Novavax, Inc. (NASDAQ:NVAX) soared on Thursday following the settlement of a Covid-19 vaccine dispute and positive numbers from a peer. The biotech still has a bleak future and the annual settlement payments will pressure cash. My investment thesis remains Bearish on NVAX stock following the big rally.
Settlement
Prior to the open on February 22, Novavax announced a key settlement with Gavi to solve a dispute over Covid-19 vaccines. The biotech faced up to a $700 million payout due to a dispute on undelivered vaccines pre-paid by Gavi.
Under the terms, Novavax will now have to pay $475 million to Gavi through 2028, if not offset by vaccine credits. Novavax paid an initial payment of $75 million, with deferred payments of $80 million annually.
The annual cash obligation would be offset or reduced pursuant to an $80 million annual vaccine credit, which may be used for qualifying sales of any of the vaccines funded by Gavi for supply to low-income and lower-middle income countries. On top of this, Novavax appears on the hook for another $225 million of additional vaccine credits over the five-year term.
In total, Novavax still appears on the hook for up to $700 million worth of cash and vaccines. The one reason the market liked the news is the extended terms for payment, so the biotech can avoid any immediate cash crunch.
The company ended Q3'23 with a cash balance of only $666 million. Naturally, the market fears were for a large upfront payment to squeeze the remaining cash balance, but Novavax only had to pay out $75 million initially.
Upcoming Q4
Novavax is set to report Q4 '23 results prior to the open on February 28. The biotech should report a solid quarter due to the Covid-19 vaccine seasonality shifting sales to the winter months.
Due to slow Covid-19 vaccine uptake, Novavax had already forecast some sales slipping into Q1 '24, with combined sales targeted to top $600 million. The official guidance for 2024 was cut to ~$1.3 billion, with Q1 sales of $300 million included in the target due to late approvals pushing some drug sales out into the March quarter.
In a sign the quarterly results, or at least guidance, will disappoint, the company announced a staff reduction of ~12% of the global staff count. The company announced these job cuts are part of the original plans to reduce costs, with a target of lowering the workforce by 30% below the Q1 '23 levels.
Novavax was still spending at a run rate of ~$850 million on operating expenses during Q3 '23. These cuts are apparently needed to reach the goal of cutting expenses to $750 million for 2024. Some of the benefits from these job cuts won't even be realized until 2025.
Moderna (MRNA) just reported Q4 '23 results that technically beat analyst estimates, probably contributing to the positive sentiment on Novavax. The reality, though, is that Moderna continues to guide towards a 50% dip in 2024 sales with any uptick in 2025 revenues due an RSV vaccine that ironically Novavax had long attempted to gain approval on, but the company constantly failed to meet endpoint targets.
The fear here is that if Covid-19 vaccine sales remain depressed at the 30 to 35 million dose level in the U.S., Novavax won't have much market share to grab. The main opportunity ahead presented by management is the potential for a combination respiratory vaccine with current U.S. flu shots in the 130+ million range annually, but the issue is that Novavax won't have this vaccine approved until 2026, at the earliest, and Moderna and Pfizer (PFE) are pursuing a similar vaccine combination and considering an option to include RSV in the mix.
A big focus on the Q4 earnings report next week will be the focus on the cash balance. Novavax would have to make another $240 million in cash payments to Gavi by 2026, and the cash balance could become extremely pressured by that point with $315 million paid to Gavi at that point.
The biotech enters 2024 with analysts forecasting a $1 billion annual sales rate matched up with an operating cost basis of $750 million. Novavax would have to produce large gross margins on the limited ongoing Covid-19 vaccine sales in order to generate a profit.
Investors will want to laser focus on whether the company will burn cash annually going forward. Also, one has to wonder on the flip side whether cutting R&D quarterly to $100 million or below is large enough to effectively compete on vaccine development with Moderna and Pfizer.
Takeaway
The key investor takeaway is that Novavax isn't any further appealing after the large settlement with Gavi. The market now knows the details of the settlement, but Novavax still has a large financial commitment to meet.
The stock has a limited market cap, but Novavax, Inc. investors should really question the path to profits and whether the current cash balance is enough to sustain the business considering the cash drip from the Gavi settlement and weak Covid-19 vaccine demand. The new management team has done a better job managing operations, but Novavax has to move away from the 3rd option in the Covid-19 vaccine market before the stock ever becomes appealing.
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