Novavax's (NVAX 3.55%) investors can't seem to catch a break. The clinical-stage vaccine maker has been down on its luck ever since it released disappointing phase 3 trial results last year for its lead product candidate. The markets responded to the news by wiping away 85% of the company's market cap in a single day. Shares have remained on a downward slide ever since.
The stock recently woke up after management announced that it would be holding a special conference call with investors to share a series of clinical updates. However, despite the mostly positive news, traders dumped the shares as soon as the results became public.
So, if the news was good and the share price fell, is it a good time to consider getting in?
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First, some background
Novavax's lead product candidate is called RSV F and it is a hopeful vaccine for respiratory syncytial virus (RSV). RSV is a major health problem worldwide as 64 million people catch this virus annually. Thankfully, most healthy adults can easily battle their way through the disease on their own. However, infants and the elderly often have weakened immune systems that make it much harder to properly fight the disease. As a result, around 160,000 deaths in total are attributable to the RSV. Given the huge unmet medical need, some estimates believe that developing a successful RSV vaccine would lead to billions in annual revenue.
Researchers have spent decades on this problem but have consistently come up short. That's why hopes were running high when Novavax announced upbeat data from a phase 2 trial studying its vaccine in older adults. The data showed that using Novavax's vaccine successfully reduced the number of patients who experienced severe forms of the virus by 64%. The results were so encouraging that the Bill & Melinda Gates Foundation awarded Novavax with a grant worth up to $89 million to support further development of the product. These updates gave the company confidence to push forward with a phase 3 trial.
Unfortunately, Novavax failed to repeat that early success in its much larger phase 3 trial. Data from the much larger study showed that its RSV F vaccine failed to outperform a placebo when used in older adults. While management blamed the poor results on a much lower disease attack rate than what was observed in the phase 2 study, that excuse fell on deaf ears. The shares imploded.
Reasons for optimism
Despite the huge setback, Novavax still firmly believes in its RSV F vaccine's potential. In a recent conference call with investors, it shared a number of clinical developments.
First, it said that it is still pushing forward with its phase 3 Prepare study. This trial is testing the vaccine's use in infants via maternal immunization. While data won't be available for quite some time, management confirmed that patients are being actively enrolled at 80 sites in 11 countries.
Second, the company conducted a post-hoc analysis of its disappointing phase 3 trial results in older adults and found that the RSV F vaccine "was associated with a 61% reduction in hospitalizations due to chronic obstructive pulmonary disease (COPD) exacerbations." This suggests that the product still could be useful in treating older adults. To find out, Novavax is planning a phase 2 trial to study its vaccine and COPD next year. Management believes this could be a $1.5 billion global market opportunity. CEO Stanley Erck even suggested that the data puts it in a good position to find a partner.
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Finally, top-line data from the recently completed E205 study showed that adding both aluminum phosphate and the company's proprietary Matrix-M adjuvants to the vaccine "significantly increased the magnitude, duration, and quality of the immune response" when compared to the formulation used in its failed phase 3 trial. What's more, it also found that using a two-dose regimen of the product leads to a significantly increased immune response. This knowledge could lead to better clinical outcomes in future studies.
Reasons for caution
While these updates sounded good, the market reacted harshly to these updates by selling off the stock. That reaction suggests that there are still plenty of reasons to be concerned about this company's future. I think that skepticism makes sense for a few reasons.
First, the disappointing phase 3 trial results are still lingering in the air. Since that trial was costly and produced results that whiffed across the board, it is understandable why traders remain worried about the drug's future.
Second, in spite of parting ways with 30% of its workforce last year, Novavax is still losing money hand over fist. Last quarter, those losses totaled $44 million. That's a scary number when compared to its cash balance of only $211 million as of March 31. If this spending rate persists -- let alone rises to accommodate additional clinical plans -- then Novavax will soon be in need of a big cash infusion. That's going to be tough to pull off since it already has $316 million in debt on its balance sheet. In addition, the pummeled stock price means that an equity raise would be extremely dilutive.
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Finally, while a partnership for the COPD opportunity would be a huge positive for Novavax, it is hard to judge its odds of success. Given the vaccine's clinical history and Novavax's worrisome financial situation, I think it is fair to say that management wouldn't have the upper hand in a negotiation.
Should investors buy the dip?
While I recognize (and hope) that the company's RSV F vaccine could still be a winner, I think there are ample reasons to remain cautious. I also have a hard time seeing how it will be able to shore up its balance sheet without significantly diluting shareholders. For those reasons, my plan is to continue to root for Novavax's stock from the sidelines. I'd suggest that potential investors do the same.
