Any time there's euphoria in investing circles, the clock starts counting down to when some hot stocks -- those that traders treated more like chips in a poker game than ownership stakes in a company -- implode. Blowing up doesn't necessarily mean going bankrupt or defrauding investors. It can simply mean the return to the fair present value of a company based on its prospective cash flow.
Other people's money
Novavax is one of the U.S.-based vaccine makers racing to develop and test a vaccine for the novel coronavirus. Its approach is more traditional than some of the gene-based treatments getting attention recently, like the candidate from Pfizer and BioNTech that just posted positive efficacy results. Novavax's vaccine works by growing pieces of coronavirus proteins in moth cells and combining them with a proprietary adjuvant -- an agent that improves the immune response. Also, unlike Pfizer and BioNTech, and many others working on a vaccine, Novavax has not partnered with any other companies for drug development.
However, management has been plenty willing to accept funding from different sources to accelerate development, and has lined up deals for production across the globe. The company accepted $1.6 billion from Operation Warp Speed (OWS) in the U.S., $399 million from the Coalition for Epidemic Preparedness Innovations (CEPI) -- an organization related to the World Health Organization (WHO) -- and $15 million from the Bill & Melinda Gates Foundation. All told, there has been more than $2 billion pumped into Novavax in support of its efforts. In addition to outside funding, management has raised an additional $650 million from selling common stock and preferred shares.
The company is nearing full enrollment in its phase 3 study in the U.K. with data expected in the first quarter of 2021. Its trial in Mexico and the U.S. is expected to launch late this month. If the vaccine candidate is approved, Novavax has deals with manufacturers across the globe to produce it for Australia, Canada, the U.K., U.S., Japan, India, and Korea. And the company's preparation has gone beyond deals for production. Management recently acquired 170,000 square feet of office space and a 10-acre lot near its Maryland headquarters to handle output expectations. Ultimately, Novavax believes it can produce doses at a rate of 2 billion per year by mid-2021.
Take the money and run
All of that funding and preparation indicates a lot of internal confidence. But from based on Novavax's history, it looks like the hype might eventually fall flat. In February of last year, the company's vaccine candidate for a respiratory virus prevalent in children under 1 failed its phase 3 clinical trial. This was the second failure for the vaccine, which had missed its target in 2016 as well.
In a bit of a rebound, Novavax did produce exceptional results in a seasonal flu vaccine in March of this year. That product, NanoFlu, is for people over the age of 65. If approved, this would be the first vaccine the company had brought to market in its 33 years. Considering its mixed track record, management seems to be throwing caution to the wind in accepting funds and signing deals.
In April, senior executives were awarded stock options that, after the agreement with OWS, were worth more than $100 million. The options would only pay out if the company's vaccine candidate made it to phase 2 trials, which it did in August. It was an odd incentive. Most options are not tied to the results of clinical trials, especially midstage progress versus actual approval. An analysis by Institutional Shareholder Services found that only seven of 125 U.S. biotech companies had awarded milestone-dependent option grants in 2018 and 2019. The awards are vested, and executives will be able to cash out in April of next year. With results from trials expected in the first quarter of 2021, I expect investors to be skeptical of any delays that could affect the stock price (and make for an unhappy team of executives).
Doing the math
I have no doubt the executives, managers, and staff at Novavax are doing everything they can to bring a successful vaccine to market. But the stock options do create skewed incentives if a situation arises in which nonpublic information could affect the payout. It's hard to say what anyone would do with tens of millions of dollars on the line. Setting aside the stock option amounts and timing, there is still the issue of the company's track record. Novavax has pursued vaccines for many diseases without success. Years ago, the company even resorted to exploring prenatal vitamins and estrogen lotion.
Between 2010 and 2019, adding up the losses from operations and capital expenditures, Novavax has burned through $1.1 billion trying to develop vaccines for MERS, SARS, respiratory syncytial virus (RSV), the seasonal flu, and Ebola. With that said, I'm still rooting for NanoFlu as the company's first success. As we await NanoFlu's fate, I'll remain curious as to how a small company with no previous success was given the largest award from a government program to combat a pandemic. Toss in stock options with an odd hurdle to clear for payouts and the company's lack of a development partner, and I'm afraid Novavax is set up to be a ticking time bomb for investors -- but I hope I'm wrong.