More than a month has passed since we learned the results of Q2 and along with it, NVAX’s ignominious revised forecast for 2022. Suppose you were one of the analysts following NVAX? Your forecast was blown out of the water. You were made to look incompetent and unreliable…as someone who had no clue as to what was going on in the Company. The level of distrust, disgust, and contempt you felt regarding NVAX management was now at its zenith. You see the stock trading well below 40 after the call. So what do you do? Common sense suggests that you would put out a revised price target of $60 or so, and then include in your research note a comment stating that the target price will be adjusted as new developments warrant.
So what did they do? After being thrown forcibly under the bus, analysts from Cowen, Reilly, and Jefferies put up revised price targets in the range of $110-$146. DOES THIS MAKE SENSE TO ANYONE? HOW DOES ONE RECONCILE OR EXPLAIN THIS? I gave this a lot of thought. The only conclusion I could reach that could explain this ostensible irrational behavior is that these analysts were all convinced that a sale of the Company was a likely event. I think we would all agree that given NVAX’s bloated cost structure, it would be difficult to achieve these targets based on conventional earnings. Moreover, the last thing these analysts are going to do is to trust NVAX management on its ability to execute properly to achieve the required earnings levels to justify these price targets. That ship has long sailed.
So, is my premise unreasonable? Actually, I think it’s the only scenario that makes any sense. Consider what NVAX told us previously. By including on the June Proxy the proposal to eliminate the super majority requirement to realize a change in control, NVAX telegraphed to the world that they were likely having discussions with an interested party about a buyout, and that a price or price-range had been discussed, and that the price would not be high. If it were high, they wouldn’t have to worry about 75% of the outstanding shares voting for the proposal. It’s apparent that the NVAX management is trying to facilitate the sale of the Company. Despite the fact that the proposal did not pass, the message remains the same…When the analysts came up with their otherwise inexplicable revised price targets, they merely confirmed what NVAX had already told us.
So back to the original question: How did they get their numbers? To answer that question, let’s go back to what we learned from the Q2 conference call. We were told that the annual Covid market was expected to be between 25%-52% higher than the Flu market. I checked the CDC website, and they said they expected that 173-183 million doses of influenza vaccine would be made available in the U.S. for the upcoming season. Let’s call that 175M doses. This suggests a vaccination rate of ~53% which I believe is customary in this country. The U.S. typically represents about half of the influenza market. So, if we double the 175M, we’re at an estimated 350M doses for the world market. (Note that if only the European Union accounted for the additional 175M doses, their vaccination rate would ~ 40%, which I believe is historically accurate. So, there’s our sanity check for the 350M estimate. If we increase the 350M by 25%, we get an estimated annual Covid market (to developed countries) of 437M doses. If we increase it by 52%, we get a 532M estimate. Recall that Trizzino had stated that Sanofi estimated a 500M annual market. So, we’re in the ballpark. Take the lowest estimate, 437M, and multiply it (not by the 25% or 20% market share which Trizzino had suggested, but by 12.5%). That would give us 55M annual Covid doses to developed countries. Token orders from the US and the EU only (to provide an alternative to mRNA) should exceed this estimate. Apply a $30 price (even though one can expect a much higher price in a post-pandemic market), and you have $1.65B in annual Covid revenues from NVAX’s customers. Now we need to estimate licensing/profit-sharing revenues that will be realized from NVAX’s partners in Japan (Takeda), Korea (S.K. Bio) and India (Serum Institute). For Japan, I’m estimating 30M doses. The license fee is 12% of $30, or $3.60/dose. This equates to $108M in annual licensing revenue. For S.K. Bio, who sells to Korea, Thailand and Vietnam, I’m estimating 50M doses. At just $15/dose at 12%, the licensing fee is $1.80/dose. This equates to $90M in annual licensing revenue. For India, I estimate that Serum will produce and sell 200M doses to India’s 1.4B people. For a bivalent vaccine, I would expect a $12 price, an $8 cost, a $4 profit, of which $2 goes to NVAX. This equates to $400M in annual license fees. In total, we have ~ $600M in annual licensing fees from NVAX’s partners. To be consistent with our conservative view of indiscriminately lowering our estimates, let’s cut this number by 1/3, and go with a $400M estimate. This brings total estimated annual revenue to be derived only from Covid vaccine sales to $2B. (Please note this has nothing to do with 2023 revenues, which I believe will exceed this amount. If NVAX ends up losing $3B of the $8B as originally reported with the signed APAs, that gives them $5B. Subtract the $2B they will do in 2022, and that leaves $3B that they should bill in 2023, even if they generate no “new” business). With the $2B post-pandemic estimate, I’m trying to go well beyond a conservative estimate. For example, if we used a 15% market share against the 437M market, and applied a $40 price/dose, revenues would be $3.0B, or 50% greater ($2.6B in sales and $400M in licensing fees). The standard revenue multiple for the industry is 4.0. I believe this multiple is applicable here based on the following: (1) The buyer will fully expect to capture more than a 12.5% market share as the competitive advantages of NVAX are made known to the world, (2) NVAX’s licensing revenues should explode in the future, reflecting the licensing of additional products, some of which will be more expensive, yielding still higher licensing fees, (3) In a post-pandemic environment, I believe the price/dose will substantially exceed $30, especially for a bivalent vaccine, and (4) Participation in the Covid sweepstakes is a fairly exclusive club. We essentially only have an mRNA option in the US. So, excluding the pipeline, we have an $8B valuation estimate for NVAX’s Covid presence.
Let’s review the pipeline. We have Flu, the Covid/Flu combo, Matrix-M and the respiratory vaccines. I have seen estimates of the world Flu market range between $5B- $10B. I will use an annual revenue run-rate of just $500M for NVAX’s candidate, despite its already-documented superiority. To date, NVAX is the only company in the world that has demonstrated the feasibility of combining both the Covid and Flu vaccine. Phase I clinical results demonstrated that NVAX could achieve significant immunogenicity for each component (suggesting protection) while yielding very acceptable safety results. I believe upon authorization NVAX can sell 40M doses of this vaccine to the developed world at $60/dose ($2.4B in annual revenue). Let’s pencil in just 20M doses at $50/dose ($1.0B in annual revenue). These estimates give us $1.5B in annual revenues for both the Flu vaccine and the Covid/Flu combo vaccine. At a 4 revenue multiple, this gives us a $6B valuation. The problem, of course, is that these products are not available now. If an acquisition closes in 2023, we could be another 2-3 years before we see these products marketed. We need to discount the $6B valuation for both time and risk. I will use a 25% discount for time and a 35% discount for risk. With a 60% discount, we value the Flu and Covid/Flu combo vaccines at just $2.4B. I believe this is an extremely conservative estimate for these assets. For Matrix-M, I’m thinking a minimum of 300M doses to combat malaria at $.75/dose ($225M). I don’t know what the market could be for the military and business travelers. Let’s add just another $25M to take us to $250M in annual revenues. With a 4 multiple, we have a $1B valuation. This valuation does not include all the potential applications Matrix-M could have worldwide to improve the chances of some compounds to be authorized or to improve the efficacy for those vaccines already authorized. Then we have the respiratory vaccines. There’s been a lot of talk about the RSV candidates from Glaxo, J&J and Pfizer. Maybe I missed something, but I don’t recall anyone creating a vaccine that can prevent pneumonia FROM ALL CAUSES. NVAX has already demonstrated it can do that for newborns even while using an inferior adjuvant. When you vaccinate all moms at the optimum time and substitute Matrix-M for alum, the results should be stunning. NVAX has a similar opportunity with the seniors. Their failed vaccine candidate in 2016 did not even have an adjuvant. They need to define the trial endpoints correctly…and that should open the door, despite the introduction of Big Pharma’s RSV candidates. This is the kind of opportunity that could generate billions in future revenue. It’s the kind of vaccine that Big Pharma will want in the NVAX basket, but they will not want to pay for it. I’m going to put an arbitrary valuation of $1B on NVAX’s respiratory vaccine candidates, knowing that any kind of quantitative analysis could generate a substantially higher number, even after discounting substantially for time and risk.
So, we’ve got an $8B valuation for NVAX’s Covid vaccine and a $4.4B valuation for the pipeline. A $12.4B valuation on 100M fully-diluted shares gives us $124/share. Is it a coincidence that this estimate is within the range of the estimates provided by Cowen, Riley and Jefferies? Perhaps…perhaps not. There are one billion ways to back into the analysts’ estimates. I have just illustrated one of those one billion ways. My thesis is simple and straight-forward. After being thrown under the bus, the analysts came up with price targets that can only be achieved by a sale. While I can be totally wrong, I just don’t see any other scenario that can reconcile this. The analysis I have proposed here simply suggests that if someone were to make very reasonable assumptions, the extension of those assumptions can easily take us to within the range of the analysts’ estimates. For those of you that like to view things from the dark side, use the 3 multiple (instead of 4) on our $2B Covid revenue estimate, even though it is not warranted by the situation. That would give us $6B + $4.4B for the pipe, for a $10.4B total ($104/share). For those of you that have an extra strong proclivity for the negative, add to that adjustment by arbitrarily cutting the valuation of the pipeline in half (from $4.4B to $2.2B). Again, this is totally unwarranted in my view. That would give us a total valuation of $8.2B, or ~ $82/share. (I believe it would take an extreme set of circumstances for someone to be able to buy the Company at just 3X projected annual Covid revenues (based on NVAX achieving a 12.5% market share), while valuing the entire pipeline at just $2.2B).
Let’s review some things that people are thinking about, like cash flow. For the 6-month period ending June 30, 2022, NVAX had a cash balance of $1,387M. This represented a $141M decrease from the $1,528M they had at December 31, 2021. This decline unfortunately does not represent the true magnitude of their cash burn. Despite the net write-offs of $248M for inventory, NVAX’s cash position was enhanced by receivables and payables account balance changes ($292M) and by a net money raise of $165M. This means that outside of operations, changes on the Balance Sheet provided ~ $209M of additional cash (This is $292M plus $165M minus $248M). So, NVAX’s real cash burn (from operations) for the first six months of 2022 was ~ $350M ($141M as reported plus the $209M in Balance Sheet adjustments). NVAX reported <$900M in revenues for the first six months of 2022. In order to achieve their $2.0B minimum revenue target for 2022, NVAX will need to generate revenues of $1.1B in the second half of the year, or $200M more than what was realized in the first six months. Ignoring that, their cash burn could be in the $350M-$400M range in the second half of 2022. If it were $400M, NVAX would end the year with ~ $987M in cash. This is not great, but it is not the dire position some people may believe.
Another issue that is raised is how can the Company be bought at $120 when it is trading for $25, or now, $23? I have always believed that before NVAX can be sold, it must achieve four things: (1) Good clinical trial results on the Flu/Covid combo candidate, (2) Worldwide booster approval, (3) Worldwide approval for children, and (4) Capability of making their own cookies via the filing of the CMC supplement to the EMA. As of today, NVAX has only accomplished the first requirement. We were told on the earnings call that the CMC filing will be made in Q3 (so we only have a week to go for that commitment to hold up). We were also told in another venue that FDA booster approval can be expected shortly. So, by the end of October, all the strategic boxes should be checked. These accomplishments should support the stock. Subsequently, NVAX can provide a simple press release stating: “Based on our cumulative accomplishments, we believe we have created a shareholder value that is significantly higher than the value implied by the current stock price. To that end, we have retained the services of XYZ investment bankers to explore and evaluate all strategic alternatives, including the sale of the Company”. This announcement should bridge NVAX’s then higher trading price to the targeted buyout price. Consider a couple of things: How many of us are familiar with a story where a biotech was man-handled to a price of $2-$3, and then purchased for a price in the teens just a few months later? Also, recall a few months ago when the stock was trading at ~ $60. In an interview, Erck talked about the whole sector being depressed, but that the Company had created a lot of value (implying a value much greater than the prevailing price). I would suggest the value he was referring to was supported by ongoing discussions with buyout candidates.
Last thought…what could happen that could totally negate the scenario we just discussed? Two things come to mind…I’ll address one of them here. We all know the trial being conducted in the United Arab Emirates is scheduled to be completed by the end of this month. In this trial there are only 1,000 participants. All participants have already been immunized with Sinopharm’s Covid-19 vaccine. Half the participants were boosted with Sinopharm’s vaccine, and half were boosted with NVAX’s vaccine. We should see efficacy-like data in October. They won’t be able to measure true efficacy because we don’t have a control (placebo) group. But what would happen if it is reported that half the participants that were boosted with the Sinopharm vaccine were infected with Covid during the six month trial period, while only 20% of the NVAX group became infected? Wishful thinking? Perhaps. But if something like this were to occur, and based on these trial results, NVAX was able to negotiate substantial supply agreements with several countries in the Mideast, this could change things considerably for the better. Heck, would China ever consider changing its destructive no-tolerance close-down policy by administering a vaccine proven to be safe and demonstrably effective for all its citizens who previously were vaccinated with the Sinopharm vaccine? Just throwing the possibility out there…
Folks, as we endure more pain than we ever thought possible, I’m trying to evaluate what we have based on what I believe are more than reasonable assumptions. There’s really nothing else to do. I’m holding on to my position because I believe that a higher valuation is warranted and will be realized.