At this point, it certainly seems like the easy money has been made in Covid-19 vaccine plays like Novavax (NASDAQ:NVAX). NVAX stock itself has rallied a staggering 3,350% so far in 2020, and it’s not the only biotech that’s posted such a parabolic rally.
Admittedly, NVAX stock is the best stock of 2020 so far. But Vaxart (NASDAQ:VXRT) has rallied over 2,000%. Altimmune (NASDAQ:ALT) has gained over 1,000%. Moderna (NASDAQ:MRNA) is up a paltry 240% by comparison but has added about $20 billion in market value in the process.
The obvious risk for all of these plays is simple: not everyone win the vaccine race. And for even the ones that do, it’s fair to wonder whether a large chunk of potential success already is priced in. Novavax, for instance, entered 2020 with a market value around $130 million. It’s now worth $8.8 billion, as the share price has skyrocketed, and the share count has increased.
Of course, there is some logic to the massive rally. Novavax has given investors reasons for optimism. And if the company is one of the vaccine winners, there should be upside in NVAX stock.
But success alone doesn’t guarantee that upside — or even that much upside at all. There are real questions that suggest at least some caution with NVAX stock, even after a pullback, and even beyond the question of whether Novavax will be successful.
How Many Winners?
It’s obviously difficult to forecast how much profit Novavax will generate from a successful vaccine. Looking just to 2021, five analyst estimates range from $5.86 to $21.75 per share. It would appear those analysts all are modeling in approval of some kind; if Novavax stumbles in its development at all, earnings next year could be negative. (Somewhat quietly, Novavax also has made progress on its NanoFlu vaccine, which could contribute profits even if Novavax can’t get a Covid vaccine approved.)
But one of the very key factors in post-approval profitability will be the number of companies that receive approval. After all, Novavax is far from the only company attempting to develop a vaccine.
Indeed, there are at least 23 different companies in the race. That includes not just focused biotechs like Novavax, Moderna, and Vaxart. Some of the world’s best drug companies, like Johnson & Johnson (NYSE:JNJ), Gilead Sciences (NASDAQ:GILD), and AstraZeneca (NYSE:AZN), have made progress as well. Russia claims to have a workable vaccine. European and Asian countries and businesses are working on vaccines as well.
In other words, NVAX stock isn’t just a straight play on Novavax’s vaccine efforts. Other efforts matter as well. If there are three — or five — approved vaccines in the U.S., Novavax’s market potential shrinks in a hurry.
And, right now, it seems likely that there will be multiple winners. It’s not going to be just Novavax that “solves” the pandemic.
Pricing Power and NVAX Stock
The competitive nature of the industry raises not just market questions, but pricing questions. Particularly if an integrated developer like J&J delivers a vaccine, pricing may not be what bulls expect.
In the early going, the news looks reasonably good. Novavax’s funding under Operation Warp Speed requires the company to deliver 100 million doses in return for $1.6 billion in funding. Those terms mean Novavax is receiving $16 per dose.
Does that figure hold in an approval scenario? It’s not clear. An integrated developer like J&J might offer to deliver vaccines for little cost or even for free. After all, the benefit of goodwill with government officials and politicians might easily outweigh near-term profits from a single drug. Political pressure in turn may limit drug companies’ appetite to push the limits on pricing.
At $16 per dose, the U.S. market would equal about $5 billion annually. International markets would be multiples larger. But cut that pricing and assume that Novavax’s vaccine only serves a sliver of those markets, and peak revenue estimates come down in a hurry. And in that scenario, a nearly $9 billion market capitalization seems to imply a rather high chance of approval.
And then there’s a final question: in the U.S. at least, how many citizens will actually get the vaccine?
Recent polling suggests that one-third of Americans won’t get a vaccine even once it’s available. Others may have health or financial considerations.
This is yet another factor that impacts potential estimates of peak earnings for Novavax. And it’s on peak earnings that biotechnology stocks usually are (and should be) valued.
To be fair, I don’t believe that NVAX stock has completely priced in approval. And NanoFlu offers another potential profit center, even if it almost certainly won’t be as large.
Rather, the point is that the case for Novavax stock, at this point, isn’t as simple as usually is the case for biotech stocks. Usually in the sector, approval means significant upside, and quite often a stock price that rallies by several hundred percent.
I’m not convinced that’s how NVAX stock will play out, even if the company does get a vaccine approved. There are other factors to consider, and those factors suggest that a good chunk of Novavax’s potential already is priced in.
Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets. He has no positions in any securities mentioned.