Seeking Alpha

9 Reasons Why The Race For Major COVID-19 Vaccine Revenues Has Greatly Narrowed

by: Upside Research
Upside Research
Long/Short Equity, Deep Value, Value, Growth At Reasonable Price

The huge amount of Operation Warp Speed funding for its six vaccines has helped them become somewhat dominant leaders in the race for a sizable share of the market.

New funding for R&D of other vaccines has declined heavily in the last two months. Major funder Bill Gates now favors that no additional funding be given to other vaccines.

The focus turned to manufacturing, and most of it is now taken by the OWS vaccines. Herd immunity from vaccines will make large pivotal trials unfeasible in the future.

Those and other factors are increasingly blocking the smaller players from the race. Investors should be careful owning them.

Of the OWS vaccine companies, I'm by far the most bullish on Novavax, followed by Pfizer then BioNTech. But all of them will shoot higher on positive results, so don't short any.

One of my investments is in a small COVID vaccine company, Heat Biologics (HTBX), and I generally route for the little guy. So I don't particularly like writing an article that has a number of facts and reasons why probably none of the remaining small players are going to become major players for COVID vaccine revenues. But I have to be realistic. Four months ago, the field was far more wide open and I was considering lots of companies as having potential to capture a serious share of the global COVID vaccine market.

Now, the writing seems to be on the wall in numerous ways. For major market share, it has basically become a six-horse race of the six vaccines that have been heavily funded by the US government: Johnson & Johnson (NYSE:JNJ), Novavax (NASDAQ:NVAX), Moderna (NASDAQ:MRNA), Sanofi (NASDAQ:SNY), BioNTech (NASDAQ: BNTX) / Pfizer (NYSE:PFE), and AstraZeneca (NYSE:AZN) [partnering with GlaxoSmithKline (NYSE:GSK)].

Note that while Inovio, Merck (NYSE:MRK), and Vaxart have received a portion of US government funding, their amounts pale in comparison to the six that received huge amounts. Vaxart's was probably less than $10 million, since the cost of a pre-clinical trial is less than that. Inovio's was higher, but they and Vaxart aren't even mentioned once on the government's Operation Warp Speed page.

They also aren't even included in BARDA's list of COVID vaccines. Inovio also has a couple of other issues including a shareholder lawsuit against it. I am fairly bearish on Inovio at its valuation. I am mildly bullish on Vaxart at its current valuation, but I don't own it. I will go into both of these in my next article.

I'm also fairly bearish on Merck because of how slow it's been with coronavirus and how very far behind it's become. Being behind by two months means almost nothing, but Merck is about 6 months behind. Also, it only received $38 million from the US government, which is tiny compared to the others. I'm somewhat sure that it has missed out on getting massive free funding from the US and from CEPI. Even if it pulled off a successful vaccine, that would cut into its profits. Most of the factors in this article apply to it the same as they do to the smaller players.

Because the main six OWS vaccines have received giant sums of money compared to the relatively smaller ones that the three above got, I'm going to sometimes refer to them as the six OWS vaccines for short in order to save space. But you'll know that I'm aware the three above got a chunk of money in the past.

A year ago Moderna, Novavax and BioNTech would have been considered smaller players or small to mid-sized players in the vaccine world. Now with their giant amounts of free funding and other developments, they are currently big players in the vaccine world. Of course they're not nearly as big as the large pharma companies. So we can still kind of view them as "the little guys" compared to the biggies.

Here are the reasons why the race for sizable market share has largely narrowed down to six vaccines for the following:

1) Operation Warp Speed appears to have used up most of its budget

As the US government's OWS page explains, Congress has appropriated $10 billion for coronavirus vaccines and treatments with $6.5 billion for BARDA and $3 billion for research by the National Institutes of Health (NIH). While there is some amount of flexibility to spend more, it's not a dramatically higher than that.

So far, $12 billion has already been committed to six vaccine candidates. Once these enter phase 3 trials, the money is essentially gone for good because it will be spent on the trials plus on doses that will be thrown away if the trials fail. Data released to date indicates that all six will probably have good enough phase 2 data to continue to phase 3.

Another $1.5 billion has been committed by the NIH to a project named the Rapid Acceleration of Diagnostics (RADx), which is working to develop better clinical tests for COVID-19. In July, the NIH committed $450 million to Regeneron for testing of a treatment. The NIH recently also announced a "flurry” of large clinical trials it is going to fund that I estimate will cost over $3 billion.

That totals $17 billion. It doesn't appear to leave much, if any, room for putting another $1.5 billion towards funding development of another vaccine with large-scale phase 3 trials and costly manufacturing.

In addition, President Trump in recent public remarks said, “We are investing in the development and manufacture of the top six vaccine candidates" and has made no mention of wanting to fund additional vaccines. During the past several weeks, top governmental health experts have also shown no interest in adding more vaccines.

2) The largest funder of vaccines besides the US is now against giving more funding to other vaccines

The Gates Foundation is the largest foundation in the world, and for the past 20 years its primary focus has been on global health and the development of vaccines. Prior to COVID-19, Gates was the largest funder of vaccines in the world ahead of every foundation and government, including the US. With its massive OWS spending, the US government is now ahead of Gates in funding. But Gates is still the largest non-governmental funder.

Through his foundation, Gates founded GAVI and CEPI, and is also their biggest ongoing funder. CEPI exists to help develop vaccines, while GAVI exists to help distribute them to low-income and middle-income countries. Gates has a large amount of influence over them. For example, the Gates Foundation's confidence in the technology of Novavax was a significant factor in CEPI giving Novavax $384 million (CEPI's largest amount of funding) a few months ago to pay for its phase 1 and 2 trials, and increase its manufacturing capacity.

Several days ago in this video interview with The Economist, Gates notes that there are six leading vaccine constructs (referring to the six vaccines funded by OWS) and says that several of them will succeed. He says emphatically that giving funding for other vaccines is not needed, and that future funding should go towards getting those six out to the world. This interview was widely covered by other news outlets.

Gates saying this carries a big amount of weight with CEPI and GAVI, and I'm sure he's saying the same thing directly to them as well because he wants to see his money used in the best way. It also carries significant weight with the vaccine experts at BARDA and NIH. The latter already seemed very disinclined towards adding more vaccines, and Gates' emphatic position further cements it.

3) The size of the free monetary advantage of the six OWS vaccines

For context, the largest grant the Gates Foundation had ever made for a single vaccine was a grant of $89 million to Novavax for a phase 3 trial. In comparison, the OWS/BARDA grants to the six companies are here (with the percentage higher than the Gates record in parenthesis):

Johnson & Johnson: $1.45 billion (1,630% higher)

Novavax: $1.6 billion (1,800% higher)

Moderna: $2.45 billion (2,750% higher)

Sanofi: $2 billion (2,250% higher)

Pfizer / BioNTech: $1.95 billion (2,190% higher)

AstraZeneca: $1.2 billion (1,350% higher)

On top of those numbers, about half of the six OWS vaccines have also gotten major funding from other sources. For example, AstraZeneca has also received $383 million from CEPI, which puts its total funding at over $1.6 billion. AstraZeneca and Novavax are both benefitting from a $150 million grant from the Gates Foundation for manufacturing of 100 million doses of their vaccines in India.

That makes Novavax's total in funding more than $2.2 billion including its OWS funding, the $384 million from CEPI, $70 million from the US Department of Defense, $15 million from the Gates Foundation for a phase 2b efficacy trial, funding from the Japanese government to help produce 250 million doses, and funding from the UK government to do a pivotal phase 3 trial in September and produce 60 million doses.

Moderna's total in funding is even higher at about $2.55 billion. I think it would be extremely hard for smaller players to try to make up that kind of ground on the six OWS vaccines above.

Gates explained to The Economist that the US was the only country that mobilized large amounts of at-risk investments in vaccine development via its major funding of the six vaccines. Gates founded CEPI and GAVI in Europe, and his focus is on global health. He's not at all a nationalistic US-centric person. So the following quote languishing praise on the US vaccine efforts stood out to me: "All the countries but the US do need to think about: why weren't they able to orchestrate early high-risk money? .... Thank goodness that BARDA ... was there to move things ahead. This was a huge favor that was done for the entire world, and it's done so we can globally take on the challenge," he said.

His comment captures what a huge difference the massive OWS/BARDA funding has made for those six companies, and why immunizing the world has largely become a six-horse race. His phrasing further shows that he's convinced the challenge of getting successful vaccines is over.

Another fact shared by Gates provides additional useful context: US government spending on research and development for a COVID vaccine accounts for 80% of the global total spending on vaccine R & D.

The monetary advantage that this gives the six OWS vaccines is hard to overestimate. It's also had somewhat of a multiplier effect because the ability to spend heavily on R & D and on manufacturing has allowed those companies to ink purchase agreements with other countries, as I'll cover more below.

4) The focus has turned to funding the manufacturing and purchasing of the six OWS vaccines

Devex, a news outlet focused on global development, has put together an in-depth timeline of COVID-related funding. The report notes that funding for development of vaccines peaked in May and June, and then began a major shift to funding of manufacturing and purchasing of the leading vaccines:

The timeline of funding shows that concern around the COVID-19 risk was emerging early — with the urgency reaching a peak between May and June. Now, funding is focused on distribution — and countries are jostling to ensure they are first in line for distribution when a vaccine is approved.

The boom continued in June, adding $12.7 billion. This was led by the $8.8 billion pledged to continue the work of Gavi, the Vaccine Alliance, with a focus on rolling out COVID-19 vaccines in developing countries as discussions became increasingly concerned with access. China also provided a billion-dollar loan to countries in Latin America and the Caribbean to support vaccine access, and the European Union put aside $2.7 billion to procure vaccines for its member countries. ....

July and August have seen a dramatic drop in new funding announcements, which continue to focus on vaccine access and manufacturing. But August has seen an increase in funding being translated into action; contracts and grants have grown with $95.3 million disseminated by Aug. 16 as work turns to preparing for a vaccine rollout.

This is also the reason why Gates opposes further funding of vaccines other than the six OWS constructs: he thinks all money should go towards expanding the manufacturing of the leading six, and towards purchasing doses from them. "We need to finance these constructs so we get them out globally because that's the only way the epidemic ends," he told The Economist. "We all need to spend billions to get the vaccine out to save the trillions that the economic damage is doing."

Gates said that because funders have given so much to the six OWS vaccines to pay for the fixed costs of vaccine trials and developing manufacturing, the marginal cost for many of the companies to manufacture each dose is only $2 to $3. He said this applies to Sanofi, Johnson & Johnson, Novavax and AstraZeneca, but not to Pfizer and Moderna because the latter use mRNA technology that makes it costly to manufacture doses. The point is that it's going to be very hard for other companies to compete with that.

Some focus has also turned to treatments. Over at the NIH, the head of the agency Francis Collins said he has become “obsessed” with NIH’s focus on treatments for COVID-19. He compared it to when he was running the Human Genome Project, but he said that this current product is much more important. He doesn't seem to be at all oriented towards funding new vaccines. The number of treatments they're working on is large and is going to consume a lot of time, money and effort.

5) Agreements with the majority of the major markets have already been done

Countries around the world do not want to get stuck without access to a vaccine, so they are rushing to sign agreements, including purchase agreements for the six OWS coronavirus vaccines. A common agreement is one in which countries agree to purchase a large number of doses as long as phase 3 results are positive and the vaccine is approved.

Countries like the US are doing "at risk" agreements in which they agree to buy a large number of doses even if the vaccines fail. The US is buying 100 million doses of each of the six OWS vaccines for a total of 600 million doses. For the vaccines that fail, the US will safely dispose of the 100 million doses.

As Seeking Alpha and other sources have reported, Japan, Canada, Korea, India, the US and the UK have already made agreements ... plus many small and mid-sized countries. The European Union is well into working on agreements with some of the OWS companies. Most people expect these to occur within the next month. I predict many more of the medium-sized markets will make agreements in the next one to two months.

6) Global manufacturing capacity will also be locked up soon

Moderna is on track to make 500 million to 1 billion doses. AstraZeneca is planning to make 2 billion doses. Pfizer and BioNTech combined expect to make 1.3 billion doses. You can see most of those figures here. But keep in mind that page lists vaccines in order of when they'll likely be done with phase 3, not based on how much share they can get or how good of an investment they are.

Novavax has announced global capacity that adds up to about 2.5 billion doses. 1 billion is through its recent purchase of one of the world's largest vaccine manufacturing facilities in Europe. Up to another 1 billion is through an agreement with the largest vaccine maker in the world, The Serum Institute of India. The Gates Foundation has already agreed to funding for about 100 million Novavax doses from the Serum Institute.

Novavax also has agreements with three FUJI-FILM facilities in the US and the UK to provide Novavax with capacity for up to 700 million doses as needed from those facilities. The top pharma company in Japan (with funding from the Japanese government) has agreed to manufacture and sell 250 million doses in Japan. A major vaccine manufacturer in South Korea has also agreed to manufacture doses that I estimate at 250 million doses. Novavax also is manufacturing in Spain. It's manufacturing in 7 countries in all.

Given the numbers above plus the numbers for the other OWS vaccines, plus the smaller deals already announced by non-OWS companies, I think global capacity is almost completely locked up already. And the remaining small portion will be locked up within another month. This will probably be a major barrier to the smaller players being able to get a sizable piece of the revenues pie.

7) Key experts predict at least one OWS vaccine will succeed, worsening the risk-reward for smaller players

After seeing strong data in trials of the six OWS vaccines, many vaccine experts have gone from being unsure of having a successful vaccine by the end of this year to being confident there will be more than one. In his interview with The Economist, Gates said that he expects that several of the six OWS vaccines will have positive phase 3 results, including some that have efficacy between 80% and 90%.

Moncef Slaoui, chief adviser of Operation Warp Speed, agrees that at least one of the vaccines will have a high level of efficacy. ""I think it will be a very effective vaccine - that's my prediction," he said. "My personal opinion based on my experience and the biology of this virus, I think this vaccine is going to be highly efficacious. I wouldn't be surprised if it's in the 90% [range]."

While the director of the National Institute of Allergy and Infectious Diseases, Dr. Anthony Fauci, said the chances of a vaccine being more than 90% effective are "not great," he said that he is aiming for 75% or higher. He also said that even if there is 50% to 60% efficacy, it will be sufficient to control the virus.

In an August 29th interview with The Times, Fauci said that he expects at least one successful OWS vaccine by the end of December: "I would say a safe bet is at least knowing that you have a safe and effective vaccine by November, December." The four OWS vaccines that are due to have phase 3 results by the end of December are AstraZeneca, Pfizer, Novavax and Moderna.

Some of the six OWS companies have also become more confident in their vaccines based on their data. For example, last week the CEO of Sanofi said the company will have an effective vaccine. "The early data is saying that we’re on the right track and that we have a vaccine," said Paul Hudson. In June he said the company had a solid probability of its vaccine having higher than 70% efficacy. Last week he said: “Our confidence has increased. We have work to do like everybody on manufacturing in large volumes. But we will have one, maybe two vaccines next year.”

Moderna has expressed confidence from early on in the process, though some scientists and former SEC officials have accused it of being excessively promotional or engaging in "highly problematic" potential market manipulation. Moderna CEO Stephane Bancel says there is an 80% to 90% probability its vaccine will have positive phase 3 results.

Novavax generally avoids making predictions and lets their data speak for itself. After its phase one results were released, several analysts said the data showed its vaccine was "best-in-class." On the heels of that top data, CEO Stan Erck has gone from being vaguely hopeful two months ago to being confident their vaccine will work. A few days ago in a European radio interview, he said: "We need to have a vaccine that is safe and effective, and I’m confident that ours will be." He also said he expects that other companies will also have successful vaccines.

I think that the Pfizer/BioNTech vaccine has had the second best data so far with antibody levels more than 300% higher than the levels of people who had significant COVID symptoms and recovered. Novavax had even higher levels of antibodies, plus the serum it compared its immune responses to was from sicker patients, making its major beat of the serum that much more impressive. Anyway, if Sanofi is correct that it will have a successful vaccine, the odds are good Novavax and Pfizer/BioNTech will also.

Fauci also predicted in July that tens of millions of doses will be available at the start of 2021, and that more than one of the six OWS vaccines will be successful: "I think as we get into 2021, several months in, that you would have vaccines that would be widely available,” he said.

In August, Fauci also forecast there would likely be enough successful vaccines and doses from the six OWS vaccines by "well into" 2021 that "anyone" who wants one will get one. Well into a year to me means about 4 to 6 months into it. Gates and others are also saying they expect the US will likely be vaccinated by mid-2021. Most of the smaller vaccine constructs won't be ready to go into phase 3 trials until well into into 2021. Phase 3 trials are by far the most expensive phase: often more expensive than all of the previous phases combined.

The choice by smaller players of whether to do phase 3 trials largely depends on whether a strong market opportunity will still exist by the time their trials are completed. If one vaccine is successful, the market size will be reduced a good amount. If two vaccines are successful, I think the market size will be greatly reduced.

8) Funders are more likely to ramp up production of 1 or 2 successful vaccines than spend cash on new development

I believe major funders such as CEPI and GAVI will sooner give grants to increase manufacturing of a vaccine that is known to work rather than give grants to experiment to see if another vaccine might work. The latter is a significant risk while the former is pretty much guaranteed to have results. In addition, besides adding some new manufacturing, production of the vaccine would be outsourced to other manufacturers whose vaccines failed phase 3.

One caveat is if the only successful vaccine is the Moderna vaccine, there will be a window of opportunity for smaller players to take serious market share. This is because its mRNA vaccine is: a) much more expensive to manufacture, b) they're only building capacity of 500 million to 1 billion doses for 2021; b) most manufacturing facilities and equipment built for more traditional vaccines cannot really be used for mRNA vaccines. So it would be very costly for funders to greatly increase the manufacturing of it, increasing the appeal of funding of new vaccines.

Moderna has said it is costly to ramp up manufacturing of its vaccine. It said it will temporarily reduce its price to "well below value" while the pandemic is not under control. So far, the company has made deals to sell it for $32 to $37 per dose, and indicated it could be somewhat lower for large volume deals. However, it said pricing will increase once the pandemic is under control. On a recent conference call with investors, it said that initial economic studies suggest that the medical savings from a coronavirus vaccine would support a price of at least $300 per vaccination. The costs and prices of the other six OWS vaccines are much lower than Moderna's.

A related factor is that transport, storage and administration of mRNA vaccines is far more expensive and riskier. For example, last week Pfizer informed the Centers for Disease Control and Prevention’s Advisory Committee on Immunization Practice that its vaccine candidates need to be stored at negative 94 degrees Fahrenheit. “These storage conditions would make traditional office or pharmacy administration very difficult,” SVB Leerink analysts said in a note to investors. They said: “These conditions could be met at tertiary hospitals and laboratories and could be accommodated in intensive one-day vaccination events at such sites, but this would still only cover a fraction of the healthy population.”

While Moderna's temperature doesn't need to be as low as Pfizer's, it still needs to be frozen, which makes it more restrictive and much harder to distribute. Professor Toby Peters, an expert in cold chain logistics at Birmingham University, said: "It's not just a vaccine fridge, it's actually all the other pieces too: the pallets which move it in the planes; the vehicles that move it to the local stores, and then the motorbikes and the people who take it out right into the communities. All these have to work seamlessly."

Endpoints News said "The other vaccine approaches, such as viral vector or recombinant protein, don’t tend to require such glacial storage conditions and will likely be easier to distribute when they arrive. Novavax has said their recombinant protein can be kept in a standard vaccine refrigerator."

SVB Leerink analysts agree, "Meanwhile, most protein subunit vaccines—the type being developed for COVID-19 by Sanofi and Novavax, among others—can be held at refrigerated temps for months." The FDA recommends keeping refrigerators at 40 degrees Fahrenheit.

So my caveat applies to vaccines from Pfizer and Moderna, but it does not apply to the other four OWS vaccines. If even one of them has positive results, it would be a sizable negative for smaller players due to the dynamics above. If three of those four have positive phase 3 results, then their combined manufacturing would probably need to be expanded about 50%. But funders would probably prefer that rather than new development.

9) World-wide herd immunity in 2021 would make it unfeasible to do pivotal efficacy trials

When SARS was brought under control, additional trials on vaccines for it ceased. When MERS was contained, the same occurred.

Natalie Dean, PhD, a specialist in emerging infectious diseases and vaccine study design at the University of Florida explains: "While several SARS vaccine candidates were developed, funding dried up to test them further. In addition, there has been no clear pathway for testing the efficacy of SARS vaccine and getting it approved for use. How can we determine whether a vaccine prevents SARS if there is no SARS to prevent? Thus, these candidates have been stalled at earlier stages of development."

Regarding a MERS vaccine, she said: "Along with other researchers involved in the WHO R&D Blueprint, we have discussed potential strategies for a MERS vaccine efficacy trial. But given the relatively low incidence even in high-risk groups (camel workers, their families, healthcare workers), trials could need 100,000-plus participants, which isn't feasible. As a result, there still isn't a clear path forward for testing a vaccine and getting it approved by regulators."

She concludes her Medscape article by saying: "For COVID-19, with widespread transmission and active funding, we should expect large trials to soon begin testing the many vaccine candidates being pursued in parallel. So if one or more of them works, we should be able to figure this out quickly."

As The Economist summarized, Gates predicts "that by the end of 2021 ... a large enough share of the world’s population would be immunised to halt the pandemic in its tracks."

"I think in 2021, it will bring the pandemic to an end," he said of the world's effort to end the pandemic. He said he thinks this will occur in the US and other developed countries by mid-2021.

Gates also said many studies indicate that herd immunity would be achieved if even 30% to 60% of people are vaccinated, due to a few factors. These include some people getting protection from having had the virus and recovered, and some who had past coronaviruses that give them protection from this one. Recent polls have found that 67% to 75% of Americans want to be vaccinated. That is much higher than the 30% to 60% that is probably needed.

The New York Times interviewed 12 scientists who said the percentage needed for herd immunity is probably 50% or less.

Three other factors that will also help to basically reduce it to mild levels are:

A) As death tolls reach more severe levels, some people will become more accepting of social distancing and mask wearing.

B) Higher levels of testing and contact tracing. A number of countries have kept infection rates low simply through increased testing and contact tracing.

C) Low-cost tests that give results within minutes. Medical author Carolyn Barber, M.D., recently wrote in the Scientific American that if the FDA approves $1 to $5 tests already developed by MIT, 3M and other groups, the pandemic would be contained even without a vaccine or contact tracing.

"If everyone made use of such an affordable alternative, we could very quickly get this pandemic under control," she said. "A positive COVID-19 test would mean the individual stays home; a negative test would mean he/she goes to work, or school or practice, or to shop or dine. Under this approach, the prevalence of the virus in the community would drop considerably—and contact tracing wouldn’t be needed, because everyone would already be doing the testing."

To be clear, I'm not talking about eliminating it completely. But simply reducing it to mild levels is enough to make it impossible to conduct phase 3 trials. In addition to being reduced to a very mild level in developed countries, it's plenty possible that by mid-2021 that the transmission rate will be low enough in middle-income countries to make trials unfeasible there too.

Trials in low-income countries are far harder to do for various reasons including a lack of health care systems and insufficient numbers of personnel who are trained to handle clinical trials. Even in those countries, by next spring the transmission rates will be lower than now due to a full year of infections. Plus people in those countries living in close quarters and not being able to afford PPE or hand sanitizer means their infection rates / herd immunity levels should be higher than in middle-income and rich countries.

Once the rich countries reach herd immunity, I expect they will send a large amount of their unneeded testing equipment to poor countries. This means the lower infections rates will probably be coupled with inconsistency. In other words, an unpredictable ebb and flow of rates in which there is a flare-up in one country or one city, but it's fairly quickly detected and contained. A vaccine maker might plan a trial in a poor country, and by the time it starts and they enroll people, the attack rate could go down and make the trial useless.

You might hope that the smaller players can complete their large phase 3 pivotal trials by mid to late 2021. But without the giant amount of funding that OWS gave its six core vaccines, vaccine development usually takes 8 to 12 years for from start to finish. So it seems to me the odds of smaller players getting all the way through to the end of phase 3 trials that quickly is very low.

Be careful with the smaller players

The following information applies to these vaccine companies and the other smaller players not listed here: Valneva (OTCPK:INRLF) CureVac (CVAC), Inovio Pharmaceuticals (NASDAQ:INO), Dynavax (NASDAQ:DVAX), iBio (NYSEMKT:IBIO), Altimmune (NASDAQ:ALT), VBI Vaccines (NASDAQ:VBIV), Vaxart (NASDAQ:VXRT), Heat Biologics (NASDAQ:HTBX), Gamaleya, CanSino Biologics, Sinopharm and Sinovac.

If you are already invested in the other smaller players or are thinking of investing in them, I encourage you to do a re-evaluation of them. In particular, I strongly recommend you deeply examine their non-COVID pipelines plus their balance sheets and base your valuation between 70% and 95% on those kinds of things. In other words, only add about 5% to 30% for the COVID potential. If it were four months ago, their chance of landing major funding like Moderna, BioNTech and Novavax was a lot higher than now.

For the reasons I explained in this article, I estimate that even the best of the smaller players only have about a 1% chance of capturing 10% of the global market. Likewise, their chances of getting more than 20% of the global market are less than 1%. This is because even if only one of the six vaccines that are heavily funded by Operation Warp Speed (OWS) gets approved, I think the major funders probably will sooner put their money into massively ramping up production of a successful vaccine than putting $1.5 billon towards a big phase 3 and manufacturing of a vaccine they are hoping might work.

There will almost certainly be excess manufacturing capacity that was built for the five vaccines that failed. Much of it will be somewhat easy to use for the successful vaccine. A sizable amount of the rest can be converted for use in producing the successful vaccine. I think governments and private funders will put their money towards that. It will be fairly hard for small players to get enough funding for very large phase 3 trials plus developing large-scale manufacturing.

In addition, if a couple of the six OWS vaccines fall a little short of the required 50% efficacy and are in the 40% to 49% range, we may see many countries still buy the vaccine because 40% to 49% is as good as the flu vaccine is many years. Also, I think it's likely those companies would examine their other vaccine constructs and or dosage levels, and put an alternative through a new phase 3 trial relatively quickly.

This is because: a) they will already have developed the other constructs; and b) they will have already developed large-scale manufacturing capacity, so bringing a product to market would take advantage of and leverage money already spent. Whereas a smaller player would be spending new money on that.

If you are going to buy a small player, you might want to do one that is on the CEPI / GAVI list of nine constructs. CEPI has had trouble generating much funding and has been unable to come anywhere near to the spending levels of the US government. But they do at least have some potential to put more money towards development. As I explained earlier, it looks like the US government is done adding any new vaccines to its funding.

However, I would not put too much weight on a vaccine being on the CEPI list. The reasons are: a) CEPI has stated its goal is to have only three vaccines that work, and I think they would settle for two; b) Moderna, Novavax and AstraZeneca are already on the list, and the latter two are getting most of the funding by far from CEPI and GAVI. Those two (plus possibly Moderna) are likely to continue getting most of the attention and funding. c) there are a few other reasons that are covered later in this article.

If you go with the valuation approach above and a COVID vaccine doesn't pan out for the company you invest in, you won't lose much. But if it does pan out, you'll make a nice profit. The challenge is that in order to find a smaller COVID player that's reasonably valued at this point in time is probably going to take you a lot of time because other investors have probably already uncovered most or nearly all of the good deals.

Definitely don't do it just because you read a few comments in discussion forums giving one or two reasons why someone thinks it's a buy. Rather, find out exactly where their products are in the pipeline, how likely those products are to make it past phase 3 and what amount of revenues are they likely to get if they do get approved.

As for my Heat Biologics stake, I took a very small position in it two weeks ago in order to stick my toe in the water and check it out. I haven't had time to really research it so I can't honestly make a recommendation for or against it. However during the last week, I've come to realize how many factors are now working against the small players who haven't gotten massive funding, I've also seen numerous interviews with experts describing where they predict things are headed.

For all the reasons I've detailed in this article, I feel it's not even worth my time to research Heat Biologics. I'm down about 22% now. I exited half of my position at a small loss several days ago when the stock had a rebound. I now wish I had exited it fully. If it rebounds again, I'll sell the rest. But even if it doesn't rebound again in the next week, I'm going to pull the trigger on an exit, no matter how far it is down. I simply don't like to invest in any stock that I haven't read a significant amount of information about and been able to see that it's a good buying opportunity.

If you've already researched a smaller player and have kept up on the latest developments in the vaccine race, and you still are convinced it's a good buy at the current price, then it probably makes sense to hold it. If not, you should likely exit it regardless of whether it's at a loss or a gain. It's generally a bad habit to hold onto stocks like that for more than a couple of weeks simply because you don't like to take a loss. Taking a loss when a stock is no longer a good buy is a good habit and a sign of investing maturity.

I also think the China vaccines and one Russian vaccine will not get a major share of the global sales for multiple reasons that I will describe in-depth in a future article. For the time being, this Reuters article has some details about the downsides that scientists see in the vaccines being developed in China and Russia. The three Chinese vaccine companies are CanSino Biologics, Sinovac, Sinopharm/Beijing Institute of Biological Products.

This article in the journal "Nature" describes a number of scientific, logistical, political and credibility issues that I think will probably prevent the vaccines being created in China from getting much global market share. Also Dr. Fauci has said he doubts the US would accept one of the Chinese company COVID vaccines due to some of these issues. This Bloomberg story describes how Russia has undercut the credibility of its vaccine by very premature approval.

Equally important, the manufacturing capacity of the vaccines of China and Russia are small in comparison to the six OWS vaccines. For example, Sinopharm is only aiming to make 200 million doses in 2021. Sinovac plans to make 100 million doses 2021. By comparison, Pfizer and BioNTech combined expect to make 1.3 billion doses, AstraZeneca is planning to make 2 billion doses and Novavax has capacity on the way for 2.5 billion doses in 2021.

The Russian and Chinese vaccines are slated to have far less participants than the trials for the six OWS vaccines. For example, the vaccine that is the furthest along, by Sinovac, only has a maximum of 9,000 participants in its main phase 3 trial in Brazil. Their other phase 3 has only a maximum of 1,620 participants in Indonesia. The phase 3 for the vaccine by CanSino is only going to have 5,000 participants in Saudi Arabia.

None of them have been able to set up even one small trial in North America. CanSino recently had its planned trial in Canada canceled due to Chinese officials blocking CanSino from exporting the vaccine to Canada. Afterwards, its CEO said that the time for North American trials has “already passed.”

By comparison, all six of the OWS vaccines are expected to do trials in the US involving 30,000 people. A couple of companies are going much further. Novavax is doing two additional phase 3 trials in South Africa and the UK. Novavax's UK phase 3 is testing the vaccine on 9,000 people starting this month with support from the British government. J & J is planning to test their vaccine on an additional 30,000 people in South America.

Conclusion and recommendations

For all of the reasons above, I recommend being very careful about investing in the smaller players. From an investment standpoint, I think all the stocks of the OWS vaccines will go up a lot if they have a positive phase 3. The amount will depend in part on how good their results are, what their valuation was before the good news and how large their manufacturing capacity for 2021 is.

The usual risks of biotech and pharma stocks apply to these names. Nobody has a perfect crystal ball, and everything is a matter of probabilities. If the phase 3 trials of any of the companies fail, they will pull back signficantly. The amount of the pullback will depend in large part on what the rest of their pipeline is like.

Within the six OWS vaccines, the only one I'm bearish on is Moderna. The reasons include: a) its clinical data has been average; b) it's at a big disadvantage on cost and price; c) It's at a moderate disadvantage on distribution; d) It only has 500 million to 1 billion doses of capacity for 2021, much less than the other five OWS vaccines.

I am basically neutral on Sanofli, Johnson and Johnson and AstraZeneca. This is partly because the latter two are not making any profits on their vaccines during the pandemic, which I think limits their upside and is going to keep their share prices very much reigned in. By contrast, the other four OWS stocks will probably go up much higher on the heels of a successful vaccine because very nice profits will soon start showing up in their earnings reports.

After investors see jump the earnings, a mix of euphoria, FOMO, momentum and good technicals will likely drive the prices to stratosphere levels. This is true even of Moderna, so for that reason I don't recommend shorting it nor any other vaccine stock. You could easily lose 300% on shorting Moderna, and 600% on BioNTech and 1,200% on Novavax. They could even overshoot those levels. Sanofi doesn't have as much room to run as those three due to its bigger existing market cap, which is part of why I'm neutral on it as investment. But I think it will run much more than the two without profits.

I'm a little pessimistic about the vaccine of AstraZeneca having good efficacy. But it has a couple of good things going for it including strong COVID manufacturing capacity. Bill Gates has said several times that its vaccine, plus the vaccines of Novavax and Johnson and Johnson are the easiest to scale and can be made for the lowest cost. That is why I don't have Sanofi much further ahead of AstraZeneca and Johnson and Johnson.

I'm moderately bullish on Pfizer and mildly bullish on BioNTech. This is mostly because their vaccine has the second best clinical data overall. But it also has the largest disadvantage on distribution and administration. Its production costs are lower than Moderna's, but higher than the other four. That will affect profit margins somewhat. For BioNTech, a drawback is that its market cap is 2.3 times higher than Novavax's. For Pfizer, I think its valuation is more attractive than BioNTech's. I also like its 4% dividend.

I'm highly bullish on Novavax. Several analysts and scientists have said its vaccine is best in class with the strongest data of any vaccines, and I agree. It has produced very strong immune responses in trials with humans, non-human primates, mice and monkeys. Vaccinated monkeys that were given the COVID virus did not get sick from it, and showed no virus in either their lungs or nostrils.

Novavax has announced manufacturing capacity for 2021 of about 2.5 billion doses, which is 500 million higher than the second highest competitor. It has signed several agreements with countries including the US, the UK, Canada and Japan. Its valuation is the lowest of the six OWS vaccines and provides the highest upside by far. Simply moving to the market cap of Moderna would mean an increase of 4x.

With a successful phase 3, Novavax should move far ahead of Moderna's current price within a few months. In addition to the UK phase 3 trial in September, Novavax will have two other phase 3 trials (in the US and South Africa) underway by October. CEO Stan Erck said results of all three pivotal trials will be known between November and December. So it's within 1-2 months of AstraZeneca and Pfizer.

The consensus price target for it is now $257, which is 133% higher than the current price of $110.3. If it has a successful phase 3, the consensus price target will probably double within a few months and triple within a half year.

Unlike Moderna and BioNTech, the other two small caps in the OWS six, Novavax has a flu vaccine with a successful phase 3 that has blockbuster potential. Named Nanoflu, it beat the leading flu vaccine in head to head trials in both phase 2 and phase 3. The total addressable market is $3.2 billion, and is projected to grow 8% a year for five years. I forecast it will reach at least $1 billion in global sales. Most biotechs are valued at 6 to 7 times sales, so I expect in several years that Nanoflu alone will have a value of $6 billion to $7 billion. Its market cap now is $6.5 billion, so even if its COVID vaccine fails, I expect it to at least return to the same price level in the future with Nanoflu. If a second vaccine in its pipeline also succeeds, the valuation will go much higher depending on its sales.

For those reasons, I recommend having an overweight position in Novavax at the current price, and keep half as a long-term buy and hold. For the other half, take profits in small chunks every 10% higher it goes. If there are pullbacks, buy some back at lower prices. There is a good chance you can make solid money doing this because of the volatility of vaccine stocks that aren't large cap,

For BioNTech, I recommend the same as the above but with a far smaller position because it's already pretty close to fair valuation given its risk and reward. With Pfizer, its large cap so you probably won't end up making much from trading the swings. In sum, I recommend a really small position in BioNTech, double that size in Pfizer and about 8 times that size in Novavax.

For example, if your normal position size is $10,000, you might want to be overweight with $15,000 to $20,000 in Novavax. But reduce it to $7,500 to $10,000 gradually as the price goes up about 60% from the current level that it's pulled back to. Then have about $2,000 to $2,500 in Pfizer and half that amount in BioNTech. Of course, do what you think is best according to your own goals and investing style.

Gates has said several times that he thinks that the vaccines that come later like Sanofi and Novavax will have higher efficacy than the earlier ones. "The initial vaccine, in terms of its effectiveness against sickness and transmission, won't be ideal and may not have a long duration," he explained.

For those reasons, Gates said the earlier vaccines "will mainly be used in the rich countries as a bit of a stop-gap" temporarily until the more effective ones come a little later. He also emphasized that in terms of the number of doses from the earliest vaccines, "we'd be lucky to have much before the end of this year." If one of these vaccines is approved 2 months ahead of another, it will only be able to produce and distribute a fairly small number of doses in that window.

A good metaphor is if a salesperson is carrying 10 meals to a village of 100 starving people. It doesn't matter if he arrives a little earlier than others. There will still be 900 starving people eager to eat. If another salesperson arrives some time later carrying 25 meals, she'll still sell them and have about 150% more sales than the one who arrived earlier.

Thus completing phase 3 a couple of months earlier or later than other companies should not be a significant consideration in your investment thesis. The most important factors are: 1) The clinical data particularly immune response levels; 2) What technology is being used; 3) A company's valuation; 4) How much manufacturing capacity it has in place for 2021 because this is a key determinant of upside; 5) What quantity of doses does it have through purchase agreements with countries and with CEPI/GAVI. 6) What are the storage and distribution requirements of its vaccine.

Disclosure: I am/we are long NVAX, PFE, BNTX, HTBX. 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: While I am currently long Heat Biologics (HTBX), I plan to exit it very soon. I do not have a recommendation for or against it.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.