Welcome to our first Watchlist Report, in these reports we discuss potential shorts which have not yet met the necessary conditions to be actionable. THESE REPORTS ARE NOT SHORT REPORTS. In the case of NVAX, we would not consider it a short candidate unless its price per share surpasses the $10 mark.
In our first watchlist report we have Novavax (NVAX), whose remarkable price increase and record volume during today’s trading session, caught many people’s attention. We believe NVAX current share price is quite overvalued and mainly the result of a drastic overreaction to recent news about the spread of a new coronavirus in China (1). In this short report we will look at the reasons behind our pessimism regarding this company, such as: failed previous endeavours, worsening cash flow and significant dilution among others.
NVAX was first incorporated in 1987 and its main offices are located in Maryland. It describes itself as “a late-stage biotechnology company focused on the discovery, development and commercialization of innovative vaccines to prevent serious infectious diseases.” The company’s lead drug candidates are ResVax and NanoFlu, which are in Phase 3 trials and Phase 2 trials respectively. ResVax is a Respiratory Syncytial Virus (RSV) treatment while NanoFlu is a seasonal influenza treatment.
A recent history of failure:
Sadly, NVAX’s pipeline development has been unsuccessful. A quick look at NVAX’s price history over the last four years will quickly confirm this. In September 2016, NVAX share price lost 70% of its value as a result of its RSV candidate failing to meet its pre-specified efficacy objectives of its Phase 3 clinical trials (2). Then, in February 2019, the company’s share price took another big hit when it dropped by 65% on news that once again its RSV vaccine failed a Phase 3 clinical trial (3).
We thus find it very difficult to be positive about NVAX’s pipeline and its future prospects. Two Phase 3 trial failures of such magnitude are simply too hard to overlook. Specially if one bares in mind the company’s financial situation.
Looking at the company’s financial filings over the last two years is far from reassuring. While it has maintained more than enough cash and cash equivalents, these have decreased by over a third since 2018 Q1. Despite drastically reducing net losses in 2019 Q3, NVAX had already lost over $100 million during the first nine months of 2019. More alarmingly, revenues decreased from $7.7 million during 2018 Q3 down to little over $2.5 million during 2019 Q3. Furthermore, liabilities have remained very large, never dropping below $350 million over the last 2 years. The company recognises this is a serious issue and goes as far as stating in its latest 10K that it might have to resort to “highly dilutive” practices to stay afloat (4):
This statement has proven to be correct over the last two years, as this time period has seen the number of outstanding shares increase from 346.7 million at the end of 2018 Q1 to 469.4 million at the end of 2019 Q1, then a 1-to-20 reverse split in May 2019 saw the number of outstanding shares shrink down to 23.5 million, only for further dilution to increase this 25.5 million by September 30 2019. And according to Yahoo finance, this number currently stands at 32.12 million (5). This dilution is likely the result of an At Market Issuance Sales Agreement for $100 million that the company entered in December 2018 (6).
It thus appears that NVAX plans to continue will hinge on share issuance at the expense of shareholder value. This is further confirmed by the company’s two latest SEC filings, a Form S3 registering for sale $250,000,000 worth of common stock, preferred stock and warrants (7) and its corresponding notice of effectiveness form (8).
We believe it is also worth noting that according to the latest 10Q (6), $325 million worth of company debt was issued in the form of convertible notes.
NVAX does not look like a good investment. Its recent price run does not reflect the serious issues this company is currently facing. Dwindling revenues, imposing debt levels, huge annual losses, a recent history of Phase 3 clinical trial failures and a reliance on dilution to stay afloat is combination that should make everyone wary. We recommend everyone to stay away from this ticker for the meantime, but we do recommend it be added to your short selling watchlist. It might be a good short if price per share exceeds £10.
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