Description

NVAX

Summary

We believe Novavax (NVAX), a Covid vaccine manufacturer, is overvalued with >50% downside.  As a poorly managed, late and subscale player in a declining market, we believe that there is substantial downside to estimates over the 6 to 12 months.  The recent US Government re-negotiation of their contract likely puts $300M+ in revenues at risk.  The global oversupply of Covid vaccines also means that Covax’s $700M in deferred revenue won’t be recognized this year.  We believe there is a high chance guidance may be revised down at their 2Q earnings report.  

Looking at out year estimates, it is clear that the market is way too optimistic both on the overall booster opportunity and NVAX’s share.  Uptake for Novavax’s vaccine in Europe has been abysmal at ~6% market share, with ~250k doses administered out of 69M doses delivered (<1% utilization).  Even with optimistic assumptions for their share of the booster market, sales would likely not justify their current cost structure.

Anemic Uptake in Europe

NVAX’s COVID vaccine Nuvaxovid was authorized by the European Medicines Agency at the end of 2021.  In early 2022, Nuvaxovid became available to European residents.  After a brief bolus of doses administered, doses have been in the ~3,000 per week range for the last few months.  

Source: European Centre for Disease Prevention and Control 

In total through June 30th, 12.6M doses had been distributed and only 242k doses had been administered for a 1.92% pull-through.  

With weekly doses administered of ~3,500 NVAX has about 6% market share for their label (primary course for adults).  This has been steadily dropping over time with peak market share of 14% earlier in the launch.  

Source: European Centre for Disease Prevention and Control 

The Advance Purchase Agreement (APA) with the European Commission (EC) is one of the largest contributors to NVAX’s guidance.  The agreement was for up to 100M doses with a minimum of 20M doses.  There was also an option to purchase up to another 100M doses.  

Source: NVAX 10Q (Nov 4, 2021)

So far the EC has placed orders for 69M doses (27M in the 1Q and 42M in the 2Q).  However, with uptake of the vaccine so anemic, we would expect that the EC is unlikely to order any more vaccines.  

Source: NVAX at Cowen Conference (Mar 8, 2022)

Shelf life of Nuvaxovid is only 9 months.  Though there are studies that can be run to extend this shelf life, so far we have not heard any details on if they are being run.  If the shelf life of Nuvaxovid is not extended, then many of the doses delivered to the EU will be expiring in the 4Q of 2022. 

Source: Nuvaxovid EPAR

Furthermore, PFE and MRNA have been delaying their shipments to Europe because of an oversupply.  PFE announced in May that deliveries would be pushed back.  In June of 2022, MRNA announced that deliveries originally scheduled for 2Q 2022 would now be pushed out to 4Q or 2023.  These amendments likely were due to pressure from EU members to cancel future deliveries - as reported by Reuters on June 14th, 20022.  The EC Vaccine Tracker shows that there are ~145M extra doses of Comirnaty and ~65M extra doses of Spikevax (distributed vs. administered).  With an overall excess of vaccines, and tepid uptake of Nuvaxovid, there is little incentive for the EC to continue placing orders. Needless to say with so many “wasted” doses, it is likely any reorders of Nuvaxovid from the EU are likely to be significantly smaller than the initial orders were. 

USG Contract Renegotiation Puts Rev of $400M at Risk

After signing a contract with Operation Warp Speed (OWS) in July of 2020, NVAX has repeatedly had to extend the agreement due to their inability to get a timely EUA for their NVX-Cov2373 Covid vaccine.  They had originally guided to EUA filing in the 2Q of 2021 (after an already delayed trial readout), but then had repeated delays involving manufacturing.  After trying for a long time to manufacture their vaccine themselves in the US, NVAX has finally decided to use a third party manufacturer, the Serum Institute of India (SII).  Using SII they were finally able to file for EUA at the end of January 2022.  EUA approval was given by the FDA on July 13th, 2022.

The original contract with OWS was for $1.6B and was on reimbursable-cost-plus-fixed-fee basis and anticipated completion by end of 2021.  Note that the average price per dose for the manufacturing is only $4.18.

Source: NVAX 10Q (Nov 10, 2020)

However, because of the repeated delays in obtaining EUA from the FDA, NVAX has had to ask OWS for repeated extensions of the contract.  This came with an increase in the funding total to $1.8B from the $1.6B originally.  

Source: NVAX 10K (Feb 28, 2022)

On July 6th, NVAX and OWS modified their agreement to specify that the “initial delivery” would be for  ~3M doses, and the rest would be negotiated based on USG demand.  Though it is not clear based on the 8K filing, it appears that the contract now expects the delivery of the remaining ~97M to be an option for the USG, instead of a concrete order.  This likely means that the vast majority of the $400M due upon delivery of the 100M doses is now at risk of not being exercised or delayed.

Source: NVAX 8K (July 11, 2022)

The company will try to spin this amendment as the USG switching from requesting the prototype vaccine to preparing for the fall season and an Omicron variant booster.  However, their entry into the Omicron booster market is far from assured.  NVAX is behind PFE and MRNA in generating their Omicron BA.1 strain data having just started enrollment at the end of May.  With the FDA guidance around bivalent BA.4/5 booster, they will have to reformulate their antigen and historically manufacturing has been a very weak area of theirs.  

The PFE agreement for the Omicron booster shots was for 105M doses likely meaning that any additional purchases of an authorized NVAX booster will be for a smaller amount perhaps only ~10M or so doses.    

On their 1Q22 earnings call in May, NVAX confirmed that they expect to receive the remaining $800M of the OWS contract over 2022 and 2023 with >$400M recognized in 2022.  The amount for this year was including delivery of doses under the contract, though it was unclear the exact number of doses.  

Source: NVAX 1Q22 Earnings Call

COVAX Doses in Peril 

On May 6th, 2021 Gavi signed a deal with NVAX for 350M doses and 700M from SII.  They had previously received $400M from CEPI to get ready for manufacturing.  Meanwhile NVAX has also received two $350M payments ($700M total) from Gavi before actual delivery of the doses.  Though the pricing has not been disclosed, it is likely towards the lower end with sell side notes estimating as low as $3-4 for low income countries.   

On their 1Q22 earnings call NVAX confirmed that as of early may they had not yet received an order from Gavi and that they were intending to revise the number and timing of doses.  Their guidance had assumed successful conversion of the $700M they had previously received as prepayment.  

Management was very defensive on the call when asked to elaborate on this point.  

Source: NVAX 1Q22 Earnings Call

Independent news reports confirm that COVAX is looking to reduce their vaccine purchases in the range of 400-600M across multiple manufacturers.  MRNA also confirmed that there was downside risk to COVAX deliveries due to weak demand on their 1Q22 earnings call.  

Limbo in the UK

NVAX signed an agreement with UK government in October of 2020 for 60M doses.  However, it required that the doses be manufactured in the United Kingdom.  Thus despite getting approval by the MHRA in February 2022 it appears that no doses have been delivered.  An additional complication is that the UK requires recommendation by the Joint Committee on Vaccination and Immunisation (JCVI) which NVAX has not received.  NVAX was unable to provide a concrete update on when that might occur on their 1Q22 earnings call.

Source: NVAX 1Q22 Earnings Call

Canadian Launch is Slow

Canada signed an APA for 52M doses in January of 2021.  Similar to the UK agreement it called for local manufacturing of the vaccine.  Press reports suggest that manufacturing of doses would be towards the end of the year.  However unlike the UK, it appears that Canada was okay launching with SII product.  

Since launch though June 19th, there have been ~12k doses administered.    And the number of doses administered per week has been steadily dropping since launch.  

2022 Guidance Cut Likely 

Management guidance for 2022 is for $4-5B in total revenue (product sales, grant revenue and royalties).  While 2Q consensus of $974M seems reachable given the 42M doses sent to the EU, there is substantial risk to the 2H 2022 revenues.

As mentioned above we see risk on 3 main axises: 

• Covax deferred revenue of $700M is at high risk of not being recognized in 2022 (management had already called out this risk on the 1Q earnings call)

• US Government may want delivery of all 100M doses this year, putting ~$400M at risk

• EU uptake has been so poor, and with only 9 month shelf life (currently), we believe the EU may not place any more substantive orders

Out Year Estimates Are Too High

Consensus has $3.26B in 2023 revenue and ~$2B for 2024.  We believe these numbers need to come down dramatically.

Source: Bloomberg

Vaccine rates have dropped as people moved from primary course, to first booster to second booster.  Despite 70% of those 65 years or older getting their first booster dose, only 34% of those then got their 2nd booster dose.  Even if the CDC recommends a 2nd booster this fall/winter for the general population, the uptake will be a subset of the eligible population.  

Source: CDC

Source: CDC

Even if we assumed 35% of the 106M with a first booster got a 2nd (or 3rd booster if they had already gotten the 2nd), that would be a market of 37M doses in the US.  

EU Data shows similar dynamics with uptake of the 2nd booster even for the eldest age group substantially lagging that of the 1st booster.

Source: EC COVID-19 Vaccine Tracker

With a 235M population for 18+ with a first booster.  Assuming the omicron boosters get 15% (similar to the uptake in the high risk elderly population) of that population leaves a market size of ~35M.  

Source: EC COVID-19 Vaccine Tracker

With a booster market of 70M, even if NVAX can capture 10% of that at a $25/dose price point would be only $175M in annual sales.  

Catalyst

• Guidance revisions
• Vaccine uptake