Novavax, Inc. (NVAX) Q2 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Novavax Q2 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, CFO, Buck Phillips. Sir, you may begin.

Thank you, operator, and good morning. This is Buck Phillips, Chief Financial Officer of Novavax. Thank you, all, for joining us on today's second quarter 2013 financial results conference call. The earnings release and archive of this call can be found on the company's website at novavax.com. Joining me on today's call is Novavax's President and CEO, Stan Erck, as well as other members of our executive team. Before we begin our prepared remarks, I need to remind you that we will be making forward-looking statements during this teleconference that could include financial, clinical or commercial projections. Statements relating to future financial or business performance, conditions or strategies and other financial and business matters, including expectations regarding revenue, operating expenses, cash usage and clinical development and anticipated milestones are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Novavax cautions that these forward-looking statements are subject to numerous assumptions, risks and uncertainties, which will change over time. Further information on the factors and risks that could affect Novavax's business, financial condition and results of operations are contained in Novavax's filings with the SEC, which are available at www.sec.gov. These forward-looking statements speak only as of the date of this call and Novavax assumes no duty to update such statements. I will now turn the call over to Stan.

Thanks, Buck. Good morning, everyone. Thanks for joining us today. First, I'd like to welcome Buck Phillips to the team as our CFO. Some of you already are familiar with Buck. He's -- most recently, he was CFO of Micromet, which is a public -- was a public U.S. headquartered and European operation company, which was sold to Amgen for over $1 billion. Prior to that, for 10 years, he was Managing Director of Vector Fund Management managing 2 healthcare venture capital portfolios. And then prior to that, 9 years at Invesco in Denver as a biotech analyst and Director of Investments. I look forward to having you guys work with Buck. He's been on all sides of the fence in terms of biotech investing and we are lucky to have him. So the second quarter. The second quarter events including up to now, I think, might have been the most productive quarter we've had yet. In April, we announced a new Phase II data for RSV in women. In July, we announced data from an RSV trial in the elderly and exploiting our core technology we began a ground-breaking program for a vaccine candidate against new emerging virus in China, which is H7N9. In parallel, we have responded to and are responding to a new threat coming out of the Middle East and Europe, the coronavirus now called MERS-CoV standing for Middle East Respiratory Syndrome. We also announced and completed our acquisition of a Swedish adjuvant company, Isconova, giving ourselves complete control over our entire product globally and have been continuing to work with our partner, BARDA, to define our final production process and clinical development plan. We'll present the results of these plans next month at our first Analyst Meeting. All exciting stuff, couldn't be more pleased to present our progress to you and I'll do that by highlighting the key takeaways for the second quarter, all of which have been previously announced. Plus, you can take a look at some new publications in peer-reviewed journals, Vaccine and BioProcessing, describing our H7N9 work. And then finally, I'll preview some of the items that we'll talk about in our Analyst Meeting scheduled for September 24. So starting with the highlights. In April, we announced top line data for the Phase II RSV study in women of childbearing age in which we enrolled 330 women. The trial had a clean safety profile and it evaluated several factors, including the use of alum as an adjuvant. We looked to 1- versus a 2-dose regimen and then 2 different dose levels of antigen. And as previously reported, the results confirmed our observations from our Phase I trial with the common theme of good safety, robust immunogenicity and in particular, the stimulation of high levels of palivizumab antibodies, which are Synagis antibodies, a characteristic which we believe is unique to our vaccine candidate. All of these data represent an important step forward of the development of our candidate for use of internal immunization. In July, we announced top line safety immunogenicity for our Phase I clinical trial in the elderly. So in this study that enrolled 220 elderly adults, all subject groups who received our vaccine candidate showed strong antibody responses to RSV without any vaccine-related serious adverse events. A couple of important points that I want to highlight. First, as you know, most elderly get an annual flu shot. In this trial, co-administration of a flu vaccine showed that our RSV vaccine did not diminish the response to the flu vaccine while stimulating a robust response to our RSV vaccine. This is key to going forward with either a stand-alone RSV vaccine or a combination RSV flu vaccine, what I refer to as a respiratory vaccine. Second, and once again, our common theme is that our vaccine generated high levels of palivizumab-like antibodies and interestingly, none of the groups had starting levels of palivizumab-like antibodies above the level of chronification in our assay that resulted in high levels of post-immunization. Now switching to the area of emerging bio threats. In the second quarter, in response to reports of the emergence of a new lethal strain of influenza, which is circulating in China, H7N9, we got together as a company and committed ourselves to demonstrating our platform can do what we said it can do and do what the U.S. government invested in us to do which -- to remind everyone, BARDA, part of the NIH, invested in us for 4 reasons. First, we had a non-egg-based manufacturing platform that, second, can make recombinant nanoparticles or VLPs that are highly immunogenic. And third, that we can use an adjuvant, which can result in substantial dose bearing in cross protection. And so, in our H5N1 trial last year, which is a pandemic strain, these first 3 characteristics were demonstrated but not the fourth. We didn't try to make it in record time and -- but that's what we're trying to do now. It's the ability to make our vaccine from identity of the virus strain to GMP manufacturer to vaccination of our first subject, all within 12 weeks. So as we announced that the time it took us from a publicly available sequence -- the publicly available sequence from the strain to making a clone was 8 days. The sequence strain to initiation of animal study started in 26 days and which, by the way, demonstrated 100% protection of vaccinated animals in our mouse challenge day. And then finally, manufacture and release of product in commercial scale bioreactors was executed by day 81 allowing us to vaccinate the first subject on day 91. By the way, dosing, it's a 2-dose vaccine regimen and dosing of the second dose to the final subject should be complete by the end of this week. We believe that we're the first company to ever do this. Also, in another region, the Middle East, a new coronavirus emerged similar to the SARS virus of several years ago now termed MERS-CoV. Similarly to our efforts on H7N9, we have now cloned a gene from MERS, expressed and purified it and have started animal studies. So I should point out that both our efforts to manufacture and release our vaccine candidate in record time and the data from the H7N9 animal challenge study were deemed important enough to be published in the journals of Vaccine and BioProcessing, and are available by visiting their website or ours. So regarding our clinical trial with H7N9, we enrolled 280 subjects over an 8-day period. Subjects received 2 doses and, as I said before, the last dose will be given by the end of this week. We'll expect to announce results next quarter. So what else did we do? We made an important acquisition. We made a tender offer for shares of Isconova, a Swedish adjuvant company. On July 31, we announced that over 97% of the shares were tendered under that offer and we look at this as a very important strategic asset allowing us to control the manufacturing of 100% of our products globally and the economics that go with it. And so finally, and mark your calendars, September 24 Analyst Meeting will be held. We expect to cover some important activities, including clinical development plans for our RSV maternal program, clinical development plans for RSV elderly and the possibilities for a combination respiratory vaccine, we'll talk about the timing of our RSV pediatric program, our seasonal flu program and our pandemic flu program under BARDA. Hopefully, we'll have some additional insights into the timing of the rabies Phase I trial and finally, we'll update you on any new emerging virus product development activities. So we had a great quarter. And with that, I'll turn it over to Buck.

Thank you, Stan. Over the next few minutes, I'll walk us through a high-level review of the statement of operations that's included in this morning's press release. For the 3-month period ending June 30, 2013, we reported a net loss of $12.6 million or $0.08 per share. This compares to a net loss of $5.9 million or $0.05 per share for the same period in 2012. For the 6-month period ending June 30, 2013, we reported a net loss of $22.6 million compared to a net loss of $13.3 million in the same period in 2012. Revealing the key components of the net loss for each period, I will focus on the 3-month period ending June 30 starting with the revenue. Novavax reported revenue in the second quarter of 2013 of $3.5 million compared to $7.1 million for the same period in 2012. Decrease in revenue relative to the prior period was primarily a result of lower BARDA-funded clinical trial activity associated with the company's seasonal and pandemic influenza programs in the 2013 period relative to 2012. In conjunction with that decrease in BARDA-related revenue, we reported a decrease in the cost of revenue in the second quarter of 2013 to $1.6 million as compared to $5.1 million for the same period in 2012. This particular expense line item will be highly correlated to BARDA revenue and the explanation of the variance is the exact same as the one I've given for revenue. Research and development expenses increased to $10.8 million in the second quarter of 2000 (sic) [2013] compared to $5.4 million for the same period in 2012. The increase in the 2013 period relative to 2012 is primarily a result of increased costs relating to the execution of the company's RSV clinical trials and activities related to our pandemic H7N9 program, as well as higher employee-related costs. General and administrative expenses were $4.0 million for the second quarter of 2000 (sic) [2013] as compared to $2.5 million for the same period in 2012. The increase in G&A is primarily due to an increase in professional fees associated with the company's Isconova tender offer. As of June 30, the company had $40.6 million in cash on the balance sheet or cash, cash equivalents and investments compared to $50.3 million on December 30, 2012. Net cash used in operating activities for the 6 months of 2013 was $18.2 million compared to $10.3 million for the same period in 2012. The increase in cash usage from the prior year was primarily due to higher research and development spending related to the company's investments in its RSV and pandemic H7N9 programs, as well as increased employee-related costs and increased general and administrative costs relating mainly to the Isconova public tender offer. That concludes my comments on the financial statements. I'll now turn the call back over to Stan.

Thanks, Buck. Thanks, everyone, for your participation. My last pitch for our September 24 Analyst Call, put it on your calendars, and we'll provide more details about the event over the next few weeks. We hope you'll be able to join us then as well. So with questions -- we'll open up to questions now.

[Operator Instructions] Our first question comes from the line of Ted Tenthoff with Piper Jaffray.

Buck, welcome aboard. It's great to have you working with such a great team at Novavax. I guess, my first question had to do really with sort of what's going on at BARDA and whether or not this could adversely impact sort of the trials that you guys have planned, reimbursement for those trials, how does all of that work and how does that affect your plan to develop both seasonal and pandemic?

Ted, it's Stan. So it -- this is what we are hired to do. We're working very closely with BARDA on H7N9 and the -- when we -- in early April, when we determined that it was something -- it's a program that we felt we had an obligation to do. We talked with BARDA recognizing that for us to move quickly it might not be in line with their ability to do contractual changes and -- but we started the program with compete agreement of the importance of the program by BARDA. And so, as you know, we work very closely with BARDA, continue to and our plans going forward get adjusted based upon data that comes out. So in fact, we have a meeting today with them talking about what the path forward for the pandemic program is and we'll make that determination hand-in-hand with BARDA. So the -- I think, as I've mentioned probably in the last 2 or 3 quarters, earnings calls, is we have been spending the last year working on preparing for late stage product development into commercialization and that requires defining a "final process" not only for our seasonal flu program but for our pandemic influenza program and that is, again, in conjunction with the folks at BARDA where -- as we had mentioned, we had planned the timing of those efforts to wrap up in the summer and we have done that. And we will expect to discuss the plans forward based upon those activities at the end of September.

Our next question comes from the line of Kevin DeGeeter with Ladenburg. Kevin DeGeeter - Ladenburg Thalmann & Co. Inc., Research Division: I wanted to ask kind of few kind of strategic questions with regard to a possible path forward for the respiratory vaccine, the combination RSV influenza. On a very high level, do you think as a profile from a development standpoint, are you comfortable working with sort of a novel influenza vaccine in combination with your development of an RSV vaccine or do you think really the most prudent path over there might be with an already approved vaccine in combination with RSV? And on kind of related question, for the influenza component of that, do you think it really needs to be a quadrivalent strain or do you think because of the dual protective aspects that a trivalent might be adequate for a combination vaccine?

Yes, Kevin. So -- thanks for the question. Because I think the combination vaccine can be a really important strategic pathway for the company. As I've talked about in the past, you can imagine that we have a proprietary RSV vaccine. We think it's an unmet need. We represent the leading company in developing an RSV vaccine and we think we can carve out a nice market for that. But combining it with our flu vaccine really puts into play the entire flu vaccine, the $3 billion flu vaccine market as well. We see no problem with putting our own proprietary flu vaccine in with our RSV vaccine. We have a lot of confidence that it's going to be as good as any other vaccine out there. And we would like to be able to control the development and the economics of both vaccines. So we're going to put our flu vaccine with our RSV vaccine and we'll put it in with our quadrivalent flu vaccine as well. I think we expect to have both the best flu RSV combination and RSV combination that you can have. And the way to do it is put it with our vaccine. Kevin DeGeeter - Ladenburg Thalmann & Co. Inc., Research Division: Okay, great. Very, very helpful. And maybe on a different note, with the -- some of the volatility in India with regard to clinical trials viability and other questions, has that impacted your development timeline or strategy with regard to the rabies program in combination with your Indian partner?

Yes, it has. It's delayed things. We have a vaccine that's gone through all of the preclinical work that you have to do in India, which includes making consistency batches, doing your tox studies. We filed with the DCGI, which is sort of the equivalent of the FDA in India. And from everything that we know, it is about to be approved to go into Phase I trials and we just -- we don't control the timing of when. We hopefully -- hopefully, will be shortly but we're now projecting by the end of this year or the turn of next year. So we're confident it's going to get there. It's just that there's been -- the press has played around with vaccine development in India and it's adversely affected the timing of our trial. We can't do anything about it. Kevin DeGeeter - Ladenburg Thalmann & Co. Inc., Research Division: Fair enough. And then maybe one more housekeeping question for me and then I'll get back in the queue. Can you provide us metrics to think about with regard to cash burn impact from the Isconova merger sort of post-closing?

Yes, this is Buck. I think the answer is, yes. We'll provide some directional guidance at a future date on this topic but I think in the case of this call today, I think we're -- we won't provide that guidance. What I will suggest is, number one, Isconova is a public company, so there are some financial statements out there that you can find. And number two, we do believe that they bring with them enough cash to fund their operations based on plan for the foreseeable future.

Our next question comes from the line of Bill Tanner with Lazard Capital Markets.

I had one on RSV, Stan, and I don't know -- I don't want to ask you to jump the gun for your September Analyst Meeting but we've been doing some work, more in-depth work on this and I guess, one of the questions that has come up in my mind is -- it seems like you've got some certainly encouraging data in women of childbearing age and you got some encouraging data in elderly and I understand the strategy to vaccinate pregnant women and it seems like the literature would suggest that, that could bear fruit in terms of passing along antibodies through the placenta. But I guess, the question that I have is, what's the contemplation for the need to demonstrate and what level of confidence you would have in the ability to vaccinate the kids with the same vaccine subsequent to their birth because if literature would suggest that the maternal antibodies, they'll begin to dissipate somewhat quickly. And I guess, the epidemiology would suggest it's important to provide some immune coverage over the first couple of years of life. So just be -- again, I don't want to ask you to jump the gun on your September meeting but just kind of curious about that.

Yes. So let me turn it over -- Lou Fries has joined us. Lou Fries is our VP of Clinical Affairs, Medical Affairs and I'll let him not jump the gun on the September meeting, but answer your question.

In the spirit of not jumping the gun, just let me say that we fully recognize the importance of immunizing children and in carrying forward their protection against RSV disease. As you know, RSV disease, while it's most focused in early infancy, does carry on with a significant burden of illness through certainly the preschool years and probably is responsible for a reasonable amount of absenteeism during the early school years. So it is certainly on our agenda to begin to enter the pediatric population. As you know, RSV vaccines have a history in pediatrics and so that will have to be done in a stepwise fashion. But that is something we will evaluate. And in point of fact, we see pediatric population as a good place to achieve evidence of efficacy early on because they have such a high rate of infection. Maybe not serious disease but still measurable RSV-related disease. So without further jumping the gun, I'll simply say, we're actively planning to enter the pediatric population probably in school-aged kids and then progressively work our way down.

And then is there anything, appreciating the fact that, I guess, in the studies thus far, there's been a dose response and an adjuvant response. So was there anything you're contemplating that if you're going to have to modify either of those variables that you might have differential outcome as compared with what you've seen with adults, and the kids. I'm just meaning, how confident, I guess, are you that you would be able to demonstrate that vaccinating a child would have a beneficial effect?

Well, I think there's very little doubt that one of the -- that the formulations we have now will be strongly immunogenic in kids. Certainly, in older children, as you know, by age 2, every child has been exposed to RSV and one of the things we've noticed that's actually been very helpful in our adult program is the fact that adults are primed to RSV and although they don't maintain for long periods of time broadly cross-reactive protective responses, they do maintain priming and so they respond very quickly. We would expect to benefit from that priming at least down to age 2. And then we'll have to do some careful dose and formulation finding under that age. But I have very little expectation that we'll have difficulty eliciting strong immune responses in children.

And then maybe just one last question and not to try to get too much into the weeds but you did mention that, obviously, vaccinating kids with an RSV vaccine is -- there've been issues in the past but that was obviously, I guess, formalin-inactivated virus. So is it reasonable to believe that some of the problems that arose from that would be not an issue with a nanoparticle?

Yes, it is reasonable to believe that. We have -- we spent a lot of time developing data in the cotton rat model, which is susceptible to enhanced disease, the exact problem that occurred in young children back in the '60s. And we found that our product not only generates a qualitatively different type of antibody response to that generated by the formalin-inactivated vaccine but that our product demonstrates protection against virus shedding and also tissue pathology that the formalin-inactivated vaccine does not. So we think there's a very strong argument that we'll differentiate our safety profile from that old and rather crude product of 50 years ago.

Our next question comes from the line of George Zavoico with MLV & Co. George B. Zavoico - MLV & Co LLC, Research Division: A quick question about Isconova. It was all stock, no cash transaction, is that correct? Just to remind myself.

Yes. That's correct. George B. Zavoico - MLV & Co LLC, Research Division: And then how quickly do you think, or maybe you're going to talk about this in September, that you might be able to implement their adjuvants into your vaccines in first -- maybe in animals and then in humans?

Yes, so we're in the midst of starting that right now, George. George B. Zavoico - MLV & Co LLC, Research Division: Okay. Now -- again, I don't want to jump the gun but one of the issues that you were talking about was a B strain that you didn't quite get the response that you needed to. Is that one of the things that you're going to cover in September that you've resolved?

Yes, I think the whole program including all 4 strains and the path forward for the seasonal program will be presented at the end of September and it will be presented in the context of our going forward with our partner, BARDA. George B. Zavoico - MLV & Co LLC, Research Division: Okay. And final question. In the Vaccine paper, it was very interesting how you do the -- maybe the cross reactivity, especially with the N protein, the neuraminidase protein. Do you see moving forward, do you get sort of a broader response by focusing on the neuraminidase response because it's less mutatable than the H protein?

Yes, this is Lou Fries again. We think that -- we believe that our antigen, and there's published data to this effect, that our antigen has the potential for a considerable breadth of response. And let me take up 2 different points there. First of all, we do build neuraminidase into the construct. As you know, neuraminidase is in some of the licensed vaccines now, but it is a passive bystander and there's no strategy to actively include it. It's a difficult molecule to quantitate and work with but we're gaining experience, we're building a set of assays that are going to allow us to understand the level of control of neuraminidase and more importantly, the level of the immune responses to it and we've been able to show immune responses to it. You correctly point out that neuraminidase evolves less rapidly than does hemagglutinin and so there is an opportunity there for cross-reactive immunity. We've already shown in animals that our neuraminidase alone in the absence of a homologous hemagglutinin can provide protection against lethal disease. So yes, we are focusing on the opportunity of neuraminidase and actively working on that. I also point out that in some of our prior publications about H5N1, we've been able to show that our construct elicits immune responses to conserved parts of the hemagglutinin that are not elicited by the egg-derived vaccines. And so we have actually several different specificities to our immune response that can serve to distinguish us from the existing vaccines. George B. Zavoico - MLV & Co LLC, Research Division: That's very exciting stuff.

[indiscernible] all of those. George B. Zavoico - MLV & Co LLC, Research Division: I beg your pardon?

I said we're going forward to work on quantitating all of those.

[Operator Instructions] We have a follow-up from Ted Tenthoff with Piper Jaffray.

Just kind of picking up on the Isconova acquisition. Can you walk us through what the safety requirements might be, and I apologize if this has been asked or you've just discussed this, around establishing a new adjuvant. And is there any risk, I fully appreciate the flexibility, the control, the ownership of this delivers you, but does there -- is there any risk that this would stretch out time frames for your vaccines?

Yes, so we re-acquired Isconova as a strategic asset for the company based on a couple of things. One is that we had data, both safety and immunogenicity data from our H5N1 trial, that used a saponin-based adjuvant, which was -- has many similarities to the Isconova adjuvant. We followed that up with some fairly -- not fairly, it was robust animal evaluation and a model that we believe predicts very well what our vaccine is going to do in humans and we performed all of those assays in the early part of this year. We also looked at Isconova's experience in various human and animal trials with other companies, the fact that it's a licensed vaccine for equine use. There are a whole bunch of data out there that gave us confidence that taking control of this would give us an adjuvant that met the safety profile to which you refer and the immunogenicity profile. And so what we have to do is incorporate it into our plans for our vaccine trials. The first one will be with our pandemic flu program and it will require that we do a new equivalent of the Phase I study with Matrix-M to demonstrate that it does what we think it's going to do. Does it hold up anything? It means that the -- it holds it up in the respect that we won't be going directly into a Phase II program on pandemic but because of the marriage of the pandemic and seasonal clinical development plans and the timelines for getting the approval for all of our flu programs, I don't think it will have any impact on the final licensure of our seasonal and pandemic flu program.

Our next question comes from the line of Jay Silverman with BioInvest.

I just wanted to know if the Isconova, the shares you issued for Isconova have already been issued and is that officially closed? I know you acquired their sure but have you issued the Novavax shares yet?

It's Buck Phillips. I think per the press release on the initial -- the closing of the initial tender offer and the tender of 97.4% of the outstanding Isconova shares, those shares have now been settled and those shares are the appropriate number. Novavax shares are now in the hands of Isconova shareholders.

Great. Okay. I think a lot of my other questions have been answered and I look forward to next month's meeting. That's going to be in New York, correct?

Actually, Jay, we'll probably do that as a virtual webcast. This is the first time the company has done this in a little while. So we'll start with a webcast and then make it an annual deal in New York City.

[Operator Instructions] At this time, I'm not showing any further questions in queue. I would like to turn it over to Stan Erck, CEO, for any closing remarks.

Okay. Well, we thank you for participating and we'll talk to you shortly. Thanks a lot.