Yesterday, next-generation vaccine maker Novavax (NVAX -4.72%) saw its shares jump by an astounding 71% on nearly 24 times the average daily volume. Investors bid up this small-cap biotech stock in response to the spread of a deadly respiratory virus (a type of coronavirus) from China to other parts of Asia, as well as to the United States.
Novavax's strong showing yesterday was fueled by the company's announcement that it had initiated the development of a vaccine specifically designed to combat the Wuhan version of the coronavirus in question. However, the vaccine maker also rolled out a prospectus supplement after the closing bell authorizing the issuance and sale of up to $100 million of common stock through the sales agent B. Riley FBR. Predictably, Novavax's shares dropped by 11.4% in after-hours trading Tuesday evening on the heels of this sizable capital raise.
Should aggressive investors buy this red-hot biotech stock right now, or is it best to watch this story unfold from the sidelines? Let's break down Novavax's near-term outlook to find out.
Novavax's pros and cons
The first question to consider is whether yesterday's huge spike in Novavax's share price was even justified. The answer, unfortunately, is probably not. By the time Novavax -- or any vaccine developer for that matter -- develops a vaccine for this specific viral strain, the threat will almost certainly have evaporated. In fact, it would probably take an unprecedented disease epidemic for U.S. regulators to green-light a vaccine that hasn't gone through rigorous clinical trials for general use. As such, Novavax's rather timely announcement that it was working on a new coronavirus vaccine candidate likely means nothing from a value creation standpoint. The biotech's stock may have trouble holding onto yesterday's massive gains, especially with a $100 million share offering now in the mix.
On the plus side, Novavax's experimental flu vaccine, NanoFlu, is on track to produce top-line data by the end of the first quarter. Now, this upcoming trial data could prove to be the real deal from a value creation standpoint. Although Novavax would have to square off against pharma titan Sanofi for a share of the $4 billion global flu market, the fact of the matter is that the company would only need a small slice of the pie for this product to be tremendous growth driver. Underscoring this point, Novavax's market cap still stood at only $315 million after yesterday's big jump. That's a drop in the ocean compared to the enormous size of the annual flu vaccine market.
More room to run?
Over the next few weeks, Novavax's shares will more than likely revert to the mean. This coronavirus vaccine candidate news is essentially a non-event for shareholders. Vaccines, after all, tend to have rather lengthy developmental timelines. Moreover, it's generally difficult for small-cap biotech stocks to build momentum in the face of large capital raises like the one Novavax announced yesterday. Put simply, there should be a far more attractive entry point soon enough. So if you're interested in building a position ahead of the upcoming NanoFlu data, it might be a good idea to wait for the likely pullback.