Novavax (NVAX-$220.84, NASDAQ) Acquired for the Model Portfolio.

As a collector, it occasionally pains me to consider parting with an item. Sometimes, the thought process involved produces a dull, persistent headache until a decision is made.

Conversely, when a recently discovered, newly authenticated, Caravaggio comes up for auction and one is temporarily short of funds, while a somewhat unremarkable Gainsborough “Portrait of an English Pointer” loiters on a back hallway wall, the trade-up choice can be quite invigorating. I counsel against hoarding and always write on upgrading investments whenever possible. It would be hypocritical to act contrary to my repeated admonitions. Policies for thee, and also for me.

This is clearly a sellers market for Covid-19 vaccines.

Near term pricing seems to be hardening based on two criteria; estimated efficacy rates and the ability to provide nearer term delivery. Recent phase three data supplied by Novavax, in conjunction with the ability of that product to be stored and shipped in traditional refrigeration units (2 to 8 degrees centigrade) presently make the NVAX vaccine, potentially, the 2nd best tool to be utilized in the current Covid-19 fight, somewhat behind the mRNA products now being offered by Moderna and Pfizer, but miles ahead, figuratively, of the JNJ and AZN inoculants.

The NVAX product, provided the data passes regulatory muster intact, reads as being capable of providing great utility in the battle. Of equal importance, given the lack of efficacy demonstrated by far too many of the traditional DNA viral vector formulations thrown into the mix, by main line vaccine producers, in the fight against Covid-19, the Novavax product also benefits from scarcity.

Differing from messenger RNA vaccines, the Novavax inoculant is a hybrid DNA product. It relies upon a harmless, lab-synthesized version of the spike protein found in the SARS-CoV2 virus to tell the immune system the right sort of viral attack is underway, then adds an ingredient called an adjuvant to the formulation. The adjuvant helps train the immune system to stimulate the appropriate antibody response. Moving away from the time honored and largely ineffective system of building a new coronavirus vaccine off an old coronavirus virus base was a bold move, carried the risk of complete failure, but has been validated in testing as a productive choice. Using artworld analogies, until a few days ago, NVAX was an interesting speculation, possibly a forgery, perhaps attributed to an Italian master, but sold without a legitimate certification of provenance.

NVAX has failed to produce a vaccine equivalent to, or superior than, currently available mRNA formulations, based upon the supplied data. However, better is no longer the main objective in a world presently short roughly 12-14 billion doses of effective and approved vaccine; “quite good” is potentially very profitable as a second line tool. The major advantage in the current pandemic, for an NVAX product, is the ease of readily scaling up output to large market delivery. Most existing contract vaccine manufacturers can quickly retool the necessary facilities to enable NVAX to meet whatever contracts become firm. Projections of anticipated global deliveries of 100 million doses per month are entirely feasible, within as soon as a fiscal quarter from commercial declaration.

The developed world is reporting issues accessing state of the art refrigeration, cannot reliably enough depend upon logistics and is desperately short of “low dead space” syringes; just how will the 2nd tier nations and the developing world hope to roll out tricky mRNA vaccines that require complete temperature control, assuming supplies could even be procured? There appears to be a huge market for a reasonably priced, albeit slightly inferior, product, one that won’t spoil during shipping or storage due to bad roads, traffic jams, officials demanding bribes to route vaccines in time or risk spoilage and routine power outages resultant from less than reliable national grids, norms in many nations.

A Novavax vaccine was always assumed to have dosing priced well below the sticker prices of the Moderna or Pfizer inoculants. As an offset, the NVAX vaccine will also feature a considerably lower per unit cost of manufacturing. Most of the Covid-19 DNA viral vector vaccines tested, to date, have either been outright failures, shelved in phase one or two trials or advanced to regulatory agencies with an marketing disclaimer affixed to the results ( * these numbers aren’t great but are better than nothing). Novavax, in sharp contrast, has reported quite good efficacy for a hybrid DNA based vaccine. This places the company in a sweet spot for DNA based inoculants and should be well positioned to price its product considerably above competitors such as Astra-Zeneca and Johnson & Johnson. As a result, margins per dose could be quite good, to possibly excellent. One doesn’t need to do much beyond review the current order book, already agreed to between NVAX and various national governments worldwide, to validate potential annual revenue estimates, in the first full fiscal year of production, of perhaps $5 billion, depending upon the timing of FDA and other regulators in major markets.

Finally, as the two leading mRNA vaccine manufacturers have effectively raised (are raising) contract sticker prices for their vaccines by 10%-20%, via dosage labelling changes, precedent has been set. Any other vaccine manufacturer with an effective product should be able to follow suit and earn revenue on overfills that are standard in the vaccine industry today.

No doubt, most modern portfolio theorists and value types will gripe I have paid too high a price. My policy is to only acquire a collectible after the process of authentication is complete, rather than speculate on provenance. Anyone can choose to bet on a newly discovered painting, possibly a Caravaggio, buy it on the cheap prior to the time-consuming work required to confirm authenticity and hope for the best. Sometimes that pays off and when it does, it does so in spades. However, in the art world, the number of worthless paintings sitting on dimly lit back hallway walls (to prevent reading artist initials), initially attributed to artist “X” but turning out to be “in the style of artist X” vastly outnumber priceless authenticated works sitting in museums. I don’t speculate on non-authenticated collectibles, that’s my policy and it works for me. Figuratively, I’ve owned a few, “less-than-remarkable” Gainsboroughs in my day, but have yet to be fooled with an outright forgery.

My remaining concern pertains to the legitimacy of the certificate of authenticity (regulatory approval). Should the provenance itself prove to be valid (authenticators are occasionally duped), I may have acquired a true collectible.

A Genuine Certificate of Authenticity may be Produced in Just a few Short Weeks

In the pharmaceutical industry, I consider federal drug administration approval, be it EU, Canada, FDA, or equally reputable agency, to be the art world equivalent of bona fides. The regulatory drug agency of Canada, on Friday, January 29th, 2021, received documentation from Novavax requesting expedited approval for the sale of their vaccine. This Canadian agency is the national equivalent of the US Food and Drug Administration (FDA). Should the regulator agree, the first 52 million doses of the Canadian contract will begin to be manufactured and shipped almost immediately thereafter. Canada is woefully short of the mRNA vaccines due to manufacturer holdbacks for sale to Europe and the United States. Less than 2% of population of Canada has received even a first jab of the current two dose regimen of vaccines to date and despite having placed sizable orders, Canada has limited political leverage to apply, certainly not adequate to budge American or European order books.

Canada’s supply challenges with mRNACovid-19 vaccine producers represent an important opportunity for Novavax to obtain a commercial production license months ahead of current Wall Street estimates. That government has utilized every financial resource available, from speculation on badly overpaying for vaccine contracts, to providing outright financial grants for dubious developers and all they have to show for it is far fewer than 2 million doses of vaccine shipments to date. The only valuable card that Canada holds in the Covid-19 vaccine supply imbalance is now regulatory; a hyper-speed granting of commerciality to NVAX will probably lead to preferential status on supply. Whatever government approves the NVAX vaccine first will ease concerns by other drug regulatory agencies (they can blame Canada if something is found to be deficient in the drug data at a later date, bureaucrats love cover); it will pave the way towards global approval, and that’s important in a time-sensitive race. I expect the government of Canada will proceed with the vaccine clearance at a record pace.

Regulators are not perfect and a “Fugazi” sometimes slips through the cracks for approval; for the most part, they do a good job. National drug agencies in the developed world apply a relatively uniform set of systems for pharmaceutical approvals. As soon as one regulator provides assent, most others soon fall into line. There is more national pressure in this case than for many drug approvals. Given the supply/demand imbalance for vaccines, as quickly as one respected agency grants approval, other regulators will feel compelled to quickly grant a commercial license, so as to stay in the pack for production output. While countries might publicly declare otherwise, drug manufacturers are clearly holding the strong hand in this pandemic.

The model large cap portfolio presently holds two equities, not for the monopolistic or duopolistic profitability, but as sources of liquidity and a minimum hurdle to be surpassed in order for any new equity to qualify for inclusion. These two equities would be classified as “core investments” by most modern portfolio theorists, GARP proponents and/or diversified equity mutual funds; I, on the other hand, deem them to be the “worst of the best” in my account. A non-return related, secondary reason, for holding these equities exist. The secondary rationale requires a full blog article to illuminate and may one day be produced.

Regular and special portfolio dividends are routinely placed into these two equities while I research or await more compelling opportunities. One of the two positions has been temporarily liquidated, in full, with the proceeds fully directed to Novavax.

Relative valuation proponents and “hindsighters” (the investor equivalent of a back-seat driver) will either partially or wholly disagree with my selection and process. I expect nothing less for my NVAX acquisition; an investor subgroup did not acquire NVAX during the speculative phase due to the uncertainty of a vaccine success (which I agree with). They do not own it now (bona fides pending) because of the lack of trailing revenue to produce a price/sales valuation. They will not purchase it tomorrow, even if they grudgingly accept the premise of this article, due to the lack of a price to earnings ratio. They certainly won’t buy it in the future (regulatory approval in hand), because at the core, having not availed themselves of every opportunity to profit, fear of making a mistake represents the fallback. Forevermore, NVAX will fail some arbitrary measure that most suddenly deem critical, be it relative or absolute.

The real objection, for the majority, to owning a fast moving equity, as always, is that the shares have appreciated too sharply for comfort and it was never available, in a thrift shop, bona fides attached.

I invest to potentially earn an above IPI return on capital over an extended period of time, not for comfort; an arbitrary expectation of safety with a portfolio isn’t essential to my research criteria and hasn’t been essential, for closing in on 4 decades of personal equity ownership. Failure is always an option. If NVAX is ultimately found to be a Fugazi vaccine developer, I won’t misdirect using folksy analogies, I will sell, lose money on that sale, possibly a lot, and learn from my mistake.

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