2023-11-14 07:58:00 ET
Summary
- Novavax's Q3 earnings call provided extensive guidance and business review.
- It finds itself in the unfortunate position of having heavily invested to serve a market which is rapidly shrinking.
- Novavax's prospects to build a successful business elsewhere are highly speculative and uncertain.
I have covered Novavax ( NVAX ) with a banquet of >20 articles over the years. My first was 11/2016's "Novavax: The Little Engine That Couldn't ,"; my most recent 05/2023's "Novavax Q1 Earnings Review: A Rocky Path" (" Rocky ").
In this article, I report on Novavax's investment merits following the extensive guidance and business review it provided during its Q3, 2023, earnings call (the "Q3 Call"). Previously during its Q2 Call , Novavax CCO and CBO Trizzino announced the FDA's election of XBB.1.5 as the monovalent strain for the 2023-2024 COVID season. The FDA granted Novavax an EUA for its XBB vaccine on 10/03/2023.
Despite this timely vaccine approval, overall Novavax's situation as reported in the Q3 Call is not a pretty picture. Expect Novavax to continue generating negative returns for shareholders for the reasons set out below.
During its Q2 Call Novavax focused on a triad of priorities for 2023
Continuing on a theme established during Novavax's previous quarterly call, CEO Jacobs discussed its three 2023 priorities as follows during Q2:
- delivery of an updated product for the upcoming fall season;
- reduction of its rate of spend, management of cash flow and evolution of its scale and structure;
- development of additional value from its technology platform and portfolio via the advancement of its pipeline and business development activities.
During its Q2, Call CEO Jacob reported two important steps accomplished in anticipation of the FDA approval which has since been secured as noted.
- manufacture of its XBB vaccine at commercial scale with ample supply; and
- deployment of a commercial team with the majority of US commercial contracts completed or in progress ensuring broad access to Novavax's vaccine this fall.
Priority 2 also received attention and Novavax showed some positive improvements for its financial goals. Jacobs pointed to the following:
- reduction of current liabilities by over $1 billion;
- a cash and receivables balance of over $900 million as heading into the fall vaccination season;
- on track with cost reduction initiatives while absorbing one-time related restructuring costs.
Novavax's third priority is a top priority of mine for Novavax. Its current reliance on its COVID vaccine, at a time when COVID is just a bad dream for many, is unfortunate. Pipeline advancement, Novavax's priority three as listed above, is critical.
Despite posting top and bottom line beats Novavax's Q3 was disappointing
General
Novavax reported its Q3, 2023 earnings before market open on 11/09/2023. It scored top and bottom line beats. Its GAAP EPS of -$1.26 beat expectations by $0.54. Its revenue of $187 million beat expectations by $23.76 million. Solid beats it would appear..
Unfortunately these headline metrics were trumped by other less appealing items as reported below. Novavax closed the day previous to its earnings release on 11/08/2023 at $6.80. It closed down just pennies at $6.71 on 11/09/20/23; then on 11/10/2023 it dropped $0.47 to close the day at $6.24.
Such falloffs are hardly catastrophic, They are nonetheless disturbing for those hoping that Novavax could turn the corner with its newly FDA granted approval for its XBB vaccine variant.
Novavax Q3, 2023 revenues
Novavax may have beaten analysts' revenue expectations during Q3, 2023. Nonetheless its Q3, statement of operations revenue report from it Q3, 2023 10-Q presents a sorry picture. Check it out below:
seekingalpha.com
Total revenues for Q3, 2023 have dropped ~75% from revenues for Q3,2022. Total revenues for the first nine months of 2023 dropped by a lesser but still significant percentage of ~57%.
Novavax's revenues consist of three components per its 10-Q (p. 32):
- product sales — COVID-19 vaccines;
- grants — revenue for services performed under its USG Agreement obtained as part of Operation Warp Speed;
- royalties and other — royalty milestone payments, sales-based royalties, and Matrix-M™ adjuvant sales.
The disproportionate contribution of grants to its revenues is unfortunate auguring poorly for its future. It is unlikely that Novavax can benefit from a repeat of the pandemic inspired government largess known as Operation Warp Speed.
Novavax Q3, forward revenue guidance
During the Q3 Call CFO Kelly provided color on Novavax's forward revenue guidance as shown on its Q3, earnings presentation slide 17 below:
seekingalpha.com
He reported Novavax's:
... updated financial guidance ... includes ... expectation to achieve total revenue for the COVID 2023, ‘24 season of $1.3 billion, reflecting the lower end of ... prior guidance range of $1.3 billion to $1.5 billion, which was for the full year 2023.
Not only is the updated guidance at the lower end of its guidance range as previously given, it also tacks on $300 million of revenues not expected until Q1, 2024. Accordingly, as updated one could consider Novavax's full year 2023 guidance as a $300 million miss. This is a notable improvement compared to its spectacular 2022 multibillion dollar guidance miss; albeit a miss is a miss and a $300 million miss is hardly insignificant.
Novavax Q3 and guided future expenses
While Novavax's revenue picture is a hot mess, its expense profile is moving in the right direction. During his introductory remarks in the Q3 Call CEO Jacob gave an overview of Novavax's updated expense picture as part of its ongoing pursuit of its second priority.
He pointed to a $950 million reduction in year to date operating expenses compared to 2022. He went on to note:
We are on track to exceed our previously announced global restructuring and cost reduction plan for 2023 by over $100 million for combined R&D and SGA expenses. Well, at the same time, having successfully achieved our objective of updating our vaccine and launching this season, demonstrating that we can significantly reduce costs while maintaining our core capabilities.
Novavax's Q3,2023 earning presentation slide 20 sets out its expense guidance for 2023-24 as follows:
seekingalpha.com
During the Q3 Call CFO Kelly provided the following color surrounding Novavax's cost reduction ambitions:
...we are prepared to initiate additional cost reductions to decrease expenses by over $300 million and further reshape the size and scope of business operations to align with the COVID market opportunity. We plan to do so by reducing 2024 R&D and SG&A expenses by over $200 million compared to prior targets to reflect $750 million or lower spend in 2024. In addition, we intend to reduce supply network costs by over $100 million as we continue to rationalize our manufacturing footprint.
Novavax's big COVID bet has failed; it's time for shareholders to move on
Novavax transformed itself into a world powerhouse of COVID vaccines, right when it was on the cusp of finally filing a BLA for its ill-fated NanoFlu flu vaccine. It switched course and built a massive world-wide infrastructure for manufacturing and distributing COVID vaccines.
The COVID moment of peak opportunity has long passed. Novavax managed to get a COVID EUA from the FDA but experienced several delays. When it was finally able to market in the US, it was third to market — too late to develop significant sales. As I write on 11/12/2023 the Novavax COVID vaccine story is all about downsizing.
Novavax is working diligently to this end. However, a company rushing to shrink to rightsize itself in a dwindling market makes an unattractive investment opportunity. Novavax's clinical pipeline as shown on its Q3, 2023 10-Q graphic has limited near term growth potential:
seekingalpha.com
The piece that I regard as most promising is its combination COVID/flu vaccine. If it had near term prospects for FDA review, I might consider Novavax as an interesting speculative hold. Sadly it is not set to file with the FDA until 2025, implying no approval potential until 2025.
Conclusion
Novavax has been a serial disappointer. It has racked up accumulated deficits of $4.6 billion in the process as shown on its Q3, 2023 10-Q (p. 3). After closely following and occasionally investing in this company over long recent years, I now rate it as a sell; its $0.741 billion market cap is freighted with too many past failures and current uncertainties.
For further details see:
Novavax: Less Is Less - Shrinking COVID Market Takes Its Toll (Rating Downgrade)