Shares of Novavax (NASDAQ:NVAX), a recombinant nanoparticle vaccine and adjuvant developer, have been struggling to find a bottom ever since the late-stage failure of the company's experimental respiratory syncytial virus (RSV) vaccine candidate for older adults. The long and short of it is that investors have largely lost faith in the company's ability to develop a commercially viable product. 

On occasion, however, it can be extremely rewarding to take a contrarian position, especially in the volatile biotech space. That being said, I think investors may want to stick with the prevailing negative sentiment when it comes to Novavax. Here's why. 

A man's hands sweeping a pile of hundred dollar bills across a table.

Image Source: Getty Images.

Big promises with no follow-through 

It may come as a surprise to some that Novavax has actually been around since 1987. Even so, the biotech has never developed a commercial-stage product. That's both a testament to just how difficult it is to strike gold in the vaccine space, and a knock against Novavax's leadership. Three decades without a commercial-stage product is a bit excessive, after all. 

The company, however, has been awfully good at convincing investors to buy stock based on the promise of future products that could, at least in theory, achieve megablockbuster status. The RSV space, for instance, has long been the holy grail of vaccine development because of the massive size of this market and the magnitude of the unmet medical need.

Put simply, a successful RSV vaccine that can effectively prevent infections in elderly adults and infants could possibly generate sales that might even top Pfizer's top-selling pneumococcal vaccine franchise, Prevnar. A RSV vaccine, after all, has long been considered to be a cost-effective way to lower the enormous financial burden associated with hospitalization in these two "at-risk" demographics.

Yet a clinically validated RSV vaccine has never materialized. In fact, Novavax's late-stage flop in RSV was completely in line with the disappointing trajectory of this field for the last five decades. In other words, this trial was always an extreme long shot based on historical precedence, even if the market -- at least for a brief period -- believed otherwise. 

Although it's arguably rather noble to pursue indications that have proven to be a black hole for clinical candidates, Novavax's business strategy of targeting such diseases hasn't been kind to investors. Since its inception, the company has repeatedly diluted shareholders, resulting in a whopping 377,052,036 shares of common stock outstanding after its latest offering only a few weeks ago.

Here's the tale of the tape to drive this point home:

NVAX Average Diluted Shares Outstanding (Quarterly) Chart

NVAX Average Diluted Shares Outstanding (Quarterly) data by YCharts

What's next?

Novavax is currently attempting to convince investors that its next RSV vaccine candidate for infants, along with its experimental flu vaccine NanoFlu, have what it takes to finally transform the company into a commercial-stage entity.

While management could be right, the company's track record shouldn't be taken lightly by potential investors. The fact is that Novavax will need to dilute shareholders again to advance these vaccine candidates toward a regulatory filing, and the company simply hasn't shown any ability to achieve this all-important milestone in the past. 

Dilution is a necessary evil when it comes to clinical-stage biotechs, and early shareholders tolerate it because the payoff can be huge. Novavax, however, has crushed its early shareholder base, and there's no compelling signs that this time will be any different. That's why you may want to stick to the sidelines with this particular name for now.