Last week, four of the top-five biggest biotech stocks hit new all-time highs as investors speculated who would win the novel coronavirus vaccine race. Ever since Covid-19 decimated markets, speculators have gambled on unknown biotechs, pouring billions into unproven vaccine-makers. Among these names was a little-known Maryland-based vaccine company, Novavax (NASDAQ:NVAX). After an incredible 3,400% run since January 2020, NVAX stock shot up from $4 to a whopping $140 per share.
But the company had been on the verge of collapse before receiving $1.6 billion from the Trump administration’s Operation Warp Speed. In the middle of this frenzy, investors should take a deep breath, and sell the stock.
Here’s a closer look at why.
NVAX Stock Is Too Expensive
Before the coronavirus hit, Novavax was a struggling company. Over its 30-year history, the company had failed to push any experimental vaccine through Phase 3 trials. Its stock price plummeted to 39 cents in March 2019.
With Covid-19, the company’s fortunes changed overnight. In a surprise move on July 7, the federal government announced it would pay Novavax $1.6 billion to fast-track the development of a coronavirus vaccine. The government had earlier chosen five far more established companies: AstraZeneca (NYSE:AZN), Johnson & Johnson (NYSE:JNJ), Merck (NYSE:MRK), Moderna (NASDAQ:MRNA) and Pfizer (NYSE:PFE). The surprise bet on Novavax’s unproven protein-driven vaccine caught many observers off guard.
Can Novavax create a coronavirus vaccine? Possibly. Only a total cynic would turn their nose and say, “absolutely not.” But with its unproven drug only in accelerated Phase 1 trials, there’s a good chance the $8 billion company has reached the upper end of its potential market value. As the blue-chip “nifty-fifty” bubble showed investors, even the best companies have a finite worth.
Competition Heats Up In Coronavirus Vaccines
According to the New York Times, drug makers are currently testing more than 160 different vaccines. Twenty-seven of them are now in human trials.
The speed and the sheer number of trials mean consumers will eventually have more than one successful vaccine. According to Dr. Emilio Emini of the Bill & Melinda Gates Foundation, parallel development of vaccines can speed up the process immensely.
Not just that. Unlike malaria and HIV vaccines, coronavirus vaccines have shown modest early successes. These findings have led researchers to believe coronavirus vaccines will be widely available by mid-2021. Today, the Bill & Melinda Gates Foundation follows close to fifteen different vaccine candidates, including several by Chinese researchers.
Even if Novavax succeeds in bringing a coronavirus vaccine candidate to market, its victory will likely be short-lived.
Politics Will Shrink Novavax’s Market Size
Anticipating political fallout, several major vaccine developers have already announced zero-profit plans for their coronavirus vaccines. On June 13, AstraZeneca, one of Europe’s largest drugmakers, announced it would supply Europe with up to 400 million doses of Oxford University’s vaccine at zero profit. On July 16, Novartis put forward a similar plan to help developing nations.
Financial analysts have understandably taken note. On Thursday, H.C. Wainwright analyst Vernon Bernardino published an analysis estimating a peak global market for coronavirus vaccines of just $10 billion by 2023. In comparison, the demand for Hepatitis C drugs, a far less prevalent disease, stood at around $7.8 billion in 2018.
Can Novavax Still Win?
Given Novavax’s unusual approach to using proteins to trigger an immune response, the company may still come out on top. Policymakers worldwide have scrambled to find a vaccine that’s not only safe and effective, but also fast to mass-produce and administer.
In the perfect scenario, Novavax might create 100 million vaccines for the U.S. government for their contracted $1.6 billion, and another 500 million doses for the rest of the world. The company might then sell its existing IP for $30 billion. That’s around half the market value of GlaxoSmithKline’s (NYSE:GSK) entire vaccine portfolio, the world’s largest maker of vaccines. The perfect outcome could pump NVAX stock to almost $700 per share.
But just because something can happen doesn’t mean it will.
More likely, even if their vaccine works, Novavax will be among the dozens of viable treatments. And NVAX stock will lose its luster. Competing in a $10 billion-dollar market could put its value close to H.C. Wainwrights’ estimate of $132 per share.
And what if its vaccine fails? Even in normal times, the probability of any drug making it from Phase 1 trials to approval are just 5.7%, according to a study that tracks 15 years of Food and Drug Administration data. And it wouldn’t be Novavax’s first failure with this type of vaccine; Novavax’s protein-based approach flopped in 2017 during Phase 3 trials of Resvax, a similar vaccine targeted at a respiratory tract illness in children.
What happens then? NVAX stock would be worth precisely where they started before the coronavirus frenzy: $4. Investors are better off taking profits and finding a surer bet.
Tom Yeung, CFA, is a registered investment advisor on a mission to bring simplicity to the world of investing. As of this writing, he did not hold a position in any of the aforementioned securities.
