Novavax's Big Disappointment -- What's Next?

The failure of a key late-stage trial studying Novavax's (NVAX) vaccine for RSV, a common respiratory virus, casts significant doubt on the company's future. Is Novavax's future dim?

In this clip from The Motley Fool's Industry Focus: Healthcare podcast, analyst Kristine Harjes and contributor Todd Campbell discuss the impact of this trial on the company and what the disappointment means for investors.

A full transcript follows the video.

This podcast was recorded on Sept. 21, 2016.

Todd Campbell: Novavax was an intriguing -- well, it's still intriguing, but it's much less intriguing after they reported phase 3 data from a study that was evaluating a vaccine targeting something called RSV, a very common viral infection that can be dangerous in elderly patients and very young patients. So, patients that you could argue are immunocompromised.

Kristine Harjes: Right. RSV is actually the second leading cause of death in children under 1 year old. It affects about 4 to 5 million children just in the U.S. alone. There are about 2.4 million adults over 65 that are affected. Novavax was looking to make a vaccine for this very common virus. You would think, if it was that prevalent, it was probably going to make a lot of money. So people were very excited about Novavax, and ultimately really disappointed, as we mentioned. They were down 84% when it was reported that, pretty much, the vaccine does not work.

Campbell: Yeah. Investors were very hopeful. Developing vaccines is hard and expensive. It involves trials that include thousands of patients, and multiple years. So people had really a lot at stake for this company, and they had bid the market cap on this company up into the multiple billions of dollars, with the view that basically, they were doing a study that theoretically would allow for vaccinations of every elderly person over the age of 70. There are 76 million baby boomers out there. Novavax was estimating that if this study had panned out, its vaccine could be used in up to 100 million seniors per year. That's an astounding figure. They were throwing around numbers as high as $6 billion per year in peak annual sales. So the fact that this trial failed, obviously, was a devastating blow to the company.

Harjes: I think it's also a pretty good reminder about the statistics that happen in the background behind these studies. If you look at their initial smaller trial, it was 1,600 people, and half of them got the vaccine, half of them got a placebo, and the results were just barely statistically significant. So they reported that there was a P value of 0.041. What that means is there is a 4.1% chance that the difference between the two groups of patients occurred just by chance, and there's not actually something meaningful going on with the vaccine. It turns out, that was the case. When you get to the bigger trial, you have pretty much even results between people who showed signs of infection who had been taking the vaccine, and those who just got the placebo. It's a good reminder for investors that when you see studies that are just barely passing the mark of statistical significance, that's a little bit of a reason to be nervous.

Campbell: Right, and it's also a good reminder to investors to look at -- last August, this company's management came out and said, "Hey, look what we've done in phase 2, the 1,600-person study. We've successfully met our endpoint." And without doing the due diligence and digging a little bit deeper like you're suggesting, people were taking that at face value and thinking, "OK, great! You expand this out to more patients and prove that this thing works in more patients. It's a no-brainer. Get this thing on the market, and let's make some money." You need to take smaller phase 1 and phase 2 trial results with a very big grain of salt, recognizing that phase 3 trials still have a very high failure rate. I think I've seen in the past studies showing that failure rates in phase 3 can run from 30% to 40%. That's a significant failure rate. So you may have succeeded in phase 1 and succeeded in phase 2, but that does not guarantee you will succeed in phase 3.

Harjes: Exactly. Now, Novavax, looking forward, they're trying the vaccine in healthy pregnant women to prevent the virus in the infants that are then born. They also have a flu vaccine and an Ebola vaccine that are both very early stage. There's really not much left with this stock.

Campbell: The value, potentially, in this stock now, in my view, is that study that's being done in pregnant women. But I think the completion data on clinicaltrials.gov for that trail is something like 2020. I don't know if we get interim results before then, but theoretically, we're talking a while before we know whether or not this vaccine can be saved and still have an application that's worthwhile. Even though the stock is trading at only $1-something per share, investors have to realize that it still has a $444 million market cap. This is not a company that is valued at $50 million or something. It's still carrying a $444 million market cap, and it doesn't have a drug that's likely to make it out to market now for at least a couple more years.

Harjes: Yeah. Neither of us is trying to catch this falling knife.