Tickers in this Article: NVAX, NVS, GSK, SNY, MRK, JNJ, AZN
While the FDA seems to be relishing its role as Little Bunny Foo Foo these days, other arms of the U.S. government are actually trying to be helpful when it comes to getting new drugs and vaccines to market. The government may have actually learned a thing or two when the H1N1 flu outbreak in 2009 took health officials by surprise, and Tuesday's contract announcement with Novavax (Nasdaq:NVAX) suggests that the U.S. healthcare system would rather not be caught unawares next time. (For background reading, see Measuring The Medicine Makers.)

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The Terms of the Novavax Deal
Novavax announced that the Biomedical Advanced Research and Development Authority (BARDA), part of the Department of Health and Human Services, decided to award a contract worth as much as $179 million to Novavax to help the company develop and manufacture vaccines for seasonal and pandemic influenza. Although Novavax had been working with BARDA for some time and was generally seen as very likely to get something, the final details were always up in the air. (For more, see Trading The Swine Flu Index.)

Now, though, the company knows that it will get a three-year contract worth almost $100 million ($97 million), with the potential of a two-year extension worth another $82 million. Generally speaking, these contracts are solid and dependable, so Novavax will not have to worry about whether year-to-year budget wrangling will leave them high and dry; so long as the company holds up its end of the bargain, the money should be there.

What This Means for Novavax
For a company with promising technology but about $36 million in cash, this is a major non-dilutive funding event. The company was already working on pandemic and seasonal influenza vaccines and this should provide the resources it needs to take the pandemic vaccine through Phase 2 and the seasonal vaccine through Phase 3. Although it is not clear whether this deal will completely resolve the company's cash needs through to profitability (assuming, of course, that the vaccines work and get FDA approval), it certainly reduces the company's anticipated funding needs to a very large extent. (For related reading, see Pharmaceutical Sector: Does The FDA Help Or Harm?)

It should also be noted that this contract includes the formulation of a manufacturing plan that could ultimately deliver 50 million vaccine doses within six months - a further sign that the government is serious about trying to be ready for the next outbreak.

One of Many
Investors should be careful, though, about reading too much into this contract as a government endorsement of Novavax's potential success. BARDA has given out a number of contracts, including a $197 million contract to VaxInnate and one worth $147 million to Protein Sciences to support their vaccine research and development.

This is not to say that Novavax's technology is not interesting and promising. Novavax looks to use recombinant virus-like particles to create its vaccines and the Novavax production method offers a closed-loop system that is substantially faster and cheaper than the more traditional methods used by vaccine makers like Novartis (NYSE:NVS), Glaxo (NYSE:GSK) and Sanofi (NYSE:SNY).

Moreover, the company does have options beyond influenza, as the technology appears applicable to viral diseases like RSV, chicken pox, SARS, dengue fever, smallpox, West Nile virus, measles and perhaps even HIV. Of course, this is a competitive market and Novavax will find itself going up against the aforementioned "Big Three" as well as Merck (NYSE:MRK), Johnson & Johnson's (NYSE:JNJ) Crucell, Australia's CSL and AstraZeneca (NYSE:AZN) (which also is developing VLP vaccines).

The Bottom Line
Like many biotechs, Novavax seems undervalued if the company's vaccines work and can get market acceptance. In this case, though, investors have already seen some data from prior clinical studies that support the basic efficacy premise of Novavax's approach, and this government contract significantly reduces the risk surrounding the company's funding situation. Biotech vaccine plays have all of the risks that go with biotech in general, but Novavax looks like an interesting option in an admittedly crowded market.

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