It's easy to understand why investors might think Novavax, Inc. (NASDAQ: NVAX) stock can't possibly sink further than it has following a meltdown in September. After all, the company has a $300 million cash pile, and success in an ongoing late-stage clinical trial could send the stock soaring.
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A closer look suggests Novavax isn't as well funded as it might appear on the surface. If its once-failed RSV vaccine disappoints again, raising enough capital to carry remaining candidates toward an uncertain future would surely grind investors' share of any potential profits into dust. Let's have a closer look at the case for selling this extremely risky stock.
Novavax finished September with $300.3 million in cash, cash equivalents, and marketable securities. To protect liquidity, the company is reducing its workforce by about 30%, and it expects to lose between $70 million and $100 million less in 2017 than it will this year. That should be an easy promise to keep, as the failed phase 3 trial testing the RSV F vaccine in 11,856 older adults has ended. In the first nine months of the year, though, it plowed through a stunning $222.86 million.
Some belt-tightening will extend the cash runway a bit, but I'd be surprised if management doesn't announce another large share offering within a couple years. Last December, Novavax started another phase 3 trial that could enroll up to 8,618 pregnant women and last up to four years. The Bill and Melinda Gates Foundation chipped in with an $89.1 million grant, but that will only cover a fraction of the bills that trials this size tend to receive.
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A significant reduction in RSV infection rates among the maternally immunized infants would send the stock soaring. The virus is the second leading cause of infant mortality worldwide, and it sends more babies to U.S. hospitals than any other cause.
However, the vaccine candidate's chance of success seems awfully slim. In September, Novavax stock cratered when the company announced a slightly larger percentage of older adults in a group receiving the same vaccine became infected than the group receiving a placebo.
To be fair, just 0.44% of patients in the phase 3 placebo group became infected, which was much lower than the 1.75% rate of infection among placebo patients observed in the smaller phase 2 study. The company's argument that the low attack rate is to blame isn't entirely without merit, but it doesn't seem like a risk worth taking.
If Novavax's fancy nanoparticle technology had already been proven unquestionably successful with a different virus, the low attack rate theory might deserve more credit. When you consider the dismal results in older adults, plus the fact that RSV virus has stumped the medical community for over 50 years, I'm inclined to believe this RSV F vaccine candidate will end up on the scrap heap as well.
Nothing in the bullpen
If Novavax continues throwing money at its lead candidate without success, it's difficult to see how it will fund development of its backup candidates. Recently, the company pivoted toward a preclinical Zika vaccine candidate. The company intends to start a phase 1 trial with it next year, but even this is up in the air. In October, it began a non-human primate study with the Zika candidate. If successful in the animal model, it still needs a green light from the FDA before even beginning human studies.
Even if all goes well with its Zika vaccine candidate, it would be several years before the company is ready to file an application. If the once-failed RSV candidate flops again, the market would probably hammer the stock out flat. Selling enough of its own shares to fund development of a Zika vaccine, or any other candidate would be extremely difficult.
About $315.98 million in long-term debt in the form of convertible notes due in 2023 clouds the company's future even further. The maximum conversion rate might limit the notes' dilutive effect, but any company looking to acquire Novavax could be required to pay the outstanding balance in full once the company changes hands.
With everything riding on a candidate that barely passed a small trial and failed a much bigger one, you're probably better off enjoying the excitement from a safe distance.
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