2023-09-07 06:19:36 ET
Summary
- Novavax's lack of a proprietary drug and declining sales pose challenges for the company's future.
- Sales for Novavax's alternative vaccine may decline as demand for Covid vaccines decreases and supply exceeds demand.
- NVAX stock has limited long-term value, but Novavax could rip on a breakout above $10 on any Covid scare in the Fall.
Every month or so, Novavax ( NVAX ) bounces towards $10 on media headlines regarding the next Covid variant. The biotech stock sells off every time as the company's vaccine remains an alternative to MRNA based vaccines, at best. My investment thesis remains Bearish on the stock at just about any level.
Source: Finviz
Still Living Off Prior APAs
The Covid vaccine market spent the last few years living off forced demand where governments were pushing for populations to get the related vaccine and constant boosters. Now, the vaccines have a more negative view and governments APAs (advanced purchase agreements) are mostly winding down with contracts turning towards normal vaccine market dynamics.
Novavax is benefiting greatly from remaining amounts on APAs. The company expects to report $700 million in sales from these deals, including 17 million committed doses.
Canada will pay up to $450 million for forfeited doses in 2023 and is now requiring Novavax to establish in-country manufacturing in 2024 and 2025 to obtain committed dose purchases in those years. Of the total product sales for 2023 in the $1 billion range, the company will only be recording $260 to $440 million in sales in the US plus the $700 million worth of APA sales with a limited amount this year for Canada.
Anyone reading the latest earnings data from Novavax, the company used the term "alternative vaccine" over and over. The problem with being the alternative vaccine to the MRNA versions is that such an option really isn't needed anymore based on the plunging sales for vaccine market leaders. Both Pfizer ( PFE ) and Moderna ( MRNA ) have seen their vaccine sales plunge suggesting the supply now far exceeds demand.
Source: Seeking Alpha
Another issue is that even the CDC confirmed the new Covid variant, BA.2.86, is infecting people already vaccinated. The demand for the vaccine could easily falter with further knowledge the protection doesn't exist to the newest variants, including the current dominate variant in the U.S. of EG.5.
All of these metrics confirm analyst expectations for sales to continue trending lower. Novavax cut 2023 revenue targets to $1.3 billion and analysts now forecast sales trending lower towards only $1.1 billion in 2025.
As mentioned above, the biggest issue facing Novavax is the lack of a proprietary drug. The best option for the biotech is an alternative vaccine to biotechs with much larger market caps and those typically aren't very viable.
Better Financials
The best part of the Novavax story is that new CEO John Jacob has finally implemented cost controls with the company. The small biotech no longer appears in the situation of needing to constantly raise funds in order to fund ongoing losses.
For Q2'23, Novavax technically reported a profit with total expenses under control. The SG&A expenses were cut to the $300 million range from nearly $400, but most importantly the cost of sales finally provided a solid margin.
The big risk is that sales trend down, as the demand for the Covid vaccine disappears and an alternative vaccine is no longer needed. Novavax has a plan to lower 2024 operating expenses below $1 billion, but the fear is revenues dip substantially during the next year after elevated 2023 sales due to the APAs in the EU and Asia-Pacific disappear.
When sales slip, a lot of times margins slip as well. The fear here is that Novavax has substantial fixed manufacturing costs regardless of sales levels.
The stock has a limited market cap of only $1 billion, but the market is naturally not impressed by the likelihood of declining sales as the APAs disappear. Novavax faces a tough road forward trying to line up profitable sales, when private markets likely view the biotech as a viable option to lower vaccine costs.
As the above chart shows, the stock has substantial resistance at $10. With a Covid spike, Novavax could follow with a breakout above $10 setting up a gap close to $16+. The vaccine stock could indeed be a great short-term trade in a such a scenario before returning to a long-term Sell.
Takeaway
The key investor takeaway is that Novavax is likely to remain under pressure in the years ahead. The small biotech would appear to lack negotiating power in a more normal vaccine market heading into 2024 and the demand for the Covid vaccine is likely to only slip further.
The stock likely doesn't face the dire negative outcome with operating costs under control, but the small biotech does still have substantial contract liabilities, including the $700 million for the Gavi arbitration. In the right scenario, Novavax could make a great short-term trade, but the stock is a big time sell on any rally.
For further details see:
Novavax: Sell A Covid Bounce