Julian and Felix Baker of the $15.6 billion hedge fund Baker Bros. Advisors are well-known for their uncanny ability to unearth hidden gems in biotech and biopharma. So when I noticed that the dynamic duo purchased a noteworthy 2 million shares of the beaten-down vaccine maker Novavax (NVAX +0.86%) in the second quarter of 2017, it piqued my interest to say the least.
The Baker Bros., after all, have repeatedly picked some of the top-performing biotech stocks over the past six years, and they've also successfully mined the ultra-risky landscape of clinical setbacks to produce some truly astounding gains.
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Acadia Pharmaceuticals (ACAD +5.11%), for example, has proven to be an outstanding growth vehicle since the fund first bought it in 2010 (up over 9,600%), even though Acadia's Parkinson's disease psychosis drug, Nuplazid, initially missed the mark in late-stage testing.
Novavax, for its part, has seen its shares lose over 90% of their value since August 2015 due to an extremely poor showing of its experimental respiratory syncytial virus (RSV) vaccine in elderly adults in a late-stage trial last year. The vaccine, if approved, is widely believed by industry insiders to be capable of producing several billion in sales. But this pivotal-stage failure suggests that it may not have the efficacy profile to ever garner a regulatory approval for this key indication.
Even so, the Acadia Pharmaceuticals example clearly shows that even drugs with a problematic clinical history can make remarkable comebacks when the appropriate changes are made in future trials. So, based on this insight, let's consider if average investors should take a cue from the Baker Bros. when it comes to Novavax and its experimental RSV vaccine.
RSV is a monstrous commercial opportunity
Novavax's experimental RSV vaccine is targeting approximately 4 million infants and 65 million elderly adults in just the United States. So if the company decided to price its RSV vaccine along the lines of, say, a typical flu shot (roughly $50 per dose) -- which is well below the price point of most other vaccines like Pfizer's Prevnar 13 or GlaxoSmithKline's Engerix-B -- this product could achieve blockbuster status with only a 30% penetration rate, thanks to the enormous size of its target markets.
Both Novavax and industry insiders, however, think this particular vaccine could far exceed even $1 billion in annual sales. Using a more likely price point that mimics other more specialized vaccines such as Prevnar 13 and Engerix-B, for instance, the numbers easily suggest that even $6 billion isn't an unrealistic peak sales estimate across both of its proposed indications (infants and older adults). That's a truly astounding figure, especially for a company with a market cap of around $324 million at the moment.
Can Novavax cross the finish line?
Whether Novavax can push its RSV vaccines across the goal line for either of these high-value indications, though, is another matter altogether. The vaccine's mid-stage data in pregnant women and elderly adults, after all, wasn't exactly awe-inspiring. The p-values of these trials were both only marginally significant, and those data were the basis for its late-stage program that now hangs in the balance.
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Worse still, the vaccine's first pivotal-stage trial in older adults was an utter disaster, with a p-value of 0.78. Point blank: The clinical data so far doesn't paint a compelling picture of the vaccine's ability to reduce symptoms associated with RSV, even though the company has repeatedly suggested otherwise during investor presentations and press releases.
Equally as important, the company's operating cash flows (negative $193 million over the past 12 months) and last stated cash position ($187 million) suggest that it may need to raise capital in a big way within a year's time. In fact, there's no clear financial path for the company to actually execute the necessary changes to the vaccine's elderly adult program at this time without either a partner or a value-destroying secondary offering.
Unfortunately, a sizable secondary offering would also put the company's stock at risk of being delisted on the Nasdaq due to the exchange's minimum bid requirements (> $1 per share), implying that a secondary may not be a realistic option.
Novavax: Buy or avoid?
There's no question that if Novavax can somehow change the trajectory of its RSV program, its stock could mimic even the jaw-dropping gains of Acadia Pharmaceuticals. But the fact of the matter is that no deep-pocketed partner has yet to step forward to offer Novavax a much-needed lifeline, which seems to reflect the industry's dire view of the vaccine's prospects moving forward.
So while the Baker Bros. may have indeed picked another diamond in the rough, there's no compelling reason -- at least to outsiders like myself -- to think that a comeback is likely at this stage. Put simply, Novavax's stock shouldn't be viewed as an investment, but rather a flat-out gamble based on all available evidence regarding its core RSV program. And that's not a particularly Foolish way to put your capital to work.
Thus, I think this penny biotech stock just isn't worth buying right now -- but its tremendous value proposition perhaps does merit making it a watchlist candidate.
