2023-08-14 14:57:17 ET
Summary
- Novavax announced Q2 2023 earnings last week - revenues were $424m, net income was $58m.
- It's an improved performance for the bottom line after the COVID vaccine maker made net losses of $(668)m and $(1.7bn) in 2022 and 2021.
- The company is focused on the upcoming fall vaccination season in the US and has a vaccine candidate with proven efficacy that it says is ready to distribute.
- The scale of the opportunity is unknown at this time - a best case scenario could be worth low-to-mid single digit billion dollar revenues to the company.
- Novavax is still drinking in the last chance saloon, with concerns over its future as a going concern - the fall vaccine season could be "do or die" for the company.
Investment Thesis
Novavax ( NVAX ) is the "so close, but yet so far" story of the government sponsored, COVID mass-vaccination era.
For a full history of the company's rags, to riches, then back to rags story, which saw Novavax produce a COVID vaccine using its proprietary recombinant protein vaccine approach, coupled with its saponin-based Matrix-M adjuvant, that briefly looked as if it might win the race for a first approved COVID shot, only to suffer from years of delays, see my previous note on the company, published in March this year for more detail.
I banged the drum for Novavax in several notes over the past couple of years, as the ~35 year old company chased a first ever approval, and saw its stock price rise from $4.5 per share in January 2020, to $290 per share in February 2021 - but optimism turned to skepticism as manufacturing and regulatory issues experienced by the company saw the share price fall back <$10 per share at the beginning of 2023.
In my last note I reviewed Novavax' FY22 earnings - another case of an opportunity being missed, with the company driving $1.6bn of revenues for the year - original guidance was for $4bn - $5bn - but making a net loss of $658m, following a $1.7bn loss in the prior year.
Contrast that with the >$8bn of net income earned by Moderna ( MRNA ), or >$10bn of net profits earned by BioNTech ( BNTX ), the 2 companies whose messenger-RNA vaccines pipped Novavax's to the post, securing Emergency Use Authorizations In December 2020 in the US, and the scale of the missed opportunity becomes clear.
Novavax provided no guidance for FY23, and Chief Financial Officer ("CFO") James Kelly warned on the Q4 2022 earnings call that a going concern disclosure had been added to the 10K submission (annual report) suggesting that the company may, in 12 months, no longer have sufficient capital to keep the business afloat. It marked a new low point for the company's stock, with shares slipping to a 3-year low of <$6.
Fast forward 5 months, and Novavax has just released its Q2 2023 earnings results . As ever, with a new private market emerging for COVID jabs, and a 2023 fall vaccination season in prospect, it is tempting to wonder if Novavax - which has shown it is capable of producing effective vaccines against numerous strains of COVID - could finish 2023 with a flourish, and give its shareholders - and prospective investors - reasons to be cheerful.
Q2 2023 and 1H 2023 Earnings Review - A Better Quarter for Revenues, and Narrowing Losses
In Q2 2023 Novavax earned $285m of revenues via product sales - i.e. sales of its COVID vaccine NVX-CoV2373, which is approved for sale in >40 countries, and by major regulatory agencies including the FDA, European Medicines Agency ("EMA"), World Health Organization ("WHO") and The Medicines and Healthcare products Regulatory Agency in the United Kingdom.
Novavax also earned $137m from grants, and $2m from "royalties and other" - altogether $424m, versus $186m in the prior year quarter. Across 1H23, however, product sales of $278m were down 56% year-on-year, from $641m. Net loss narrowed by $71m, to $(235m) for the half year, for net loss per share of $(2.69). Net loss in Q2 2022 was $(510m), whereas in Q2 2023, Novavax drove a small net profit of $58m, or $0.58 per share on a diluted basis.
The overwhelming majority of sales in Q2 2023 were made ex-US and ex-Europe. Encouragingly, perhaps, total expenses narrowed from $669m in Q2 2022, to $369m last quarter, with $56m attributed to cost of sales, $219m to R&D, and $94m to SG&A.
Looking Ahead - Advanced Purchase Agreements and the US Market
Novavax has a new President and CEO - and member of the board of Directors - John Jacob, appointed in January 2023, who is attempting to engineer a turnaround at the company.
The CEO has already made a mark, for example agreeing a new deal for COVID vaccine supply in Canada, that will bring in $350m of cash payments in 2023, and agreeing to a deal - announced on the 9th of August - with South Korea based SK Biosciences, who acquired a 7% stake in Novavax, paying $85m, which works out ~$13 per share, a 59% premium to Novavax's traded price at the time. In exchange, SK has exclusive rights to supply Novavax vaccine in South Korea, and non-exclusive rights in Thailand and Vietnam until 2028. Jacob told analysts on the Q2 2023 earnings call :
We are also on track with the global restructuring and cost reduction plans announced last quarter. And as of today, have reduced current liabilities in 2023 by over $1 billion, ending the second quarter with over $900 million in cash and receivables.
There's no question that Novavax's balance sheet looks healthier, and meanwhile, John Trizzino, Novavax's Chief Commercial Officer ("CCO"), told analysts that:
Ex-US, we expect total revenue of approximately $700 million from APA orders for 2023 based on committed dose delivery schedules, subject to updated variant manufacturing and regulatory approvals
Novavax FY23 Guidance (Novavax earnings presentation)
As we can see above, Novavax may have lowered guidance slightly, but given the company's history of over-promising and under-delivering, this more detailed and realistic guidance almost feels like a step forward for the company.
Under the new CEO, Novavax is now laser-focused on 3 new strategic priorities, listed in its earnings presentation as follows:
- Deliver an updated product for the upcoming 2023 fall vaccination season (US);
- Reduce rate of spend, manage cash flow, and evolve our scale and structure;
- Leverage our technology platform, our capabilities, and our portfolio of assets to drive additional value beyond Nuvaxovid.
In essence, Novavax clearly sees its long-term opportunity in what it hopes will be a fast growing US - and potentially European - market for private COVID vaccinations, although the outlook is somewhat confusing.
US COVID market outlook (Novavax earnings presentation)
As we can see above, the FDA - via its Vaccines and Related Biological Products Advisory Committee ("VRBPAC") has specified which strain of COVID a fall vaccine ought to target, and on the Q2 2023 earnings call Trizzino informed investors:
Based on the evaluation and recommendation from VRBPAC, the FDA selected the XBB.1.5 as the monovalent strain for the 2023-2024 COVID season.
Novavax has been manufacturing this new variance train at commercial scale based on the final strain recommendations in June. Our updated XBB.1.5 COVID vaccine is on track to be in our US facility in September and immediately available for distribution and use upon authorization.
However, CEO Jacob also sounded a cautious note, telling analysts:
While we are all excited about the progress we've achieved year-to-date on our key priorities, I want to be clear that there is still significant execution risk for our business ahead of us as we seek regulatory authorizations for our first updated version of Nuvaxovid and prepared to compete in the US market as it converts to a commercial model for the first time.
If there is an 80m - 100m dose market as Novavax forecasts, and if Novavax charges e.g. $35 per dose, and secures a 5% market share, the potential revenues on offer are, by my calculation, ~$150m, but if Novavax grabbed a 15% share of the market and charged the ~$125 that Moderna and BioNTech's partner Pfizer ( PFE ) have discussed charging in a private market, the opportunity grows to >$500m, in the US alone.
Novavax discusses "tender" and "private" markets in its earnings presentation, and a supply chain involving national and regional retail, grocers, and independent pharmacies, plus, within public health, the Centers for Disease Control ("CDC"), Department of Defense ("DoD"), and Indian Health Services - as a reminder, Novavax has a manufacturing partnership in place with the Serum Institute of India, which currently manufactures the original NVX-CoV2373 vaccine under the brand name Covovax.
Finally, Novavax will focus commercial activities for its latest vaccine within the US on Group Purchasing Organizations, Integrated Delivery Networks, and Physician Buying Groups.
Vaccine Targeting Latest Strain Aces Study, but New Targets Already Emerging
The reality is that nobody knows the exact size and scale the private COVID vaccine market will reach - if it was to match the influenza market - currently >50% of US adults have an annual flu shot, which costs ~$70 without insurance, resulting in an ~$11.5bn market, a 15% share could be worth >$3bn per annum to Novavax, given the higher price of the COVID vaccine.
All Novavax can do at this stage is to create an effective vaccine and ensure that, for once, the company is ready to sell and distribute at a similar scale to the likes of Moderna and Pfizer / BioNTech. Novavax management, as discussed above, appears confident that they have sufficient supply, clients, and market opportunity to hit the ground running - and they appear confident they have a strong vaccine candidate also.
Chief Medical Officer Filip Dubrovsky discussed the "key study upon which our XBB strain change regulatory filing is based" on the Q2 2023 earnings call:
This study compared a prototype vaccine to BA 5 in a bivalent vaccine with prototype plus BA 5 in 750 adults. The study design was agreed upon with regulatory agencies to support the upcoming strain change filing for XBB.1.5.
Here are important findings from the study. We achieved all three co-primary endpoints. The bivalent vaccine induced a superior neutralizing response against BA 5 compared to the prototype strain vaccine. It also generated a non-inferior BA 5 seroconversion response to noninferior neutralizing response to prototype.
As an aside, the monovalent BA 5 vaccine was more immunogenic than the bivalent a finding that recapitulated the preclinical data we discussed in the June VRBPAC.
These data have been submitted to the FDA to support regulatory approval for our updated XBB COVID vaccine.
A slight concern - not just for Novavax but all COVID vaccine makers - is that the World Health Organization has recently named a new strain of COVID as a "variant of interest" and a newly dominant strain. The strain is known as EG.5 and is apparently accounting for ~17% of all cases in the US. If EG.5, which is apparently similar to XBB.1.5. in nature, were to become the overwhelmingly dominant strain in the US, would Novavax et al have to start the vaccine design all over again, to allow for targeting this new variant?
Concluding Thoughts: Yet Another Chance for Novavax to Join the Vaccine Elite - Will it Prove Another False Dawn?
Novavax is arguably the only credible alternative COVID vaccine that does not use a messenger-RNA approach, and as such, the private COVID vaccine market is yet another chance for the company to show it can be a reliable supplier of a COVID vaccine.
Although the company missed out on the riches that Moderna and Pfizer / BioNTech divided between them - >$100bn of revenues between 2020 and 2022 - and even contrived to make heavy losses despite its vaccine being proven safe and effective, perhaps this was an inevitable symptom of a company that was simply asked to grow too fast over a short period i.e. acquiring a factory in the Czech Republic and attempting to turn it a global vaccine manufacturer overnight, or grappling with the different regulatory environments in >40 countries, against globally powerful Big Pharma companies like Pfizer, AstraZeneca ( AZN ) and Johnson & Johnson ( JNJ ).
If you are arguing the bull case for Novavax, you could point to the company being seemingly well prepared for an assault on the newly emerging private COVID vaccine market. Importantly, the company has eased some of its debt concerns, reducing the overall burden from $(2.5bn) at the end of 2022, to $(1.6bn) as of Q2 2023. Management has forecast that combined annual R&D and SG&A expenses are expected to fall below $1bn in 2024, perhaps leaving room for a return to profitability in that year - operating costs are expected to exceed total revenues in 2023.
If arguing the bear case, however, you could question whether a private COVID vaccine market will be anything like as large as the influenza market, whether insurers will provide reimbursement for COVID vaccines, and even whether Novavax et al have been targeting the right strain. You could also point to Novavax' inability to compete with Moderna and Pfizer /BioNTech throughout the pandemic, and wonder if anything is likely to change given Novavax management has never been anything but bullish, without delivering on its promises, in the past.
To summarize, it is hard to know in which way Novavax stock may move next. The stock price is down >30% so far this year, presently trading at $7.3, and giving the company a market cap of $695m. If I had purchased Novavax stock at a premium during the pandemic years, only to be disappointed by the subsequent fall in value, I would certainly not be selling my position today, as the fall vaccine season ought to tell us a great deal about what to expect from Novavax going forward.
It's quite possible the company could lift its revenue guidance for 2023 in Q3 or Q4 as we begin to see what a private COVID vaccine market looks like, but equally, a failure to impose itself in this new market and drive a significant revenue contribution may mean the company has had its last drink at the last chance saloon.
The company is still working on a COVID / influenza combo jab, a stand-alone flu jab, and a high dose COVID vaccine, so hope won't quite be extinguished, but if Novavax does not make the best use of this new opportunity, realistically it could be the company's last in my opinion. The risk of another disappointment may be too high for the majority of investors.
For further details see:
Novavax Q2 2023 Earnings Review: Still Drinking At The Last Chance Saloon