Novavax's Big Disappointment -- What's Next?

The failure of a key late-stage trial studying Novavax's (NASDAQ: NVAX) vaccine for RSV, a common respiratory virus, casts significant doubt on the company's future. Is Novavax's future dim?

In this clip from The Motley Fool's Industry Focus: Healthcare podcast, analyst Kristine Harjes and contributor Todd Campbell discuss the impact of this trial on the company and what the disappointment means for investors.

A full transcript follows the video.

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This podcast was recorded on Sept. 21, 2016.

Todd Campbell: Novavax was anintriguing -- well,it's still intriguing, but it's much less intriguing after they reported phase 3 data froma study that was evaluating a vaccinetargeting something called RSV, a very common viral infection that can bedangerous in elderly patientsand very young patients. So,patients that you could argue are immunocompromised.

Kristine Harjes:Right. RSVis actually the second leading cause of deathin children under 1 year old. It affects about 4 to 5 million children just in the U.S. alone. There are about 2.4 million adults over 65 that are affected. Novavax was looking to make a vaccine for thisvery common virus. You would think, if it was that prevalent,it was probably going to make a lot of money. So people were veryexcited about Novavax,and ultimately really disappointed, as we mentioned. They were down 84%when it was reported that,pretty much, the vaccine does not work.

Campbell:Yeah. Investors were very hopeful. Developing vaccines is hard and expensive. It involves trials that include thousands of patients, and multiple years. So people had really a lot at stake for this company, and they had bid the market cap on this company up into themultiple billions of dollars, with the view that basically, they were doing a study thattheoretically would allow for vaccinations of every elderlyperson over the age of 70. There are 76 million baby boomers out there. Novavax was estimating that if this study had panned out, its vaccine could be used in up to 100 million seniors per year. That's an astounding figure. They were throwing around numbers as high as $6 billion per year in peak annual sales.So the fact that this trial failed,obviously, was a devastating blow to the company.

Harjes:I think it's also a pretty good reminder about the statistics that happenin the background behind these studies. If you look at their initial smaller trial, it was 1,600 people, and half of them got the vaccine, half of them got a placebo, and the results werejust barely statistically significant. So they reported that there was a P value of 0.041. What that means is there is a 4.1% chance that thedifference between the two groups of patientsoccurred just by chance, and there's not actuallysomething meaningful going onwith the vaccine. It turns out,that was the case. When you get to the bigger trial,you have pretty much even resultsbetween people whoshowed signs of infectionwho had been taking the vaccine,and those who just got the placebo. It's a good reminder for investorsthat when you see studies that are justbarely passing the mark ofstatistical significance, that's a little bitof a reason to be nervous.

Campbell:Right, andit's also a good reminder to investors to look at -- last August, this company'smanagement came out and said, "Hey,look what we've done in phase 2, the 1,600-person study. We'vesuccessfully met our endpoint." Andwithout doing the due diligenceand digging a little bit deeper like you're suggesting,people were taking that at face valueand thinking, "OK, great! Youexpand this out to more patients andprove that this thing works in more patients. It's a no-brainer. Get this thing on the market,and let's make some money." You need to take smaller phase 1 and phase 2 trial results with a verybig grain of salt,recognizing that phase 3 trialsstill have a very high failure rate. I think I've seen in the paststudies showing that failure rates in phase 3 can run from 30% to 40%. That's asignificant failure rate. So you may have succeeded in phase 1 andsucceeded in phase 2,but that does not guarantee you will succeed in phase 3.

Harjes:Exactly. Now, Novavax,looking forward, they're trying thevaccine in healthy pregnant women toprevent the virus in the infants that are then born. They also have a fluvaccine and an Ebola vaccine that are both very early stage. There's reallynot much left with this stock.

Campbell:The value, potentially, in this stock now,in my view,is that study that's being donein pregnant women. But I think the completion data on clinicaltrials.gov for that trail is something like 2020.I don't know if we get interim results before then,but theoretically, we're talking a whilebefore we know whether or notthis vaccine can be savedand still have an applicationthat's worthwhile. Even though the stock is trading at only $1-something per share,investors have to realize that it still has a $444 million market cap. This is not a company that is valued at $50 million or something. It'sstill carrying a $444 million market cap, and it doesn't have a drug that'slikely to make it out to market now forat least a couple more years.

Harjes:Yeah. Neither of us istrying to catch this falling knife.

Kristine Harjes has no position in any stocks mentioned. Todd Campbell has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.