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Msg  63518 of 65209  at  6/16/2019 4:32:42 PM  by

Equitynova


I Had It All Figured Out

 

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 quarter.

 

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 the memories?

 

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 described.

 

GLTA,

Equitynova



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Replies
Msg # Subject Author Recs Date Posted
63519 Re: I Had It All Figured Out bensonfuller 1 6/16/2019 8:37:25 PM
63522 Re: I Had It All Figured Out roscho 0 6/17/2019 1:40:56 AM
63525 Re: I Had It All Figured Out horcents 0 6/17/2019 9:25:47 AM
63533 Re: I Had It All Figured Out - Equitynova wwilson_2003 7 6/17/2019 11:01:11 AM
63535 Re: I Had It All Figured Out wmkjohiv 0 6/17/2019 2:16:54 PM
63552 Re: I Had It All Figured Out Cosaman 16 6/17/2019 11:43:21 PM
63586 Re: I Had It All Figured Out flucurious 0 6/19/2019 7:51:46 PM


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