Despite the long-lived loyalty of Novavax's (NVAX 8.40%) boisterous base of retail investors called the "Nova-stans," the company's seemingly endless struggles appear poised to burden it to the point of collapse. Management is openly musing about the prospect of going into bankruptcy, and its shares are down by over 79% in the last six months alone.

While it's faintly possible that the biotech will survive, investors shouldn't stick around to find out, and it's probably also time to do some soul-searching about the merits of deciding to become one of its shareholders in the first place. Here's why.

Why it's time to cut your losses

At the moment, Novavax has a gnarly complex of problems that it has no way of solving. 

Its top line for 2022 was $2 billion, earned by sales of its COVID-19 vaccine called Nuvaxovid. Despite those sales, it reported net losses of $657.9 million last year, and it might be on the hook to hand back $697 million in advance payments to Gavi, an international vaccine-purchasing consortium and customer that is claiming in arbitration to have never received the shots it paid for. At the same time, its total operating expenses for 2022 were more than $1.7 billion, and it has approximately $1.3 billion in cash and equivalents on hand. 

See the problem? Before even mentioning its debt load of $616.7 million and any near-term interest payments, it's clear that Novavax's expenses and potential liabilities are likely far beyond its ability to pay. Even if it doesn't need to give back money to Gavi, things are dire. Management is explicitly stating that the company might not survive another 12 months, and it plans to slash expenses to try to salvage the situation. And since it isn't profitable right now and likely already past the peak of global demand for coronavirus jabs, its manufacturing-unit economics are unlikely to get any better at smaller production scales. So its quarterly cost of goods sold (COGS) might get even higher as a proportion of revenue than it is today, at 50.8%.

Selling Novavax today means that you'll probably be taking a loss on your shares. But the future is unlikely to look much better even if you're willing to hold your shares for a few years longer, and you can reinvest your remaining capital in a more productive place sooner than that. Without any of its non-coronavirus vaccine programs on the cusp of commercialization, and without a strong product-market fit for Nuvaxovid, the biotech is unlikely to be able to raise additional capital at a reasonable interest rate if it tries to take out fresh debt. Likewise, issuing new shares of its stock would dilute shareholders, and it might be hard to find support for the current price level. There isn't any easy way out of Novavax's problems, and there probably isn't a way out at all. 

Takeaways for next time 

Before the next bull market develops, it's important to take inventory of what went wrong with shareholders' investing process for Novavax to avoid potentially making similar mistakes. 

Unfortunately, many of the company's shareholders seem to have purchased its stock after its massive run-up in 2021, hoping for the good times to keep rolling even as it hadn't yet commercialized its first product. Then, when its stock started to plummet on news of manufacturing difficulties and trouble with regulators, the promise of a near-term commercialization likely kept many people hanging on...and on, and on, through its problems selling enough doses, and its struggles to actually manufacture enough doses to meet demand. Then, in 2022, a new CEO delivered shareholders with hopes of a departure from prior problems.

Those hopes probably won't be materializing, but it's the last nail in the coffin that hopefully demonstrates one key feeling to be cautious about when investing: Hope. Hope isn't an investing thesis, especially not when it's stimulated by a hype cycle with a hot stock like Novavax. While it's still possible to get burned when you make a sober set of calculations about the prospects of a company's shares falling or rising, allowing your emotions to determine your reasoning process increases the chances of losing your shirt. 

So, if you're trying to get ready for the next bull market after selling your shares of Novavax, remember that it can be helpful to check a company's claims and timelines against what it actually accomplishes. If there's too big of a discrepancy between its targets and its achievements, it's a sign that your investing thesis might need an adjustment, not to mention your expectations.