After a phenomenal start to the year in which the stock jumped 140% between January and mid-August, shares of biotechnology company Novavax, Inc. (NVAX) took an unfortunately sharp reversal.
In the month of September alone, NVAX dropped 33% in the markets. Further exacerbating matters was an earnings and revenue miss for third quarter of fiscal year 2015 results — bringing to question whether NVAX has the goods to press forward in light of recent bearish developments.
Despite the drama in the markets, overall opinions toward Novavax are actually quite mixed. Of the nine research firms covering NVAX stock, a majority view the biotech as a “strong buy,” with none offering “hold” or “sell” recommendations.
However, independent analysts from respected financial publications have countered with bearish arguments, citing weakness in fundamental factors as well as technical patterns that statistically suggest imminent volatility.
Granted, there are some obvious reasons not to invest in Novavax. Its revenue per share has been comically flat over the past five years, and earnings growth is on the better side of nonexistent. Not surprisingly, its quarterly financial statements have largely disappointed Wall Street, with NVAX stock missing earnings per share consensus target 10 times over the past 15 reports.
The one major saving grace is that long-term debt for Novavax is minute relative to the cash it has on hand. But those focusing on traditional barometers of corporate health are missing the bigger picture.
Novavax Is Tackling a Complicated Problem
By nature, biotech firms are notorious for engendering volatility in the markets. Even worse are those engaged in clinical trials of experimental treatments — unexpected setbacks can rapidly evaporate years of profitability, as investors of Clovis Oncology, Inc. (CLVS) have found out the hard way.
So let’s not criticize a leopard for having spots; traders should know what they’re getting into with experimental biotechs.
The ace up Novavax’s sleeve — a potential game-changer — is its proposed vaccine for Respiratory Syncytial Virus, or RSV. According to the National Institute of Health, RSV is one of the leading causes of virus-related lower respiratory tract illness in infants and young children. The healthcare costs associated with RSV can well-exceed hundreds of millions of dollars. In addition, RSV can lead to respiratory illnesses for the elderly and anyone whose immune system is compromised.
Finding a cure would not only be a humanitarian boon, but a financial one as well. The challenge, however, is the age of the target patient. RSV typically levers its most severe affliction on infants younger than three months, and that creates all manners of difficulties since the immune system is immature at that stage.
The innovative approach that Novavax took is to instead address the mother’s immune system. A report released by the company in late September demonstrated that pregnant women at high risk for delivering babies susceptible to RSV could receive a vaccine, thus indirectly offering protection to the offspring. Clinical studies revealed that the vaccine provided “coverage” to the infants for a few months — just long enough to wait out RSV’s most dangerous period.
Unfortunately for NVAX stockholders, Wall Street was unimpressed with the scope of the vaccine’s effectiveness. Although Novavax demonstrated proof of concept, the distribution of antibodies from mother to child was deemed low. The markets were particularly harsh, hammering NVAX stock 20% from its opening price of $7.91 on Sept. 29, the release date of the clinical results.
Bottom Line on NVAX Stock
While the medical analysis has bearish implications for NVAX, keep in mind that RSV is a very serious problem that will eventually need to be addressed. Because of the aforementioned challenges in developing a treatment, there are no official RSV vaccines available.
The only practical alternative is Synagis, an intravenous drug developed by AstraZeneca (AZN). Therefore, the market remains wide open. Should Novavax crack the RSV code, expect rampant demand for NVAX stock, and a straight buyout from one of the Big Pharma club members.
Ultimately, NVAX stock is a balancing act. On one side of the equation, several investors have gotten cold feet based on broad challenges, quickly driving down NVAX in the markets. But the more optimistic side highlights the ingenuity of Novavax, taking on a medically complex project with proven results.
Although the scope of the Novavax treatment is less than desired, there’s huge potential for a breakthrough. And that tempting possibility may be the tipping point for the bulls.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
