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Buy Novavax After Its Latest Pullback?

By Keith Speights – Apr 17, 2018 at 6:33AM

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Novavax has a couple of promising experimental vaccines. But could even more dilution be around the corner?

Novavax (NVAX -10.14%) stock was up nearly 70% year to date early last week. Then came the biotech's announcement on Wednesday that it would sell stock in a public offering to raise cash. It didn't take long for Novavax to give up a big chunk of its previous gains.

Do investors looking to buy Novavax on the cheap now have an opportunity to do so? Or is it better to hold off? Here's what you need to know about where things currently stand for Novavax -- and what could be in store for the clinical-stage biotech.

Medical professional holding syringe in vial

Image source: Getty Images.

About that stock offering

Novavax's stock offering shouldn't have been a surprise. I wrote in early March that I expected a stock offering would be on the way soon. That prediction was an easy one. Novavax didn't have enough cash to fund operations through the end of 2018. The stock was trading near its 52-week high. A stock offering made sense.

What might have caught some by surprise was the price tag for Novavax's stock offering. Before announcing the stock offering, the biotech's share price was $2.08. Novavax, however, priced the offering at $1.65 per share -- a 20% discount.

There are several things I think investors should note with the stock offering and its impact. First, the timing was quite good. Sure, Novavax would probably have been better off to sell more of its stock a month or so earlier. However, putting deals together with underwriters takes some time. 

Second, a decline in the share price was to be expected. It would have been much more surprising if Novavax stock didn't drop after the stock offering. The company is issuing over 30 million new shares, with an option for the underwriters to buy another 4.5 million or so shares. That's roughly 10% of Novavax's previous number of outstanding shares.

Third, it's not unusual for a clinical-stage biotech issuing such a block of new shares to set a price tag that reflects a larger discount than the effect of dilution would cause. It comes down to the laws of supply and demand. Assuming relatively constant levels of demand for Novavax stock, adding to the supply of available shares results in a lower price.

Catalysts on the way

Aside from the effect on Novavax's share price from the public stock offering, nothing about the prospects for the biotech have changed. Novavax still has several catalysts that should be on the way. 

Novavax expects to report an interim analysis for a late-stage study evaluating its respiratory syncytial virus (RSV) vaccine for maternal immunization of infants by early 2019. The risk of failure in this study has been lowered to some extent by the company's previous report of an informational analysis conducted by the independent data safety monitoring board that indicated an efficacy of at least 45%. If the results from that late-stage study are positive, Novavax plans to submit for approval of the RSV vaccine by late 2019 or early 2020.

The company also plans to advance its nanoparticle-based influenza vaccine, NanoFlu. Novavax reported encouraging phase 1 clinical study results for NanoFlu earlier this year. The next step is to begin phase 2 testing of the vaccine this fall. If all goes well in phase 2, Novavax should be able to move NanoFlu to a pivotal late-stage study in the second half of 2019.

Time and chance

Is Novavax a buy after its latest pullback? The answer depends on time and chance.

Time is important, because Novavax continues to lose a lot of money. The company reported cash, cash equivalents, and marketable securities of $157 million at the end of 2017. Novavax is raising gross proceeds of roughly $50 million with its latest stock offering. How much time does the biotech have before it will need more money? Probably around a year. 

The problem is that Novavax can't wait until the last minute to conduct another stock offering. I suspect the company will have to raise more cash before it announces results from the late-stage study of the RSV vaccine. 

Chance is even more important for Novavax. There's no guarantee the RSV vaccine or NanoFlu will be successful. The odds of a vaccine in phase 2 development (like NanoFlu, assuming it gets the go-ahead to advance) ultimately winning approval are less than one in four. On the other hand, vaccines in phase 3 such as Novavax's RSV vaccine have close to a three-in-four chance of winning approval, based on historical data. 

I think the company has a decent shot at being successful over the next few years. But it's certainly prudent to note that Novavax likely will need to raise more cash in the not-too-distant future. Waiting for that seemingly inevitable move before buying shares isn't the same thing as trying to time the market, in my view. However, there is a risk with waiting: It's possible Novavax stock could increase significantly between now and the time the company dilutes its shares again.

Remember, though, Novavax is still speculative for now. Investors with a long-term mindset might want to consider buying a small position in Novavax, but don't risk more than you're willing to lose. 

Keith Speights has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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