2023-10-17 12:57:59 ET
Summary
- Pfizer's downgrade in revenue guidance for its COVID drug products raises concerns about the revenue outlook for Moderna and Novavax.
- Moderna's updated Spikevax COVID vaccine has been approved for individuals 12 years and older, while Novavax's protein-based vaccine has received Emergency Use Authorization.
- Both companies rely on COVID vaccine sales, but the size and scale of the private COVID vaccine market remain uncertain, posing risks to their revenue projections.
- While Moderna's long-term future looks more secure, thanks to multiple potential product launches, Novavax's future remains uncertain.
- Despite an outside chance of Novavax's valuation climbing on a successful fall COVID vaccine season, I'm expecting both share prices to shrink, not grow, across the next 6-9 months.
Investment Overview - After Pfizer Downgrades COVID Franchise Revenue Guidance For 2023, Are Moderna / Novavax Also At Risk?
Over the weekend, pharma giant Pfizer ( PFE ) issued a press release stating that it was slashing its 2023 revenue guidance as a direct result of downgraded expectations for its COVID drug products, the antiviral, Paxlovid and the messenger-RNA vaccine Comirnaty.
Although Paxlovid revenues are expected to be hardest hit , thanks to an amended supply agreement with the US government, which management believes will result in a reduction of FY23 Paxlovid revenues of ~$7bn, Pfizer also stated that its COVID vaccine revenues would be ~$2bn less than expected.
If Pfizer - whose Comirnaty vaccine was the best-selling COVID vaccine of the pandemic era, earning close to $70bn of revenues in 2021 and 2022 alone - is issuing profit warnings about COVID vaccine revenues in 2023, then two other COVID vaccine developers - Moderna ( MRNA ) and Novavax ( NVAX ), the subjects of this post, are likely to face a similar problem.
Last week, Moderna announced that its supplementary New Drug Application ("sNDA") for its own COVID vaccine, Spikevax - which was approved at the same time as Comirnaty, and has a similar mechanism of action ("MoA"), being a messenger-RNA vaccine, and has driven revenues of ~$40bn to date, has been approved for individuals 12 years of age and older by the Food and Drug Agency ("FDA").
The vaccine helps protect against the latest strains of COVID as identified in June by the Vaccines and Related Biological Products Advisory ("VRBPAC"), and including EG.5, FL.1.5.1 and BA.2.86.
In a blog post, Moderna's long-time CEO, Stéphane Bancel, said that:
In the U.S., we expect Spikevax to be at pharmacies and care settings in the coming days. Once available, we encourage the public to get both their updated COVID-19 vaccine and flu vaccine this fall. Outside of the U.S., regulatory applications for our updated COVID-19 vaccine are under review and we expect to share an update in the coming weeks.
Meanwhile, Novavax announced last Friday that its protein based vaccine and MATRIX-M adjuvant will be available "across the U.S., including but not limited to, Costco, CVS Pharmacy, Giant, Publix, Rite Aid and Stop & Shop," after its vaccine addressing the new strains identified by VRBPAC was granted an Emergency Use Authorisation ("EUA") on Oct. 3.
Unlike Moderna's vaccine, Novavax' EUA permission to market and sell its drug only lasts for the "duration of the declaration that circumstances exist justifying the authorization of emergency use of the medical product." It seems likely that the shot could gain full approval, however, and will be approved in Europe and other territories also, based on safety and efficacy established using non-clinical data, according to a press release:
Novavax's COVID-19 vaccine induced functional immune responses against XBB.1.5, XBB.1.16 and XBB.2.3 variants. Additional non-clinical data demonstrated that Novavax's vaccine induced neutralizing antibody responses to newly emerging subvariants BA.2.86, EG.5.1 FL.1.5.1 and XBB.1.16.6 as well as robust CD4+ polyfunctional cellular (T-cell) responses against EG.5.1 and XBB.1.16.6.
These data indicate Novavax's vaccine can stimulate both arms of the immune system and may induce a broad response against currently circulating variants.
Developing a safe and effective vaccine has never been too much of a problem for Novavax - the original Nuvaxovid established proof of concept in multiple large clinical studies, leading to its approval in >40 countries - but delays in gaining the necessary approvals, as well as manufacturing and distribution issues, means that while Comirnaty and Spikevax were earning >$100bn in revenues between them, Novavax largely missed out on the biggest opportunity in its >35-year history.
The company has in fact been loss making, recording net losses of $(156m ) and $(1.4bn) in 2022 and 2021, respectively, although it does have >$500m cash on its balance sheet.
Arguably, however, Novavax is in a better position today to establish a foothold in a new, emerging private COVID vaccination market and challenge the supremacy of Moderna and Pfizer / BioNTech's messenger-RNA vaccines with its product approved, and its logistics better coordinated, than three years ago, when management could not quite deliver when it mattered.
At the same time, Moderna, which banked >$8bn in cash - reported as of Q2 2023 - has a $35bn market cap valuation to support, and although it has multiple other late stage pipeline assets across its four main R&D divisions, and has promised (in its 2023 investor day presentation ) to deliver ~$20-$30bn of revenues annually as a business over the long term, needs to deliver the $6bn - $8bn of COVID vaccine revenues it has promised shareholders in 2023, and ensure that a vaccine developed for the endemic COVID setting can become a key asset within its Respiratory division, which it expects to contribute $8bn-$15bn of revenues by 2027.
There's a good deal of uncertainty around what kind of a picture a private COVID market will present but it's fair to say that in the short to medium term at least, it's likely to dictate the direction of Novavax and Moderna's share prices over the next 12-18 months. Neither company has commercialized any other product besides their COVID vaccines.
Whilst Moderna hopes to have a flu, Respiratory syncytial ("RSV") and COVID / Flu combo on the market by 2025, and has ambitious plans to secure up to 19 product approvals across different indications by 2028, Novavax, which is committed to reducing its R&D and SG&A expenses from ~$1.7bn in 2022, to <$1bn by 2024, is heavily reliant on COVID vaccine sales to keep the business afloat.
Moderna, thanks to its cash and diversified pipeline, is arguably a much safer bet for the long term than Novavax - a company that's "drinking in the last chance saloon," as I suggested in my last post for Seeking Alpha on the company , covering Q2 23 earnings, while Novavax has good short-term upside potential if its role in the emergent endemic COVID market is larger than expected.
Assessing The Endemic COVID Market Opportunity - Over- or Under-Estimated?
Both Novavax and Moderna have speculated about the private COVID vaccine market opportunity. Novavax discusses a "potential market demand of 80m - 100m doses," and has set a list price of $130 for its shot - nearly 5x more than the figure charged to governments during the pandemic. Pfizer's latest COVID vaccine is expected to cost ~$120 per dose, and Moderna's ~$129.
That translates to a US market opportunity of ~$11.7bn, although other estimates vary . According to polls conducted by Reuters / Ipsos, >50% of 4.4k American adults surveyed Americans expressed an interest in receiving a COVID shot, with 30% of people said to be "very interested." Another poll conducted by Politico and Morning Consult suggested 57% of respondents would "probably" get vaccinated.
On the negative side, Moderna CFO David Denton has suggested that only ~24% of Americans, or ~82m people, would be likely to get an updated shot. Moderna's investor day presentation, however, points out that between October 2022 and April 2023, the total number of people hospitalized by COVID was >600k, while ~200k people were hospitalized with flu, and ~167k with RSV. The flu market, Moderna estimates, is worth ~$6bn per annum today, with 500-600m doses globally, but could grow to ~$9bn by 2028.
Across the first 6m of 2023, Novavax earned $278m of revenues from product sales i.e. from its original COVID vaccine - down from $641m in the prior year equivalent period. The company is forecasting for FY23 total revenues of $1.3bn - $1.5bn, and product sales of $960m - $1.14bn, suggesting that across 2H23, product sales will need to be at least ~$772m to meet management's targets.
This guidance includes advance purchase agreements ("APAs") of ~$700, according to the company's Q223 press release, however, meaning that in order to meet guidance, Novavax need only generate ~$250m from US private market sales to meet its internal expectations. With R&D and SG&A combined expenses guidance of $1.3 - $1.4bn, it seems there's an outside chance of Novavax recording a small operating profit this year.
From Moderna's perspective, the company generated revenues of just $0.3bn in the second quarter of 2023, after recording $1.8bn of revenues in the first. Most of these revenues were related to APAs - ~$2bn in the first half of the year, and management says there's likely ~$2bn more revenues due in the second half of the year from this same source.
~$2 - $4bn of additional revenues could arrive from commercial contracts signed with retain pharmacies, wholesalers, US government entities i.e. the Centers for Disease Control ("CDC"), and employers and other providers, in the second half of the year, management says.
Moderna broadly agrees Novavax' forecast that the fall 2023 COVID vaccine market will be ~100m people, which is double the number of patients administered a dose in the US last year over the same period, and significantly less than the 150m flu doses administered in the US each year.
In short, Moderna needs to find >$4bn of revenues in the second half of 2023 in order to meet management's guidance of $6bn - $8bn of revenues, with 30% of those revenues arriving in Q323, and 70% arriving in Q4. With cost of sales and R&D expenses expected to be in the region of ~$6bn, Moderna, which earned net income of $8.4bn in 2022, and $12.2bn in 2021, may find itself recording a net loss in 2023.
To summarize, my take would be that Novavax and Moderna's argument that ~100m US citizens will seek a COVID vaccine during the fall vaccine season may be a little overblown. Given list prices, a 100m patient market would imply a $12bn market opportunity in the US alone, but if we risk adjust this based on 50m doses given in 2022, the new >$120 per shot pricing, and comments from Pfizer CEO Albert Bourla, that "COVID fatigue" is setting in, and only ~17% of Americans will seek a fall COVID vaccine, or <60m, a market opportunity capped at ~$7.5bn seems a more realistic figure to think about.
How Do Qualified Expectations Affect Valuations?
If we look at Moderna and Novavax share price performance across the past five years we can see that, having hit the heights of <$450 per share, and >$250 per share at the height of the pandemic, respectively, valuing Moderna at a nearly $150bn market cap, and Novavax at >$22bn, both companies' share prices have been rapidly declining ever since.
While Moderna shares remains nearly 400% up over the past five years, however, as a result of the massive revenue and income generated by its Spikevax COVID vaccine, Novavax shares are worth nearly 85% less than they were five years ago, when COVID was unheard of, and the company was pushing for approvals of its RSV and influenza vaccines.
It's usually quite rare to see a company's market cap fall below forecast revenues for the full year, but that's what has happened at Novavax. The >$2bn awarded to Novavax by President Trump's Operation Warp Speed program back in 2020 has arguably been more of a curse than a blessing for the company.
On one hand it has helped Novavax build a global footprint, with a manufacturing facility in the Czech Republic, relationship with the Serum Institute of India, which manufactures its vaccine for ex US and European territories, operations in Europe, Asia, the US, and APAC, and strategic agreements in place with the like of Japanese Pharma giant Takeda (TAK).
On the other hand, the cost of maintaining this infrastructure, having failed to set it up in time to capture anything but a tiny sliver of the US and European COVID vaccine markets, could ultimately prove prohibitively expensive for Novavax - the company had previously warned that its future as a going concern is subject to uncertainty, unless costs of operations are slashed, and significant private COVID vaccine sales made.
As such, you could argue that while Novavax' survival as a company depends upon the emergence of a $5bn - $10bn private market emerging in the US, and ideally in Europe and Asia also, if such a market does materialize, Novavax stock could mount a strong comeback. If the company were to catch just 10% of a notional $7.5bn market in both the US and Europe, it would be driving revenues of ~$1.5bn per annum.
For context, another vaccine / adjuvant developer, Dynavax ( DVAX ), which is forecasting for FY23 revenues of $200-$215m for its Heplisav B hepatitis vaccine, and operational expenses of about the same, enjoys a market cap valuation of >$1.8bn.
From Moderna's perspective, forecasting for $6-$8bn of total revenues in 2023, with $2 - $4bn of that expected to be realised in the second half of the year, and a net loss for the year a distinct possibility, is its current $35bn market cap warranted? For context, I took a look at 13 commercial stage pharma companies who generated revenues of $5 - $10bn in 2022, and found that average revenues were $7.65bn, average net profit margin ~16%, and average market cap ~$35bn.
That would imply that Moderna is fairly valued, but it's worth remembering how speculative that FY23 forecast for of $6bn - $8bn revenues is, based on a market opportunity - a private COVID vaccine market - that according to Pfizer CEO Albert Bourla, is shrinking by the day, due to "COVID fatigue."
Concluding Thoughts - Am I Buying Novavax Or Moderna Ahead Of Fall Vaccine Season? No. The Short-Term Risk Is Too High
In this post I have tried to discuss the histories of both Novavax and Moderna, why their exposure to the pandemic has essentially defined them both as companies - despite Novavax being a >35-year old company, and how Moderna's ability to secure an EUA for its original vaccine in 2022 in the US, and shortly after in Europe, and Novavax's failure to do so, has made all the difference to the two stock valuations today, after some wild swings in both companies share prices during the uncertainty of the pandemic period.
I also have made the point that both companies are heavily dependent on a successful Fall COVID vaccine if their 2023 guidance is to be met, and to ensure losses do not become too damaging for either company.
Unfortunately, calculating the size and scale of any private COVID vaccine market remains fraught with uncertainty. The company that arguably stood to gain most from this opportunity, Pfizer, has cautioned that it's going to be smaller than expected, with ~17% of the US population seeking to get vaccinated against new strains of COVID. While Pfizer continues to expect ~$60bn of annual revenues from its ex-COVID products, however, neither Moderna nor Novavax has that luxury, with no other commercially approved products to fall back on.
In few years' time, Moderna management is promising that can change, and that it expects to invest $25bn in R&D, generate 2027 revenues of $8 - $15bn from respiratory disease vaccines (namely influenza, COVID, RSV), and $10bn - $15bn of revenues from its three other divisions, namely latent and other vaccines, oncology therapeutics, and rare disease therapeutics.
If Moderna were to achieve all of these goals, then of course its market cap valuation will rise, perhaps even having the opportunity to surpass former highs of close to $150bn (based on a rule of thumb 5x forward sales projections), but the nearer-term reality suggests the mRNA giant will struggle to meet FY23 guidance, and as such, its valuation is more likely to correct downwards than upwards across the next 6-9 months, even with an RSV vaccine launch expected in 2024.
The reality is that the COVID vaccine market during the pandemic was a unique market opportunity. While Moderna did well to seize that opportunity, in markets such as RSV, Oncology, and rare disease it's fighting better resourced, more experienced global pharmas with entrenched market positions, and revenue generation will be much harder won than during the pandemic, when its only competition was from Pfizer, amid near-unlimited demand.
As far as Novavax goes, while I would concede that a good fall COVID vaccine season could give the share price and company valuation a significant bump, the company's poor track record when it comes to taking advantage of positive market dynamics make me doubtful that Novavax can build a significant enough market share in a potentially smaller than expected market.
I believe Novavax' global share of the private market opportunity is unlikely to rise >5%, or $750m of annual sales, and at these volumes the company may well be looking at making a loss on each vaccine manufactured, which puts the company's longer term future in doubt.
As such, I can't support a Buy recommendation for either Novavax or Moderna at this time, although longer term, I do believe Moderna can become a successful company with so many later stage opportunities in play.
Novavax's future looks a little more uncertain, and the fear, uncertainty and doubt ("FUD") that may create in the market could be viewed as unlocking a contrarian "buy" opportunity, although anyone who has followed Novavax for the past few years has probably become wary of the endless setbacks.
For further details see:
Moderna Vs. Novavax: Neither Offering Short-Term Value As Fall Vaccine Season Begins