The health care sector has fallen hard over the past month, and small caps in particular have led the sector lower. Because of the indiscriminate nature of this drop, I believe this rapid downturn could be creating some buying opportunities for investors with a long-term outlook. For example, the recombinant nanoparticle vaccine maker Novavax ( NVAX -0.92% ) is now down over 30% this month, yet the company offers a couple of compelling reasons to be optimistic about its future. With this idea in mind, here are my top three reasons why Novavax could be a bargain at current levels.
Reason No. 1
Novavax offers investors a strong clinical pipeline with multiple vaccines that have blockbuster potential. Chief among these candidates is Novavax's experimental vaccine for respiratory syncytial virus. The World Health Organization estimates that there are around 64 million new cases of RSV each year, and there is no prophylactic vaccine available for the majority of patient types. Specifically, AstraZeneca's ( AZN -1.02% ) palivizumab (brand name Synagis) is available for preterm babies born earlier than 35 weeks, but there are no treatment options for infants or elderly patients who are highly susceptible to RSV infections. Novavax's mid-stage experimental RSV vaccine would target three distinct patient populations: infants, young children, and the elderly. Thus far, the company has successfully completed a mid-stage trial for women of child-bearing age, and plans on initiating further mid-stage trials for other target populations later this year.
Novavax also has a growing influenza vaccine clinical program indicated for both pandemic and seasonal influenza. It reported some notable successes at the mid-stage level for its influenza vaccines over the past two years, and more trials are planned to begin later this year. Although the exact pathway to licensure is uncertain, i.e., accelerated or normal, I believe it could have a commercially available influenza vaccine on the market by 2016.
In terms of the commercial opportunity for influenza, the global flu vaccine market is expected to rise to around $4 billion as early as next year. Moreover, three big pharmas dominate this market space, namely AstraZeneca, GlaxoSmithKline ( GSK -0.53% ), and Novartis AG ( NVS 0.06% ). What's key to understand is that both GlaxoSmithKline and Novartis have developed new flu vaccines within the past two years in order to meet the growing demand, yet there is still a chronic annual shortage, showing that there is room for another player in this market.
Reason No. 2
One of the things I like most about Novavax is the fact that it has a stable revenue source via its contract with BARDA to develop the next generation of influenza vaccines. The initial three-year period of the award provided Novavax with $52 million in revenue that allowed the company to build and improve infrastructure without having to dilute shareholders. Last February, this award period was extended for an additional seven months. Not many developmental biotechs can offer investors stable revenue streams at this stage of their life cycle.
Reason No. 3
When considering speculative clinical-stage biotechs, one of the first things I look at is insider buying versus selling. In Novavax's case, the company's president, Stanley Erck, and vice president, "Buck" Phillips, have made a number of buys on the open market this year. Last week, this trend continued as they both purchased shares on the open market. As these top-level managers presumably know the most about their company, I view these insider buys as a positive.
Novavax shares more than doubled in the last year prior to this pullback. And despite this recent dip, they are still up 97% over the past 12 months, so they haven't exactly crashed. My view is that Novavax soared along with the rest of the sector and has simply fallen in conjunction with its peers. Going forward, however, I believe there will be fewer and fewer developmental biotechs that will outperform the broader market, and those that do will likely have success on the clinical front. Based on the clinical successes for Novavax's recombinant nanoparticle vaccine platform to date, this company looks like it could be one of those winners. You might want to dig deeper into this speculative biotech, especially after its relatively large pullback in the past month.