Novavax: The Short Squeeze Story Isn’t A Complete No-Brainer (NASDAQ:NVAX)

Introduction

Novavax, Inc. (NASDAQ:NVAX), a prominent biotech company, distinguished itself during the COVID-19 pandemic by pioneering a spike protein-based COVID-19 vaccine, deviating from the widely adopted mRNA technology used by its competitors. However, Novavax’s stock has recently faced a downward spiral, plummeting by an additional 9% just yesterday.

The negative market sentiment surrounding Novavax has led to its shares becoming some of the most heavily shorted in the current market. While I also find it challenging to justify Novavax’s current approximately $700 million valuation to a certain extent, I can’t negate a short-term trading opportunity on the horizon. A crucial FDA approval, expected within the coming days, if positive, could potentially trigger a temporary rebound in the company’s shares, thereby setting the stage for a potential short squeeze. In this article, I will dissect the essential components necessary for such an event to unfold. Furthermore, I’ll discuss why, even if the shares rise, the – call it technical data – beyond the sheer short interest suggests a mixed outlook, making this Short Squeeze scenario less of an unequivocal no-brainer, despite some Reddit boards already buzzing with excitement.

Moreover, I will offer a fundamental perspective on Novavax, exploring alternative revenue sources within its pipeline and its established treatments for some of the world’s most daunting diseases, such as malaria.

Short Squeeze – Analyzing the Potential

With GameStop’s (GME) temporary trip to the moon in 2021, we all learned about the peculiar term “short squeeze” and, more importantly, how sweet such a squeeze can taste. A short squeeze occurs when the ability of short sellers to cover their short exposure by buying back shares in the underlying company becomes constrained, setting off a chain reaction that exerts upward pressure on the stock price. Short squeezes are notorious for descending quickly and unpredictably. However, I believe that there are several signs that may indicate the possibility of a looming short squeeze event.

FDA Approval – The Key Catalyst

First and foremost, we need buying pressure—a surge in a company’s stock price triggered by a significant announcement or any other event pertaining to the company. In the case of Novavax, we find such a catalyst. Novavax has unveiled an updated COVID-19 Booster Shot, the Monovalent Omicron XBB 1.5, capable of addressing a broad spectrum of circulating COVID subvariants, including EG.5.1 and XBB.1.16.6, currently on the rise in the U.S., contributing to the recent uptick in COVID cases. Competitors such as Moderna (MRNA) and Pfizer (PFE), in collaboration with German biotech firm BioNTech (BNTX), have already secured FDA approval for their updated vaccines, poised for a fall market entry. The extent to which individuals will seek additional vaccine protection against these new variants amid the pandemic’s transition into an endemic state remains uncertain.

Such demand is likely concentrated among the elderly and vulnerable segments of the population. Pfizer anticipates that approximately 24% of the eligible U.S. population, or roughly 80 million people, will opt for a booster, compared to the 17% who did so the previous year. It’s unlikely to resemble the mass vaccination efforts seen during the pandemic’s peak. The critical question, however, is how many individuals will continue to seek regular booster shots, sustaining revenue streams a little longer, especially for companies like Novavax. We will revisit that point later in the article.

Nevertheless, the impending FDA approval for Novavax’s updated vaccine is a pivotal moment for the company’s future. On September 12th, Novavax expressed optimism after positive discussions with the Advisory Committee on Immunization Practices (ACIP) about its protein-based booster vaccine, raising hopes for FDA endorsement.

Upon FDA authorization, Novavax’s vaccine will be widely accessible across the U.S. Furthermore, Novavax is actively collaborating with other global regulatory authorities, including the European Medicines Agency, Health Canada, and the World Health Organization, for international authorizations. For instance, recent reports indicate that the German government intends to procure more than 10 million doses of Novavax’s updated vaccine upon final approval by the European Medicines Agency.

High Short Interest

Another decisive factor in the short squeeze equation is the level of short interest in the company. Novavax, as mentioned earlier, stands out as one of the most heavily shorted companies across the market right now, with short interest accounting for approximately 49% of its floating shares, equivalent to around 42 million shares out of a total of approximately 94.4 million outstanding shares. Given the average daily trading volume of nearly 9 million shares on NASDAQ, this translates to a short interest ratio of 4.6 days to cover all short positions.

However, this figure isn’t exceptionally alarming, and my view is that for a definitive short squeeze signal in that respect, it would be more appropriate for that number to be 10 or higher. As for the company’s ownership structure, institutional investors dominate Novavax’s stock float, accounting for 47%, with Vanguard holding the largest stake at 10%.

Charted Metrics

Expanding our perspective, let’s delve into various other metrics that provide further insights into the potential for a short squeeze in Novavax. Novavax’s stock price, while not at its 52-week low, has been edging closer to those levels lately. The Relative Strength Index (RSI), a measure of overbought or oversold market conditions, currently stands at approximately 40. An RSI below 30 often signals an imminent price rise. Additionally, Novavax shares exhibit a put-call ratio of 0.76, which indicates the balance between disclosed open put option positions and open call options. Ratios below 1 tend to denote bullish sentiment.

As reflected by the red graph, borrowing costs for Novavax’s shares, which currently stands at 10%, are relatively high compared to other stocks. Yet, recent data shows no significant changes, offering no clear signals in terms of being a Squeeze indicator.

The chart’s blue bars represent the number of shares available for shorting, another important variable. As this number approaches zero, it increases the likelihood of the share price hitting bottom. However, it doesn’t guarantee a short squeeze, but it certainly raises the possibility. Upon reviewing the chart alongside the two metrics discussed, there isn’t a clear pattern that I can discern. Borrowing costs have spiked dramatically at times, and available shares for short sellers have nearly disappeared on occasion. However, there hasn’t been a short squeeze in Novavax so far, even though the company already entered 2023 heavily shorted and thus has been a short squeeze candidate ever since.

This underscores the nature of these indicators—they provide signals, but don’t guarantee outcomes.

To underscore my point here, I’ve created a chart showing Novavax’s share price experiencing significant swings in recent months.

As mentioned, despite being heavily shorted and some of the named indicators even pointing to an additional chance of a Squeeze in the company’s stock at times, it hasn’t happened so far. Hence, what leads us to believe that it might occur this time? Assuming that even if the company’s shares jump more than 30% upon the FDA approval, they did so already once in July this year, but nothing further. I can’t definitively answer this question, so feel free to interpret the data and viewpoints I’ve provided on your own. However, even if a GameStop-like squeeze is unlikely following a potential positive FDA approval and the company’s shares return to $300 highs, a rebound to $10 levels, which seems more realistic, would still yield a substantial profit.

Novavax’s Fundamental Prospects Beyond COVID-19

As previously mentioned, the COVID-19 vaccine market was a lucrative opportunity during the pandemic, with governments actively promoting mass vaccinations and raising public awareness.

However, as the momentum behind COVID-19 vaccinations diminishes, Novavax is now primarily relying on the remaining commitments under Advanced Purchase Agreements (APAs), expecting to report $700 million in sales for the current year. For example, Canada is set to pay up to $450 million for doses in 2023 but has also mandated Novavax to establish in-country manufacturing by 2024-2025 to secure committed dose purchases in those years.

Upon reviewing the company’s investor materials, it’s apparent that their primary focus is still on COVID vaccines. My opinion is that while COVID is transitioning into an endemic state and receiving less attention than during its peak, there may still be opportunities for the commercialization of updated vaccines, catering to the latest variants, and this could indeed offer an annual but seasonal revenue stream. However, I find it highly unlikely, based on Pfizer’s prognosis, that 80 million people will continue to receive booster shots every year over an extended period, and I expect this number to gradually decrease in the coming years if it even gets achieved this year. Moreover, even if we assume that 80 million boosters a year could be maintained, there would still be significant competition for Novavax in this space.

Full-year Guidance

So, to comprehensively assess the company’s fundamentals, it’s crucial to consider its long-term trajectory beyond COVID.

For the foreseeable future, the company has provided revenue guidance in the range of $1.3 to $1.5 billion, with cost guidance, including R&D and SG&A expenses, ranging from $1.3 to $1.3 billion.

This represents a 40-50% reduction from last year’s levels of $1.7 billion.

For reference, FY22 revenue was approximately $1.6 billion. These projections assume FDA approval of their updated COVID-19 vaccine for distribution in the upcoming fall.

Seasonal Influenza

Now, let’s delve into the company’s potential avenues beyond COVID-19, starting with its pipeline. In addition to Novavax’s COVID-19 efforts, there is a treatment for seasonal influenza called NanoFlu.

NanoFlu, a subunit vaccine developed by Novavax, boasts a leading Phase III program for Influenzavirus B and Influenza A Virus, H3N2 Subtype infections. According to Globaldata, it has been involved in seven clinical trials, with three completed, one ongoing, two planned, and one terminated. The projected annual global revenue for NanoFlu is expected to reach $479 million by 2037.

Malaria

Another notable product is a malaria treatment that has received authorization. In April of this year, Nigeria provisionally approved the R21/Matrix-M malaria vaccine, developed by scientists at the University of Oxford, UK. Nigeria, being the most populous and malaria-affected country globally, accounts for 32% of global malaria deaths, incurring an annual economic cost of $1.1 billion.

The R21/Matrix-M vaccine has undergone clinical trials in various countries and has demonstrated more than 75% efficacy in African children over 12 months. This vaccine represents a significant advancement over the currently approved malaria vaccine, Mosquirix from GlaxoSmithKline (GSK), which provides inadequate protection.

Novavax has established a partnership with the Serum Institute of India Pvt. Ltd., which pays Novavax a royalty, although in the single-digit to low double-digit range. While developing a malaria treatment is a noble endeavor, it remains unclear what sales levels the company expects from it. It’s also concerning to me that the company’s communications are currently dominated by COVID.

In a simplified analysis, assuming the company receives $10 in royalties per distributed malaria shot, vaccinating the entire African continent could potentially create a substantial revenue stream. However, given the company’s limited communication in this regard and the absence of corresponding figures in its financial statements, coupled with the projection of influenza vaccine revenue reaching half a billion but not until 2037, I find it challenging to justify the company’s current $700 million valuation. This raises questions about the risk-reward ratio from a fundamental perspective, and, at this moment, I do not see it as a compelling long-term investment for that reasons.

Conclusion

Based on the current landscape, I view Novavax as a potential short-term trading opportunity rather than a long-term investment. While the company is awaiting FDA approval, expected in the coming days, which could trigger a temporary rebound and potentially a short squeeze, there are critical factors to consider.

The short squeeze scenario is not a straightforward no-brainer, despite the high short interest. Key indicators, that we have bespoken, provide mixed signals.

Regarding Novavax from an operational standpoint, Novavax’s heavy focus on COVID vaccines raises questions about its long-term sustainability.

Looking beyond COVID-19, Novavax’s pipeline shows promise, including the NanoFlu influenza vaccine and the R21/Matrix-M malaria vaccine. However, there is uncertainty regarding these treatments’ profit potential.

In the short term, there may be trading opportunities based on events and market dynamics. However, in the long run, even if FDA approval occurs soon, I remain cautious about becoming a long-term investor in this business. Therefore, I’m inclined to limit my capital exposure to Novavax, Inc. shares, primarily participating in potential rebounds triggered by events or oversold metrics.