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Novavax Stock Upgraded: 3 Things You Need to Know

By Rich Smith - Updated Oct 31, 2017 at 1:18PM

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'Tis the season for cold and flu stocks.

Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope.

At long last, the leaves are changing colors. There's a chill in the air, trick-or-treaters on the streets, and on Wall Street in particular, it's time to start picking flu vaccine stocks.

At least, that seems to be how Citigroup sees things. This morning, the megabanker announced it is upgrading shares of flu vaccine R&D specialist Novavax, Inc. (NVAX -1.17%). Not only that, but Citigroup is assigning Novavax stock a $1.60 price target, which implies 45% upside for investors who buy this $1.10 stock today.

Here are three things you need to know.

H1N1 influenza virus

Enemy close! Novavax vaccines are taking aim at the flu virus. Image source: Getty Images.

1. What Citigroup said has the details. Citigroup believes that investors are underappreciating Novavax's new NanoFlu, a nanoparticle-based flu vaccine currently undergoing phase 1/2 trials in search of Food and Drug Administration approval. According to Citigroup, data on these early trials should arrive sometime before the end of this year. Feedback from the FDA can be expected as early as the first quarter of next year.

Either or both of these news events could move Novavax stock positively if the news is good. As the analyst explains, "superior flu vaccines are in demand," creating "strong market opportunities" for products that prove their effectiveness.

2. What products does Novavax offer?

Novavax has several potential products that could meet this demand and capitalize on these opportunities. As fellow Fool Keith Speights explained in September, Novavax currently has three clinical trials underway with the FDA for its respiratory syncytial virus fusion (RSV F) flu vaccine. These are in addition to the NanoFlu study.

How big could these new drugs get? Keith cites the example of French drug giant Sanofi, which pulls down $1.6 billion a year in sales of its own several flu vaccines, arguing that Novavax's NanoFlu in particular, "could be in good position to take a significant share of the flu vaccine market."

For a company like Novavax, which did barely $15 million in revenue last year and whose entire market cap is just $350 million, that's an exciting prospect.

3. What risks does Novavax bring?

And yet, Novavax stock is hardly a sure thing. With little to no revenue to support it, Novavax is losing money and burning cash at the rate of more than $200 million per year. True, the company has more than $187 million in the bank today, but at the rate it's burning money, that cash won't suffice to keep it running for even a year.

Meanwhile, with none of its highest-profile flu vaccines any further along than phase 2 trials, Novavax is less than halfway through the FDA approval process, and probably still at least three years away from bringing any product to market.

Translation: Unless it does something soon, Novavax will almost certainly run out of money before it brings a product to market. Even if it ultimately succeeds in developing FDA-approved flu vaccines, Novavax must raise a lot more cash to fund their development.

What that means for investors

In one word: dilution. To raise the money it needs, Novavax will almost certainly need to go through multiple rounds of issuing new stock and diluting existing shareholders along the way.

Now, does this mean that Citigroup is wrong to recommend Novavax stock, that the company is doomed to fail, that its stock is a dog? Not necessarily, no. But investors do need to be aware that the Novavax stock that Citigroup is recommending today may not look much like that of a company that eventually brings a product to market. Over future years, Novavax's share count is likely to get much bigger, and its eventual (and hypothetical) profits more spread out among those many more shares.

Unless you keep that fact fixed firmly in mind, you're not "investing" in Novavax stock -- you're speculating.

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Novavax, Inc. Stock Quote
Novavax, Inc.
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