 100% upside as discussed due to the size of market this drug could enter into.
(Figure 3) Novavax Has Seen Nice Returns Thanks To NanoFlu Data While Competitors Have Lagged In Recent Months
A $2 billion market for ResVax could bring substantial gains to NVAX stock in a short period of time. Though, investors have been cautious heading into the phase III data releases as NVAX has had a history of disappointing on late stage approvals. Wall Street Analysts remain confident with 7 strong buy ratings on Novavax and only 2 Hold recommendations amounting to a $4.38 average price target.
With any small-cap biotech investment comes substantial risk. NVAX could be in big trouble if their leading candidate, ResVax, were to fall through. We saw this happen back in 2016 with RSV F causing the stock to lose nearly 80% of its value in the months following a surprising negative data release. This history of failures goes back even further to 2002 when the company struggled to push through Estrasorb punishing the stock (Figure 4). Preliminary ResVax data will give investors an idea of whether or not the third time's a charm.
(Figure 4) Disappointing Late-Stage Trial Data Has Caused Big Losses For NVAX Shareholders In The Past
With NanoFlu looking positive Novavax has a small safety net going into ResVax trials. If ResVax is successful the drug could hit the markets by 2023. As with any stock, but particularly small-cap clinical stage biotech's never invest more than you are willing to lose. Novavax could easily see 50-70%+ swings in price from March until August and this may open up new opportunities for profits.
How To Play Novavax Going Forward
I really do believe Novavax will deliver this time around as the company just cannot afford to have another flashback to 2016. Wall Street is confident as well, therefore, I believe NVAX is a buy for a very small portion although the substantial risk is clear. One thing that is obvious is there will be plenty of volatility in 2019. Investors can use this volatility to profit from NVAX. Long investors may find a bullish call spread attractive with potential for more than doubling their investment if willing to risk it all (Figure 5). While short investors may find bearish put spreads attractive at the right price (Figure 6). Both are bold moves but may be worth a shot closer to March 31st.
Better options entry prices are expected in the months leading up to the data release as many of the options for these later dates still remain rather expensive at the current prices in my opinion. $20 entry was used as a mid point example as that is right around the average these spreads normally trade at. I have seen them as low as $10 (.1) and as high as $35 (.35) depending on where the price of NVAX is currently sitting at the time.
(Figure 6) Buying A Put Spread Can Help To Limit Potential For Losses While Still Allowing For Substantial Gains
Both of the aforementioned plays can most likely be bought in at cheaper prices closer to the release of data. One play that I particularly like is to buy both the previously mentioned bullish call spread and a bearish put spread for $20 each and hold for the expected news. That way if the volatility delivers as little as a 35% (~$0.75) move in price of the stock either way, as I expect it easily will, the owner of the spreads would take home $50 total or $10 profit on a $40 investment ($20 entry price on each spread) (Figure 7). That way whether it is negative or positive news, as long as there is substantial news released a profit can be likely taken in. The risk to reward of this play is not as attractive as going long or going short NVAX, but may be beneficial to use along with other tactics as I see the chance of profit being rather high.
(Figure 7) An Example On A Play On Novavax's Volatility With The Purchase Of Both A Call And Put Spread
Options strangles offer another risky play for those daring enough to place a bet on high volatility. This entails buying both a $2.5 call and a $2 put preferably with the April Expiration and expecting a move greater than the buy in price. The key to profiting off of Novavax will be entering in at the right time and price. I see the stock having a nice run up to the release of data, so now may be a good time for bulls to enter in while for those that are bearish it will pay to wait. I believe the stock could easily reach around $3.75 (~70% upside) following the release of preliminary data and will continue to add small amounts of shares at any opportunity below $2.20 up to the data release. I plan to take a couple shots at both my mentioned volatility plays and calls as the date draws nearer as well.
Disclosure: I am/we are long NVAX. 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.
Additional disclosure: Options plays have substantially high risk along with high reward. Invest with extreme caution