Novavax (NASDAQ:NVAX) has had a phenomenal run since I bought shares in the fall. Overall my cost basis is $6 per share; right now the stock is trading hands at $48 per share.

What's fascinating, and a little scary, is that the dramatic stock increase has almost nothing to do with my original investment thesis. The reason why I bought Novavax: influenza. Novavax had a strong vaccine candidate in phase 3 trials, and the flu vaccine is a $5 billion market opportunity.

What I didn't know at the time was that COVID-19 would strike, putting much of the world into lockdown mode, and sending some small biotech stocks into the stratosphere. That's why shares have run up so high: Novavax has developed a potential vaccine for COVID-19, and it's starting clinical trials in humans.

A person administers a vaccine

Image Source: Getty Images

Speculation or savvy investment?

When a stock goes up 700% in seven months, you might imagine there are emotions involved. Novavax has jumped so high so fast because COVID-19 has caused a major, almost unthinkable shift in our world. Some experts even say we should stay in lockdown mode until a vaccine is produced and widely distributed.

Well, historically it takes seven years -- or more -- for the U.S. Food and Drug Administration (FDA) to approve a vaccine. Obviously, Americans can't spend seven years hiding away. Because this is an emergency situation, health authorities are rushing COVID-19 vaccines into human trials right now, and are trying to get these drugs to market as soon as possible.

Novavax's vaccine candidate is starting its phase 1 trial in Australia with 130 participants. The company expects to announce trial results in July. That is shockingly fast. Of course, positive results could send the stock skyrocketing (again); bad news might send the stock crashing.

For investors, what's interesting is how quickly this product might hit the market. Novavax is already planning a follow-up trial to begin in August. And the biotech is already getting manufacturing in place for emergency use. The company estimates it will be able to ship 100 million doses of a COVID-19 vaccine by the end of the year, and 1 billion doses by the end of 2021.

Novavax can afford to spend all this money on an unproven vaccine because the Coalition for Epidemic Preparedness Innovations (CEPI) gave the company $388 million to continue to develop it. It's basically free money for Novavax. So that's why Novavax can start setting up a phase 2 trial, and manufacturing facilities, even before the data comes in from the first trial.

Best-case and worst-case scenarios

The best-case scenario is rather amazing. Consider how much economic damage COVID-19 has wrought in our world, which is likely to be in the trillions of dollars. So, yes, a working COVID-19 vaccine would be incredibly valuable. Governments would pay a lot of money to get a vaccine on the market, so economies can reopen and people can get back to work. The market opportunity is sky-high.

In the best-case scenario for investors in Novavax, it brings the first vaccine to market or has the highest success rate in clinical trials -- or both. The company is prepping for 1 billion doses to be shipped during 2021. Obviously, prices would have to be negotiated. But the opportunity is clearly vast -- far bigger than the typical $1 billion blockbuster drug.

Consider too that a COVID-19 vaccine is potentially a much larger market than a COVID-19 drug that treats people who have caught the virus. There are whole societies anxious about COVID-19, and many healthy people who want to be vaccinated. The worldwide market for flu vaccines is $5 billion. Most people are far more frightened by COVID-19 than by the flu. And that fear translates into a sizable market opportunity.

So that's the best case: Novavax is early to market, and it has a superior COVID-19 vaccine. Suppose the company charges $100 for its vaccine and distributes 1 billion doses in 2021 as it said it could. That would bring in at least $100 billion. Right now, Novavax has a market cap of only $3 billion.

As for the worst case, that's easy: The vaccine fails a clinical trial. That happens all the time, to the smartest biotech scientists. And there should be little doubt what could happen to Novavax's stock if its COVID-19 vaccine fails in clinical trials -- it could crash, big time. It might be one of those horrific 70% drops that happen all the time in the biotech universe.

Don't forget the flu drug

On the other hand, Novavax investors have a wonderful safety net. Suppose the worst-case scenario comes to pass, and the company's COVID-19 vaccine is a dismal failure. What that would mean is that CEPI wasted its $388 million -- but Novavax didn't burn any of its own cash pursuing the goal.

Yes, that scenario could crash the stock price, and drive COVID-19 speculators out of the stock. But none of that possible bad news would affect Novavax's data for its flu vaccine, NanoFlu. Nor would it change the likelihood of FDA approval for NanoFlu.

While there's plenty of COVID-19 speculation going on in this stock, what's not speculation is the good news about NanoFlu. This is the drug that beat the pants off multiple flu vaccines from market-leader Sanofi in phase 1, phase 2, and phase 3 clinical trials. NanoFlu is on Fast Track designation to be approved this year, and it's a billion-dollar molecule in its own right.

So that's the argument for buying Novavax shares now, despite the fantastic run-up. If the company has any positive news in its COVID-19 trial, the stock will skyrocket in value (again). And if the COVID-19 vaccine trial fails? The short-term fall in the stock price will be significant. But over the long-term, the stock price will be higher than it is today, because the company's flu vaccine is so valuable.