Despite the long-standing loyalty of Novavax‘s (NVAX -0.76%) rowdy base of retail investors dubbed “Nova-stans,” the company’s seemingly endless struggles appear poised to strain it toward collapse. Management is openly speculating about the prospect of bankruptcy, and its stock has fallen over 79% in the last six months alone.
While it’s faintly possible that the biotech will survive, investors shouldn’t keep finding out, and it’s probably also time to do some soul-searching about the merits of deciding to become one of its shareholders in the first instance. Here’s why.
Why it’s time to cut your losses
Currently, Novavax has a knotty complex of problems that it has no way of solving.
Its top line for 2022 was $2 billion, earned from sales of its COVID-19 vaccine called Nuvaxovid. Despite those sales, it reported a net loss of $657.9 million last year and could be on track to return $697 million in advance payments to Gavi, an international vaccine-buying consortium and customer that claims in arbitration to have never received the shots it paid for. At the same time, its total operating expenses for 2022 were more than $1.7 billion, and it has approximately $1.3 billion in cash and equivalents.
Do you see the problem? Before even mentioning its $616.7 million debt load and any near-term interest payments, it’s clear that Novavax’s expenses and potential liabilities are likely far beyond its ability to pay. Even if it doesn’t have to give money back to Gavi, it’s terrible. Management expressly says that the company may not survive another 12 months and it plans to cut costs to try to salvage the situation. And since it’s not profitable right now and has probably already passed the peak of global demand for coronavirus jabs, its manufacturing unit economics are unlikely to improve at smaller production scales. So its quarterly cost of goods sold (COGS) could be even higher as a share of revenue than it is today at 50.8%.
Selling Novavax today means you are likely to take a loss on your shares. But the future doesn’t look much better, even if you’re willing to hold onto your stocks for a few years longer, and you can reinvest your remaining capital somewhere more productive sooner than that. With none of its non-coronavirus vaccine programs on the verge of commercialization and without a strong product market fit for Nuvaxovid, the biotech is unlikely to be able to raise additional capital at a reasonable rate if it tries to take on new debt. Likewise, issuing new shares in the stock would dilute the shareholders, and it may be difficult to find support at the current price level. There is no easy way out of Novavax’s problems, and there probably isn’t a way out at all.
Takeaways for next time
Before the next bull market develops, it is important to take stock of what went wrong with the shareholder investment process for Novavax to avoid potentially making similar mistakes.
Unfortunately, many of the company’s shareholders seem to have bought their shares after its massive launch in 2021, hoping that the good times will continue even though it had yet to commercialize its first product. Then, when the stock began to fall on news of production difficulties and problems with regulators, the promise of a near-term commercialization probably kept many people hanging on … and on and on, through its problems selling enough doses , and its struggling to actually manufacture enough doses to meet demand. Then, in 2022, a new CEO provided shareholders with hope for a departure from past problems.
Those hopes probably won’t come true, but it’s the final nail in the coffin that hopefully shows one key emotion to be careful with when investing: Hope. Hope isn’t an investment thesis, especially when it’s fueled by a hype cycle with a hot stock like Novavax. While it’s still possible to get burned when you make a sober set of calculations about the prospects of a company’s stock going down or up, letting your emotions dictate your reasoning process increases your chances of losing your shirt.
So if you’re trying to get ready for the next bull market after selling your shares of Novavax, remember that it can be helpful to check a company’s claims and timelines against what it actually achieves. If there’s too much of a discrepancy between its goals and its results, it’s a sign that your investment thesis may need an adjustment, not to mention your expectations.
Alex Carchidi has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a non-disclosure policy.