- Novavax, Inc. bounced on hype while the prospects from the business continued to dim with the demand for Covid vaccines.
- The small biotech has major doubts about the financial picture of the company considering the massive operating expense structure built up to produce Covid vaccines.
- Novavax stock remains a Sell due to like further dilution ahead and no logical path to profits.
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Following a going concern proclamation from the company, Novavax, Inc. (NASDAQ:NVAX) had bounced over 50% of the lows to over $9. The biotech faces a problematic year as demand for Covid boosters dries up and the company has a major mismatch with their current expense structure. My investment thesis remains Bearish on the stock as investors await Q1 results in mid-May.
Where Are Sales
The big question with Novavax is whether the small biotech can transition into the commercial Covid vaccine market. All of the sales boost from the last couple of years was related to overwhelming demand for Covid vaccines that Moderna, Inc. (MRNA) and Pfizer Inc. (PFE)/BioNTech SE (BNTX) couldn't fulfill.
If consumers and health organizations can choose the vaccine maker, one has to seriously doubt how many will chose the Novavax vaccine. TD Cowen analyst Brendan Smith concurred with this view that Novavax will struggle in the commercial market due to lagging the mRNA platforms in brand recognition. The analyst made the following statement when finally downgrading Novavax to a Market Perform rating with a $10 price target:
This could delay a potential US rollout behind mRNA boosters from Moderna and Pfizer/BioNTech in the fall, both of whose commercial franchises are already bolstered by significant name-brand recognition
The competitive landscape is a major issue with analysts only forecasting minimal revenue in the 1H of the year. Analysts have the company producing the following quarterly sales in 2023.
Management appeared to suggest limited to no Novavxovid sales in the 1H of the year. Back in February, the U.S. Government signed an agreement for a minimal 1.5 million doses of the Covid-19 vaccine for the upcoming 2023/2034 vaccine season.
Just in April, President Biden signed legislation to end of the Covid-19 pandemic reducing government support for vaccine makers. Since the vaccine has only been authorized for emergency use by the FDA, Novavax will need to obtain FDA approval going forward with the government ending the emergency use.
In addition, Novavax faces a lawsuit from Gavi facing up to a $700 million hit placing a big hole in the balance sheet. The basis of the lawsuit is a dispute over a supposed non-refundable advance payment of $350 million from Gavi back in 2021 and an additional $350 million last year for Novavax to provide vaccine doses available to COVAX before the end of 2022.
Harmed By Vaccine Approval
The ironic part of the Novavax story is that one can now argue the stock and company was potentially harmed by the emergency approval of Novavxovid. The previous management team ramped up spending to meet the high demand for Covid vaccines at the time and has now left the company with massive losses due to the elevated spending levels based on the original vaccine success.
When announcing the plans to deliver an updated protein-based vaccine based on FDA recommendations, the Chief Communications Officer appeared to signal a plan based on Novavax being an alternative solution versus the leading vaccine solution:
Offering vaccine choices - and ensuring continuous access to those choices - must be at the center of any strategy to protect public health against COVID-19
In Q1, new CEO John Jacobs confirmed already slashing $50 million in costs, but the biotech was still forecasting to run at a $1.5 billion annual expense rate. In addition, Novavax still needs to get the annual Covid vaccine approved for this Fall and the company might need additional funding for the Covid/influenza combination shot depending on the strength of upcoming data.
The problem for shareholders is that the biotech is just hanging on with a vaccine the U.S. Government potentially wants to keep around as a worst-case scenario. As of now, Novavax isn't being rewarded with this position.
The biotech has a cash balance of $1.3 billion entering 2023. By the time the current quarter ends, Novavax could be looking at the cash balance cut in half with the going concern question based solely on whether the company wins the case with Gavi.
Based on the limited revenues, Novavax would burn up to $350 million in cash during Q1'23 alone. A similar amount in Q2 would leave the small biotech with a cash balance dipping to only $600 million, below the $700 million lawsuit.
The biotech has a promising $2.1 billion left in committed APAs with the EU for 2023 and 2024. The big question is what Novavax has after these committed doses with Covid demand waning. In fact, analysts only forecast the company delivers $1.75 billion worth of revenue over this period while still producing large losses suggesting doubt on whether these commitments are met.
With Covid turning into an annual vaccine, management must provide a path to profits with the Q1 earnings report in May.
The key investor takeaway is that Novavax, Inc. is under major pressure to resolve the financial hole the company finds itself after ramping up expenses to produce Covid vaccines. The current prospects leave the biotech needing more funding to pursue a promising Covid/influenza combination vaccine leading the biotech back in the perpetual hole of diluting shareholders.
Investors should avoid Novavax, Inc. stock until a path to profits exist.
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This article was written by
Stone Fox Capital (aka Mark Holder) is a CPA with degrees in Accounting and Finance. He is also Series 65 licensed and has 30 years of investing experience, including 10 years as a portfolio manager.Mark leads the investing group Out Fox The Street where he shares stock picks and deep research to help readers uncover potential multibaggers while managing portfolio risk via diversification. Features include various model portfolios, stock picks with identifiable catalysts, daily updates, real-time alerts, and access to community chat and direct chat with Mark for questions. Learn more.
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