I had virtually memorized the call transcripts of May 2
and March 18. While both were positive, the tone had clearly changed on the May
2nd call. Erck said: “Interactions with the regulatory agencies have been, and
remain, very good.” Later he said: “Let me emphasize that we remain optimistic
that we have a Phase III package, including both safety and efficacy data that
can support licensure.” And then he said: “We believe we have achieved an
important breakthrough in the field of pediatric infectious disease.” Then the
President of R&D (with reference to the all-cause data) said this data was
“quite profound.” At one point, Erck indicated that the KOLs were unanimous in
their support of the data. He also said that their potential partners loved the
data. So why was Erck so positive about obtaining regulatory approval? I
surmised that some of the KOLs probably had close ties to the FDA staff, and
thought their view of the data was similar to their own. We were told we would
hear about the key regulatory meetings held in May and June in the 3rd
It got even better than that. Erck told us there would be
“multiple investor communications” later in the quarter (Q2). When asked about
it, he said those communications would be about RSV and Flu. I thought to
myself…if we weren’t going to hear about the most important presentations in
the Company’s history until Q3, what could he possibly tell us about RSV in Q2?
After all, there was no additional data to disseminate. So, I thought maybe we
would hear that NVAX received the WHO’s blessing for pre-qualification status
for the RSVm vaccine, and/or a major purchase contract with the Gates/GAVI
alliance. For Flu, there were three possibilities: (1) Confirmation that Phase
III would be an immunogenicity trial, (2) An article in a prestigious
publication about the Phase II results, and (3) Don’t laugh…a BARDA award. We
learned that the BARDA award would require a Phase II study. Those top-line
results were published on January 3rd.
So, I thought NVAX’s plan was to build up some goodwill
with some of these announcements before the June 28th meeting, then
win the vote on the options plans, then follow-through with the regulatory
decisions in Q3. The announcement from the FDA destroyed everything. Not only
was the response not anticipated, but the timing was certainly not anticipated.
NVAX thought they would hear from the FDA in Q3. The announcement last week
destroyed NVAX’s short-term strategy.
It is hard to imagine that NVAX sells today at
$.25/share, ~ $150M on a fully-diluted basis. It is selling at virtually
nothing. Management is asking us to reward them for this performance by voting
to increase the number of shares in the Stock Incentive/Stock Purchase Plans so
that they can award themselves options at $.25/share. That way, even if they
ultimately sell these shares for $1 or $2 or $3 (old share structure), they
will make 4-12X their money, without taking any risk…all at our expense. Not
only do I consider this a flagrant violation of the fiduciary duty owed to the
stockholders, I also view it as one of the most egregious acts of pure greed
that I have ever witnessed. Frankly, I am dumbfounded by the suggestion…
I am hoping that these proposals are voted down, so that
Management’s interests are then aligned again with those of the stockholders. NVAX
then immediately needs to announce that they have hired an investment banker to
sell the Company. Putting aside the value of the patent portfolio and the
longer-term potential revenue streams, NVAX has three programs that can be
expected to generate revenue in the short-term. They are RSVm (Europe), RSVm
(LMICs) and the Influenza vaccine for the elderly.
We’ve discussed it perhaps 100 times. The key difference
in assessing the data between the FDA and the EMA is that for the lower bound
confidence interval number, the FDA required a 30 and the EMA required a 0.
Everyone on this Board knows that NVAX’s lower bound number was -1 using the
test site data, and 15.9 using the more representative pre-specified
blinded-pediatrician data aggregated from examination of the hospital records.
IMHO, the FDA’s decision was an effrontery to mankind, but they can always hide
behind the fact that the lower-bound confidence interval number missed by a
long-shot. The EMA cannot hide there. Sure, someone can argue that -1 isn’t
quite 0, so there is still some risk. But then, we would have to ignore the
very favorable pediatrician data, the demonstrated efficacy in preventing
hospitalizations, the strong data in preventing severe hypoxemia, and the
“quite profound” All-Cause data, which showed a reduction of 46% for severe
hypoxemia at 90 days of life, even when that condition was not caused from RSV.
On top of all that, the vaccine has a safety profile that mirrors a placebo.
All I can say is that if NVAX is not given the go-ahead by the EMA, then the
“FIX” really is in. Any serious bidder for the Company would have to include this
expectation in their number. The European market was estimated by NVAX to be
$750M. Normally, I would use a 2 multiple to determine a fair valuation. Under
these circumstances, I think we should use 1.
As to the LMICs, similar to Europe, I believe it is not a
question of “if” but “when”. NVAX is working with the WHO to obtain the
legally-required pre-qualified status to market the vaccine to these LMICs.
Europe and the US account for 8M of the 120M babies born worldwide per year. The
Gates foundation is targeting 55M, or ~ ½ of the remaining 110M babies. Cut
that number in half again, and call it 25M. If NVAX is allowed to make $10
profit per dose (instead of the $200 profit on European and future US sales),
this would provide an annual $250M contribution margin. Under normal
circumstances this annuity could be worth ~$500M. Let’s call it $250M.
Once NVAX receives permission to do an immunogenicity
trial for its Phase III Flu trial (which I believe is imminent), the chances of
success skyrocket to > 90% IMHO. I would put a nominal value of $500M on the
NVAX Flu program and RSV/FLU combo program.
These are very low numbers…as they aggregate to $1.5B on
600M fully diluted shares, which equals $2.50/share (old money). Right or
wrong, this is what I would expect. NVAX’s $1.4B of losses, which would yield
about a $400M tax shield, will offset the $328M in debt. Under these
circumstances, it is prudent to ignore the future substantial potential
benefits of having an RSV vaccine to reduce hospitalizations for seniors that
have COPD, and to prevent RSV for the senior market. (I believe the COPD market
is highly addressable and lends itself to a fairly clean trial process.)
I believe these numbers are so low that they will invite
companies that that are not currently in the vaccine business to consider
“creating” a world-class vaccine division literally over-night to offset their
higher priced drug immunotherapy programs. Companies could pay $1.5B just to
get the NXAX R&D capabilities and the longer-term revenue potential they
provide. But, in the case of a NVAX acquisition, the acquirer would also be getting
the expectation of a fairly sizeable revenue stream in the short-term,
something you rarely see should the deal be priced this nominally.
NVAX needs to confront the reality of this fire sale now.
The Company will be out of money by October, and therefore will seek to raise
money probably in July. It would be nice if they could get the EMA to render a
decision in July, rather than September, before closing down for August. In any
case, for the reasons I have elaborated, any bidder contemplating success would
need to include this approval expectation in their offer.
The old 600M fully-diluted share count includes over 110M
shares for prior stock option grants and the conversion of debt. I suspect at
least 80M of these shares would not currently materialize in this count. That’s
the good news. The bad news is that we don’t know if NVAX will be able to avoid
raising say another $40M one last time to get them through the sales process.
Hey Gates…how about giving us a down-payment on a future sales order…just for
On a personal note, I have not been reading this Board
for about two months. So, I don’t know if what I have said here has already
been discussed. A good friend of mine told me that some folks were looking for
some input. I am personally having a difficult time processing what has
occurred and sleeping. Under no circumstances did I believe we would ever be
confronting a fire sale (with a 75% discount on price, and about an 85%
discount to the shareholder because of the additional dilution). I have spoken to many friends, family and
associates over the last decade about the potential merits of NVAX and their
technology. For me, personally, this is a very difficult time.
I wish all of you fathers out there a Very Happy Father’s
Day. Let’s hope that the NVAX outcome can be somewhat better than what I have