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Novavax: High Probability Of A Huge Gain Within Weeks - Part 1 Of 2

Summary

Novavax has a high probability the FDA will approve its vaccine to prevent RSV, which infects millions, hospitalizes 230,000, and kills 15,000 people each year in the U.S. alone.

The company is due to report Phase 3 results by September 30, and positive results would make it extremely likely the FDA will approve it.

The world-wide market for the vaccine is enormous and is completely untapped.

With no existing vaccine out there, Novavax sees no pricing pressure.

Based on market size and pricing, I forecast sales will reach $6 billion to $9 billion and the stock will go over $40.

Novavax (NASDAQ:NVAX) is on the verge of a probable FDA approval of its vaccine to prevent RSV (respiratory syncytial virus) infection in older adults. The company has said that results of its Phase 3 clinical trial named Resolve will be announced by the end of this quarter, which ends September 30th.

The Prevalence and Impacts of RSV

There is currently no vaccine for RSV. As the CDC's website explains, RSV...

  • ...infects millions of people per year in the U.S., for example resulting in 2.1 million outpatient visits among children younger than five years old, and 2.4 million infections of people over 65.
  • results in 177,000 hospitalizations of adults over 65 years old, 57,000 hospitalizations of children under five years old, and 900,000 medical interventions a year in the U.S. (includes hospitalizations and visits to ERs and urgent care centers), and
  • kills over 15,000 Americans each year, triple the number of people who were killed on 9-11. 14,000 deaths are people over the age of 65.

Also, 8% to 13% of hospitalized patients require admission to intensive care due to respiratory failure. 51% to 93% of people over 65 with RSV infections manifest shortness of breath with other symptoms including fever, wheezing, cough, nasal congestion, sore throat and muscle pain. RSV commonly causes pneumonia, bronchitis and other respiratory illnesses. For example, 30% to 50% of people hospitalized for RSV have pneumonia due to it. This very long PDF report has details, particularly pages 35 and 36.

People outside of the high-risk age groups also regularly get RSV with similar symptoms, though normally their symptoms are less severe. Some people who think they have the flu actually have RSV. While the company is currently only focused on high-risk age groups, I think it's possible that many people in lower-risk age groups will want the vaccine once they become aware of it.

Novavax estimates RSV causes a total economic burden of about $28 billion a year in the U.S. alone.

Reasons for High Probability of FDA Approval

While nothing is guaranteed, the probability of FDA approval and subsequent recommendation by the Advisory Committee on Immunization Practices (ACIP) is strong for a combination of these eight reasons:

1) The vaccine had a successful Phase 2. It was found to prevent lower respiratory tract infections from RSV in 46% of participants, and prevent all symptoms of RSV disease in 44% of participants. The vaccine was created using Novavax's cutting-edge proprietary nanoparticle technology. You can read numerous details about the science of it (and the Phase 2 results) in this 28-page report.

2) The company did a fairly sizable Phase 2 trial, meaning its sample size was sizable, which increases the probability that it will have similar results in Phase 3. If the Phase 2 trial had a smaller number of participants, the probability of Phase 3 showing similar results would be much lower.

The P-value of Phase 2 was 0.041. In a nutshell, this means there's a 4.1% chance the observed effectiveness of the vaccine was simply random chance and not caused by the vaccine; and a 95.9% chance it was due to the vaccine. This indicates that there is a strong probability that the Phase 3 results will be similar to Phase 2.

They don't need to match exactly, as p-values of up to 0.05 are often acceptable to the FDA, especially if a treatment scores high in safety during trials. 0.05 is 22% higher than .041, so the p-value of Phase 3 could probably be 22% higher than in Phase 2 and still be accepted by the FDA.

3) The safety/risk impact on people receiving the vaccine in Phase 2 was basically identical to people in the control group who received the placebo, so there was not even an inkling of safety concerns. If this continues in Phase 3, it will help in getting approval. The FDA will consider treatments with p-values higher than 0.05 if they had strong safety records in trials and the symptoms they reduce are significant, which leads us to...

4) The extremely high prevalence, severity and impact of RSV increase Novavax's likelihood of being approved even if the p-value of Phase 3 is on the weak side. As the Editor-in-Chief of FierceBiotech, John Carroll, wrote: "With Novavax taking the lead in such a big field, with global implications, regulators are more likely to provide an assist in getting this vaccine through Phase III at a more rapid pace."

For example, if a treatment has a p-value over 0.05 and has some risk and is only effective at reducing/preventing a mild symptom that affects few people, it most likely won't be approved. But a treatment with the same p-value that has little to no risk and prevents pneumonia that affects a huge number of people could well be approved. The FDA considers a few different factors.

5) Analysts who study those factors for numerous other biotechs are confident Novavax's Phase 3 will be a success. For example, Piper Jaffray wrote: "Based on the Phase II study, we are confident the RSV Phase III trial is sufficiently powered to achieve statistical significance..." Also, Bret Jensen, a bio-tech specialist with 27,000 followers on Seeking Alpha, last week in an Instablog wrote: "The company is highly likely to receive approval for its RSV vaccine and have it on the market in 2017. Novavax is well funded, has a diverse pipeline aimed at addressable markets and at some point could also make a logical acquisition target." He also wrote a longer article in late July that goes into considerable detail about the company.

6) The company has several times said it's confident Phase 3 results will be positive. On the last earnings call, the company's president of Research and Development, Greg Glenn, said: "We expect pivotal efficacy results will support the filing of our U.S. BLA 2017 as well as other global marketing applications." The BLA can only be filed if Phase 3 is successful.

Although Novavax already has manufacturing capacity to meet demand for the vaccine for over two years, it recently signed a lease for a 150,000 square-foot facility to add to its total manufacturing capacity. It would have no reason to do so if it wasn't fairly sure that FDA approval will occur. It has also taken numerous other steps in the past three months that indicate it's highly confident of FDA approval. Its money is where its mouth is.

7) In late May, the FDA announced it had given the RSV vaccine Fast Track status, which includes giving Novavax more frequent interactions with the FDA review team and giving a rolling review of the New Drug Application. While Fast Track status does not mean automatic FDA approval, it indicates the FDA is eager to see the vaccine go to market provided the Phase 3 data is good enough.

8) Novavax with advice from the FDA and experts modified Phase 3 to make its probability of success higher than the already successful Phase 2. Stanley C. Erck, president and CEO of Novavax, said: "We have taken advice and recommendations from the FDA, along with numerous key opinion leaders and clinical experts, to design the Resolve trial to align with and build on the strength of our previous clinical results."

The Upside Probability and Reward, and Downside Probability and Risk

The core decision points in a biotech like Novavax are first what is the probability of a successful candidate, and second, what is the probable upside reward if a candidate is successful and what is the probable downside risk if it's not.

Based on the factors above, I place a 96% probability of the RSV vaccine being approved, and a 4% chance of it not being approved. Though most people hate to determine a specific number because it's more comfortable to think in vague terms, I think it's useful as an investor in biotech. I recommend you do the same with this and other biotechs.

I'm going to go into detail about the rewards and risks...


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