Government of Canada Enters into a Manufacturing Production Agreement “Memorandum of Understanding” with Novavax (NVAX-$264, NASDAQ).

“That was a Shrewdly Negotiated Deal on behalf of the Government of Canada”….Said no one, Ever.

The US public is often critical of the American federal and state response to the Covid-19 pandemic. In comparison to the actions undertaken by the government of Canada, since SARS-CoV2 escaped the borders of China, all levels of American government look absolutely heroic on a relative basis. In the United States, suppliers of PPE retooled as quickly as possible to increase domestic production. Pharmaceutical companies were strong-armed, both overtly and covertly, to ensure US citizens received the first opportunities to obtain the best vaccines possible. Now, a steady and ever growing daily supply of mRNA inoculants are delivered to all parts of the United States, regardless of political affiliation.

Throughout the entire Covid-19 pandemic, Canadian politicians and bureaucrats, particularly in the area of procurement, have been taken to the woodshed on every supply order necessary to effectively minimize the spread of the SARS-CoV2 virus. Having outsourced almost 100% of domestic medical and pharmaceutical production to foreign multinationals, many headquartered in countries with economies considerably smaller than Canada (Israel, Switzerland, Ireland, India, just to name a few), the country has found itself to be the victim of its own shortsightedness and is now globally known as an easy mark. Without fail, every contract entered into between Canada and a private firm, in this fight, has been so lopsidedly bad for Canada that the Government of Canada has stopped publishing details, ostensibly as a national security measure, but more likely to minimize ridicule if the appallingly poor terms were detailed.

The first of many “walks of shame” began in early 2020 after Canada loudly trumpeted purchase contracts, estimated to range from $175 million-$450 million, for “Canadian” rapid testing Covid-19 technology that turned out to be nothing more than a Taiwanese produced box commonly utilized by genealogy DNA testing facilities. The procurement arm of the government of Canada proved incapable of distinguishing the difference between Ribonucleic Acid (RNA) tests and Deoxyribonucleic Acid (DNA) tests.

Shortly thereafter, the Government of Canada provided up-front funding of an estimated (actual numbers are classified) $175 million to a Chinese state-sponsored pharmaceutical developer in order to obtain ready access to a Covid-19 vaccine. That firm promptly ran off with the money, didn’t so much as bother to enroll a single Canadian in a phase trial and never even sent a sample of the vaccine out for evaluation.

The government of Canada next provided a total of $435 million in funding to a subsidiary of Mitsubishi Pharma and Phillip Morris to build a tobacco plant ingredient facility, in a heavily pro-government region, on the “magic bean” basis that this facility might produce a viable Covid-19 vaccine, possibly sometime in the mid 2023 timeframe. Officials failed to read the fine print (quite visible actually) that indicated if the compound showed promise, the end vaccine would be made in Durham, NC.

It comes as no surprise to read that the government of Canada has announced a memorandum of understanding with Novavax to turn over an entire government of Canada National Research facility to provide manufacturing capacity for the NVAX Covid-19 vaccine. I had recently noted Novavax had submitted their vaccine submission to the Canadian regulators for approval, to be sold to Canada. I speculated that this was being done with the implicit understanding that quick approval would result in an immediate order flow of vaccine to Canada. I believed that the ability of Canada to dangle the prospect of quick regulatory approval, for a new developer, would represent a fair trade as inducement for NVAX to direct contracted vaccines Canada’s way.

A fledgling vaccine producer, lacking production facilities of its own, is completely reliant upon contract manufacturers to produce the output. This is the business model of Novavax; they create the product, take it through the testing phase and assign production to third party contract manufacturers to produce the Covid-19 vaccine formulation. Contractors require a profit sufficient to cover not only the cost of production plus a markup, but also an amount needed to cover depreciation and amortization of processes and equipment. Private contract pharmaceutical companies typically earn a 20%-30% margin on arrangements to make a compound or end product for a customer.

The Canadian government is desperate for domestic production of a vaccine product. That much is clear. Terms of this MOU are private. I can only speculate; based upon the prior actions of the federal government of Canada throughout this pandemic, it seems almost certain that Novavax may have extracted a contract that will assure obscene profits for NVAX shareholders. I posit that the Canadian government might be doing this deal at cost, or even below “all in” cost (the government of Canada does not worry about the minutiae of depreciation, amortization and labor expenses at federal facilities)

The Canadian MOU, if finalized, may go down as the deal of the century for Novavax.

NVAX obtains a firm Government of Canada order for 70+ million doses of Covid-19 vaccines at a premium price. Next, fast track drug approval status begins in Canada in order for the Novavax inoculant to be cleared for sale. Then, the Government of Canada proceeds to build and equip a state of the art federal manufacturing plant to produce this vaccine. The government’s own regulators will naturally approve the plant as capable of producing the output, which removes yet another costly regulatory obstacle in the pharmaceutical production world. Finally, to top it all off, the Government of Canada elects to produce the vaccine, on behalf of Novavax, in order to meet the terms of the contract, entered into BETWEEN the government of Canada and Novavax.

For all intents and purposes, reading between the lines, it seems that NVAX is offering up a temporary license for production of 70+ million doses of vaccine, with a potential sale value of more than $1 billion US, to the Canadian government, all without having to expend one dime on facilities, production costs or shipping. On that basis, other than the Novavax one time cost of a giant vault to store all that money, the Canadian contract could, realistically, be all profit at zero cost. If NVAX was smart, they would have asked for a tax waiver on this revenue, and given the utter lack of fiscal sense reported by the Government of Canada to date, that too would have been granted. Under such terms, the Novavax contract would be akin to earning a 100% royalty on revenue.

That was a Shrewdly Negotiated Deal on Behalf of the Government of Canada”….said no one, ever.

I am supremely sad for Canadian taxpayers, but from a financial perspective, am glad to be on the opposite side of this transaction. The sole consolation for Canadians is that should the contract be finalized, it will be the only expenditure made by the Government of Canada, to date, that will result in an assured supply of Covid-19 inoculant.

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