Novavax Q3 Earnings: It’s The Hope That Kills You

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Investment Overview

After releasing its Q322 earnings yesterday, Novavax’ (NASDAQ:NVAX) stock price now trades at just under $20 per share, its lowest price since May 2020.

It is therefore official – Novavax – despite being awarded $1.8bn by the US government, and despite developing a vaccine that stands comparison with Pfizer (PFE) & BioNTech’s (BNTX) ~$70bn selling Comirnaty, or Moderna’s (MRNA) ~$40bn selling SpikeVax in terms of efficacy and safety, is now worth less than it was in May 2020, in the early days of the pandemic.

That’s quite an extraordinary feat, and disastrous for anybody who invested in the company when Novavax stock hit highs of $170 in June 2020, for example, and failed to sell at peak prices of e.g. $290 in February 2021, $257 in August 2021, and $217 in December 2021.

At its peak Novavax achieved a market cap valuation of ~$22.7bn, which is hardly excessive when we consider the rewards on offer – a share of a market that has generated revenues of >$100bn in two years. A lot of the blame for the collapse in the share price should rightly be directed at management, although there are some mitigating circumstances.

Novavax opted to conduct its first pivotal Phase 3 trial outside of the US, and was unable to get its final data out before Pfizer / BioNTech and Moderna, which both won Emergency Use Authorization (“EUA”) in the US in December 2020.

Novavax’ UK and South Africa Phase 3 results arrived in Feb 2021, by which time the delta strain had arrived, complicating the data, but even so, the vaccine showed 89% efficacy in studies in the United Kingdom, and went on to gain authorization in the UK, Canada, Australia, Switzerland, Singapore and New Zealand, and thanks to a partnership with the Serum Institute in India, South Korea, Thailand and Bangladesh.

A second Phase 3 study taking place in the US and Mexico took an age to complete, however, and Novavax made no vaccine sales in 2020 or 2021, generating revenues of $476m in 2020, and $1.15bn in 2021 purely from grants and royalties. Net losses were $418m in 2020, and $1.74bn in 2021.

Novavax finally won marketing authorization in Europe in December 2021, and secured an Emergency Use Authorization (“EUA”) from the US in July this year – too late to supply any vaccine doses to the government sponsored mass vaccination programs outside of its original deal with Operation Warp Speed (“OWS”).

Novavax’ problems were mostly related to delays in filing its regulatory submissions and bringing its manufacturing capabilities up to speed – such as its factory in the Czech Republic. The challenge of gaining authorization for and mass producing its Nuvaxovid vaccine proved too great for the company.

Despite all of the problems, Novavax guided for revenues of $4 – $5bn in 2022, but once again, the company failed to meet expectations and guidance has been revised down to $2bn, which includes grant revenues and royalties, as well as vaccine sales.

During its Q322 earnings call and throughout its Q322 earnings presentation, Novavax management opted to focus on the ability of its current vaccine, NVX-CoV2373 to be used as a primary or booster shot, in adults, adolescents and children, based on long-term data from its various studies, and to talk up the promise of a private COVID vaccine market.

The question is, are the opportunities genuine, can Novavax’ management team execute, what’s the likely revenue opportunity, what’s the most likely outcome for the share price, and perhaps most importantly, is anybody still prepared to believe this management team’s promises?

Let’s start by looking at Q3 performance.

Novavax Q322 Earnings – Fewer Revenues, More Losses, Guidance Downgraded

It would be fair to say that Q322 earnings were neither disastrous, and not particularly inspiring. The headline figures were that revenues for the quarter were $735m, compared to $179m in Q321 – a gain of >310% – and that included $626m of actual product sales, as opposed to grant and royalty revenue, which made up the remainder.

On the negative side, cost of sales was $435m, R&D costs $304m, and SG&A costs $123m, which adds to total operating expenses of $862m, compared to $486m in Q321. Net loss was ($169m), compared to ($322m) in the prior year period. Novavax additionally reported a cash position of $1.3bn.

Revenues across the first three quarters of 2022 are therefore ~$1.625bn, and net loss ($476m). Revenues in Q4, based on FY22 guidance for $2bn – revised down from $2 – $2.3bn last quarter, and $4 – $5bn initially – will presumably come in around $375m.

Overall, it’s a confusing picture. Novavax says it has delivered 94m doses of its vaccine in total – including through its partners the Serum Institute of India, SK Bioscince, and the Japanese Pharma Takeda (TAK), and 38m doses in Q322, which included 1m doses delivered to the United Kingdom and 3.2m doses to the US. But, is any government around the world looking to buy more doses of NVX-CoV2373?

Novavax was not providing any guidance for 2023 on its earnings call, and frankly, Chief Commercial Officer John Trizzino did not strike a note of optimism when answering analysts’ questions on the subject. At one point Trizzino told analysts:

Yes. It’s really difficult to predict what 2023 is going to look like and (I) hesitate to even whisper at guidance at the moment.

Later, he enlarges somewhat:

You’ve even heard from some of the other manufacturers, it’s a little bit challenging to assess at the moment. I think what will happen as we come through the next couple of months, look at what our book of business looks like and it still remains strong, I think we’ll have a determination about whether it’s existing APAs or incremental business coming into 2023.

It’s certainly true that the likes of Pfizer and Moderna are not providing any 2023 guidance at present, which speaks to the level of uncertainty. Broadly speaking, however, there are three ways Novavax can generate meaningful revenues in 2023.

Novavax in 2023 – What Are The Opportunities?

Novavax’ three main opportunities in 2023 are firstly to market and sell its existing vaccine to governments primarily as a booster shot to support the Pfizer and Moderna vaccines, secondly to sell its existing vaccine into an emerging private market, and thirdly, to try to develop new vaccines, such as a COVID-19 / Influenza vaccine.

Unfortunately, all three of these strategies have significant flaws. Let’s look at each in turn.

The Booster Opportunity

Novavax devotes much of its Q322 earnings presentation and earnings call to discussing the effectiveness of Nuvaxovid as a booster shot. Study 307 for example has been carried out in 911 patients, the majority of whom received two or three doses of Pfizer’s Comirnaty or Moderna’s SpikeVax, and were then given a booster shot of Nuvaxovid.

The study demographics closely resembled broader US population dynamics. The results of the study demonstrated that after the additional Nuvaxovid booster shot, the level of protection / immunogenicity in patients was comparable or higher than the levels of protection shown in prior Phase 3 trial results. Novavax Chief Medical Officer Filip Dubovsky commented:

In summary, we believe the 307 findings are important both because they confirm consistency of manufacturing, which is critical for vaccine life insured in the US and because they showed robust immune responses to prototype and variants after homologous and heterologous boosting with post-boosting antibody levels approximating those levels associated with protection in our Phase 3 studies.

There are several issues here however. Firstly, the number of Americans who received booster shots this fall was apparently very low. According to the New York Times, by mid-October, only ~15m people had received one, and many Americans appeared to be “unaware of or simply uninterested in them.”

Secondly, both Pfizer and Moderna developed new vaccines for these booster shots, designed to target the emergent BA.5 strain. Novavax has not updated its own vaccine, claiming there is no need to do so. Although that’s to a certain extent born out by the data, my guess is that if further booster shots are purchased by governments, they will opt for the updated vaccines over Novavax’ old shot.

The Private Market

If Novavax cannot sell its old vaccine Nuvaxovid to governments as a booster shot, then perhaps it can grab a share of a newly emerging private market – a market in which it can raise the price it charges per dose to >$100, as Moderna / Pfizer are likely to do.

Novavax estimates that this market could number ~225m people in the US, and ~250m in the EU. At $100 per dose, there’s a $47.5bn per annum market in play. If Novavax could grab a 10% share of this market the company could finally achieve its revenue estimate of $4bn- $5bn annual revenues in 2023 or 2024, perhaps, but there are issues with these market dynamics.

Firstly, if only 15m Americans opted to get the fall booster shot, is Novavax’ estimation that 225m people in the US will seek one out privately really accurate? It’s possible that more people will opt to get a shot if they are included in medical insurance plans, but that leads to second problem for Novavax – it doesn’t have a full approval in the US – only an EUA – so may not be allowed to be covered by insurers.

Finally, Novavax’ share of the government sponsored vaccine market was nowhere near 10%. In the US, data suggests Pfizer has distributed ~380m doses, and Moderna ~240m doses. In the European Union (“EU”), Pfizer has apparently distributed 643m doses and Moderna 153 doses.

That’s a total of ~1.4bn doses, and let’s add say 300m more for AstraZeneca (AZN), Johnson & Johnson (JNJ) and other shots – 1.7bn doses. Novavax has delivered a total of 93m doses, which accounts for ~5% of all doses distributed to date.

In a highly optimistic scenario in which the US private COVID vaccine market reaches 225m people – more people than currently receive an annual flu vaccine (~196m people) – then Novavax’ revenue opportunity is more like $2.4bn – or $1.2bn if it cannot secure reimbursement in the US.

It could be argued that is not too disappointing a figure, but then there’s another issue. Can Novavax keep pace with the variants?

The Next Generation Vaccines

Novavax also devoted much of its quarterly earnings presentations to justifying its decision to stick with its original vaccine when the likes of Moderna and Pfizer are rolling out new vaccines to tackle emergent new strains.

Personally, I have some sympathy for this approach – after all, by the time Moderna rolls out its BA.5 targeting vaccine, BA.5 has mutated into BA.6 or 7 or 8, while Nuvaxovid continues to show decent efficacy against new strains.

I’m far from certain that agencies buying vaccine doses in bulk will see things that way, however, and there has to be more than a suspicion that Novavax is not developing updated or bivalent vaccines due to the fact it doesn’t have the expertise to do so quickly enough.

It’s failure to guide Nuvaxovid through the regulatory processes necessary for approval ultimately cost Novavax the opportunity to generate double-digit billion revenues. Why should investors believe it will be any more successful with e.g. an influenza / COVID shot? Let’s not forget that Novavax also has a Phase 3 stage RSV vaccine, and a Phase 3 stage influenza vaccine in its stable. Neither are mentioned in the company’s Q322 presentations or prepared remarks, and there has been no progress made for several years now.

It’s not necessarily that Novavax does not have the technology or that its sub unit vaccine approach is not suited to developing new iterations, it’s simply the fact that it took Novavax more than two years to secure an EUA for Nuvaxovid in the US, when it took Pfizer and Moderna around six months, and there are no signs that this pace of development if likely to reverse any time soon.

Conclusion – Fool Me Twice, Shame On Me

As George W. Bush once memorably did not say, “if you fool me once, shame on you, if you fool me twice, shame on me!” After two years and nearly $2bn of funding, Novavax may finally deliver $2bn of revenues in 2022 through sales of a vaccine that by most measures (safety, efficacy, storage) could have earned double-digit billion revenues in 2021 and 2022 if management could only have executed faster.

With that said, looking ahead to 2023 there’s no financial guidance, no advanced purchase agreements, no new vaccine against emerging strains, no private market to speak of yet, and operating expenses that may run into 9 figures.

Some might argue that all of this is reflected in Novavax’ current valuation, which stands at just $1.5bn – only $200m more than its current cash position. Could there be another turn on the COVID vaccine rollercoaster ride for Novavax and its investors in 2023, based on its potential to succeed, as opposed to its historical inability to execute?

You can never say never, but in Novavax’ case, the theoretical is beginning to lose out to the reality, and most investors are probably sick of the vertigo. My best guess would be that Novavax has a $500 – $1bn revenue opportunity at best in 2023, will likely be loss-making, and will not launch a new product. The current share price of $20 therefore feels about right.

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