Novavax (NVAX -0.43%) has had a phenomenal year in 2020. The mid-cap opened in January as a micro-cap, starting off the year at $4 a share. Nine months later, its shares are trading hands for $113. That's a remarkable upgrade in valuation.

Novavax is a vaccine specialist, and the demand for vaccines has increased dramatically because of COVID-19. This virus has done trillions of dollars' worth of economic damage and has killed at least a million people worldwide. Most of humanity is going to need to be vaccinated, and governments are already paying billions to make that happen. 

Let's look at why a major pharmaceutical company might want to acquire Novavax.

Small child is vaccinated while wearing a mask.

Image source: Getty Images.

COVID-19 exposed a vulnerability in big pharma's R&D

When the coronavirus hit the world earlier this year, big pharma was caught with its pants down. While many small biotechs were able to produce drug candidates quickly, big pharma was not ready.  It was notable (and not really surprising) that major pharmaceutical players like Pfizer and AstraZeneca decided to partner with others in the vaccine space. AstraZeneca's vaccine candidate is based on research and development done by Oxford University, while Pfizer, instead of producing a vaccine in-house, decided to collaborate with BioNTech.

Other major pharmaceutical companies, like Johnson & Johnson and Merck, were notable laggards in the vaccine race. And Roche (RHHBY 1.05%), a massive $300 billion healthcare giant, still doesn't have a COVID-19 vaccine in its pipeline. Novartis (NYSE:NVS) doesn't have one, either.

Why is that? After all, Roche is a huge player. It spent $12 billion on research and development last year. According to Fierce Biotech, Roche outspent every other pharmaceutical company in drug research in 2019. And Novartis wasn't far behind, at $9.4 billion. Yet both companies appear to have a gap in their R&D labs.

Most of Roche's R&D budget goes to cancer research. Very little has been spent on the study of vaccines. While Roche does have an infectious disease unit and treatments for the flu, it has no flu vaccine candidates. And while the company has developed a diagnostic test for COVID-19, and is working on treatments for the disease, so far it's a no-show in the vaccine race.

Novartis, too,(NVS -0.49%)appears to have no COVID-19 vaccine plans. The company wants to help, of course. Doctors at Massachusetts General Hospital have produced a vaccine candidate, and Novartis has agreed to manufacture the drug for free. Yet why is there not a COVID-19 vaccine candidate from Novartis itself? Answer: the company sold its vaccine unit to Glaxo (NYSE:GSK) in 2014.  While this sale might have been profitable at the time, in 2020 the coronavirus is causing us to rethink the value of vaccine research.

Vaccines are critical

Many of us underestimate the importance of vaccines. Awful diseases like hepatitis B, tetanus, whooping cough, polio, measles, and chicken pox have largely been wiped out in the U.S., thanks to vaccination programs. Most of those vaccines work very well, and so there has been little financial incentive for drugmakers to pursue new or stronger vaccine candidates. This is why big pharma has skimped on vaccine research -- it wasn't perceived as cost-effective.

Influenza is a major exception. Because influenza mutates, a one-and-done vaccine doesn't work. Therefore, many adults get vaccinated for the flu on an annual basis. And it's a sizable market, over $4 billion a year. Right now, Sanofi (SNY 0.77%) is the market leader in flu vaccines.

Sanofi prides itself on its vaccine research: "At Sanofi Pasteur," the company's press materials note, "we are at the forefront of vaccine research and development, creating immunological solutions to prevent and cure diseases for every stage of life." Recently, Novavax's flu vaccine outperformed Sanofi's flu vaccine in phase 1, phase 2, and phase 3 head-to-head matchups. So it's possible that Sanofi might want to acquire Novavax to add to its knowledge base.

However, it's even more likely that one of the other big pharmaceutical companies will want to acquire Novavax. For many years, vaccine research was akin to charity for people in third-world countries -- that's why the Bill and Melinda Gates Foundation has had a strong relationship with Novavax for years. But aside from the flu, adult vaccination hasn't been a major concern in the U.S., so a vaccine specialist had little perceived value at the beginning of 2020. And then COVID-19 struck.

Most of the world is going to be vaccinated for COVID-19

The U.S. government has spent billions to spur vaccine research, awarding Novavax $1.6 billion from Operation Warp Speed to fund the clinical trials for its COVID-19 vaccine. The market viewed this grant as a validation of the company's science, but also as a reminder of how important vaccine research is right now (and maybe in the future, too).

We don't know yet whether a COVID-19 vaccine will be a one-and-done shot or require multiple doses. The virus is mutating, but at a much slower rate than influenza. So it's possible that we'll only have to be vaccinated once for this coronavirus. But it's also possible that as the virus mutates, new vaccines will have to be developed to meet the threat (just like with the flu).   

Novavax's stock has been highly volatile all year, rising and falling based on the progress of its COVID-19 vaccine candidate. Scientists have praised Novavax's published data as strong, and data from the company's phase 2 and phase 3 trials will be revealed in the fourth quarter.  

COVID-19 has reminded the world of the importance of vaccines to keep us safe. This is why Novavax is so much more valuable now than it was back in January. And it's why big pharma might be interested in acquiring this vaccine specialist now.