Novavax, Inc. (NVAX) Q4 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Novavax Fourth Quarter and Year-End Earnings Conference Call. (Operator Instructions) I'd now like to turn the call over to your host for today's conference, Mr. Buck Phillips, Chief Financial Officer. Sir, you may proceed.

Thank you. Good afternoon. This is Buck Phillips, Chief Financial Officer of Novavax. And I would like to thank everyone for joining today's call to discuss our fourth quarter 2013 financial results. Today's earnings release is currently available on our website at novavax.com and an audio archive of this conference call will be available on our website later this evening. Joining me on today's call is Novavax's President and Chief Executive Officer, Stan Erck; and Novavax's Senior Vice President of Research and Development, Dr. Greg Glenn; 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 related matters including expectations regarding revenue, operating expenses, cash usage and clinical developments 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 change over time. I will now turn the call over to Stan Erck, President and CEO.

Thanks, Buck, and good afternoon everyone. We'll be following our standard earnings call format today. I'll begin with a few remarks to review recent developments and business highlights and then I'll turn the call back over to Buck to go over the financials. We'll then open the line to take any questions you have. So starting with 2013, Novavax made substantial progress. Our vaccine pipeline took major steps forward with multiple clinical vaccine programs demonstrating proof-of-concepts and high levels of immunogenicity. Notably, we reported data from two RSV F vaccine trials during the year, one in 330 women of childbearing age and the other in 220 elderly adults. To remind everyone, both of these trials demonstrated the safety of our vaccine candidates and both resulted in post-vaccination antibody levels which are several fold the level of antibody that would be predicted to be protective. The results represent a breakthrough and encourage us to move ahead with the RSV vaccine programs for the maternal immunization, pediatric and elderly indications in 2014. During 2013, we were also able to demonstrate our pipeline's capabilities with regards to pandemic preparedness. In April, less than 10 days after Chinese health authorities announced an outbreak of H7N9, we were able to commence production of the recombinant vaccine and shortly thereafter initiate a clinical development program for it, the first in the world to do so. By July, the first doses of our H7N9 vaccine were injected in humans. Our vaccine proved capable producing levels of antibodies that predict production following vaccination. And we were proud to see these results available online in November and published in the December 26, 2013, edition of the New England Journal of Medicine. This is the first and to date the only published data showing the ability to produce protective antibody…

Thanks, Stan. Before I continue, as was the case last quarter, I must note that the financials I'll be discussing here reflect consolidated results inclusive of our July 2013 acquisition of Isconova AB, now known as Novavax AB. My comments today will primarily focus on fourth quarter results. Results of the full year of 2013 are available in the press release we issued this afternoon. For the fourth quarter of 2013, we reported a net loss of $14.1 million or $0.07 per share compared to a net loss of $8 million or $0.06 per share for the fourth quarter of 2012. For the full year of 2013, the net loss was $52 million or $0.31 per share compared to a net loss of $28.5 million or $0.22 per share for 2012. Novavax had revenue in the fourth quarter of 2013 of $8.7 million as compared to $4.6 million for the same period in 2012. The increase in revenue is primarily due to the HHS BARDA amendment relating to H7N9 manufacturing and other activities as well as the PATH amendment to support the company's Phase 2 clinical trial in women of childbearing age. Research and development expenses increased $16.3 million in the fourth quarter of '13 compared to $9.6 million for the same period in 2012, primarily as a result of the increased cost related to the company's RSV and H7N9 avian vaccine candidate clinical trials, along with higher employee related costs. General and administrative expenses increased $4.1 million in the fourth quarter of 2013 compared to $2.5 million for the same period in 2012, resulting primarily from Novavax AB's expenses and higher professional fees. As of December 31, 2013, the company had $133.1 million in cash, cash equivalents and investments compared to $50.3 million as of December 31, 2012. Finally, net cash used in operating activities for 2013 was $45.4 million compared to $18.2 million for 2012. The increase in cash usage from the prior year was primarily due to the higher research and development spending described before, including the company's RSV and pandemic H7N9 influenza clinical trials, as well as increased employee related costs as we grow the company. This concludes my prepared remarks. Let me hand it back over to Stan.

Thanks. That's all we have for prepared remarks today and we'll open it up to Q&A.

(Operator Instructions) And our first question comes from the line of Ted Tenthoff with Piper Jaffray.

I wanted to touch base first on the extension of the BARDA contracts and a quick related question. Obviously, activity is heating up here, but what kind of funds do you still expect to receive under that initial $97 million contract? And that was extended through September of this year, is that correct?

So the way the BARDA contract works is back in, I think it was 2009 and early 2010, we submitted a proposal for a five-year research and development plan for, in this case, seasonal and avian influenza. And so they approved it and we started the contract in early 2011. And as with any research program, things change, the scope changes. We went from a trivalent to a quadrivalent. We used new adjuvant in the program. So trying to keep track of all those changes - And so the contract is broken into two pieces, a three-year base period, which was predicted to be worth $97 million; and then a two-year option period to bring it up to a total of $186 million. So that base period was predicted to end in February of this year. And as it turns out, because of all the scope changes, the work wasn't going to be finished in the base period. The normal way you go about these government contracts is you get to the end of a base period, you resubmit for a what's called a no cost extension to the period which you think you'll use up all $97 million. So we've done that. The answer to your question is, is we expect to use up the entire $97 million and then move into the option period for the additional $87 million.

And related to that, [related to] [ph] the 2014 anticipated event, you say that the goal is to start a Phase 2 study, with a quadrivalent VLP seasonal vaccine in the fourth quarter. Now is that a push-out? Is that the combo that you're referring to there? Or is that the Phase 2 for just the quadrivalent? And is there some push-out considering that it will start in the fourth quarter or so? What will those remaining $30 million-plus or so for the BARDA contract go to if the Phase 2 quardrivalent study doesn’t start till the fourth quarter?

All of the activities that we're working on right now are an effort to sequence the development of this through to licensure. And if you start with licensure and go back, you got to run a Phase 3 program. And during that Phase 3 program, you're going to be making your consistency lots. And before you do your Phase 3 program, you've got to make the lots for Phase 3. And then we have to time the last Phase 2 before the flu season this year, so we can begin our Phase 3 next year. And so all of our activities are to scale up the process, so that we're confident that the process that we use for this Phase 2 we can just turn on the dime and start manufacturing Phase 3 materials. So that's what we're using the time for. And that trial should start before the flu season and beginning of the fourth quarter.

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

Looks like a lot of balls moving down the field on the vaccine front. I just wondered if you could touch on how you view this feasibility of moving any or all of them through registration. And I guess really thinking more along the lines of two dimensions, one being the development capacity that you have at the company and if that's adequate or needs to be expanded, and then secondly as it relates to the capital that might be or access to capital, I guess, that would be required to do that.

Yeah. So let me take the infrastructure and people part of it first and really answer the basic question. We have a very full plate. We've got a lot of successes. We've got arguably several different products coming down the platform towards licensure. We've got a quadrivalent seasonal flu. We've got a pandemic or avian influenza vaccine. We've got and then three different approaches to RSV and the maternal, pediatric and elderly. And it's possible that we would approach one or more of these with a combination pentavalent respiratory vaccine. So do we have the capacity to do that? To date, we do. We've got 215 people in the company right now. I think roughly 180 or 185 of those people are new since I've been CEO in the last three years. We've been building up the capability to do all the things that are required, maybe not very sexy, but are required to take a product into licensure. And that includes analytical development, process development, regulatory, clinical and control quality assurance. And that's where all of our growth has been, and it's all focused on being able to take multiple products to licensure. Inevitably, one, when you're trying to work on that many things, timetables change in one program or the other. But right now, clinical data drives the clinical timeline. And so you also asked about capital. The recently raised capital, the capital that we did last year was to be able to give us the runway to get through some clinical data points and show proof-of-concept in a couple of our different programs and initiate a Phase 3 trial, our first Phase 3 trial with flu. So we have capital to do that right now. And it's clear in the future we'll need to add to that stockpile of capital to be able to take the products through clinical FDA licensure.

Bill, let me just add, I think if you look at our numbers in the past, you'll see under investing activities in the statement of cash, Bill, you'll see what we're spending on CapEx on an annual basis. When we talk about our cash runway, we anticipate additional investment into our manufacturing facilities, our process development facilities and equipment. So you could assume that when we make statements about our cash runway, we are contemplating those investments at this point in time.

And then I had a couple maybe for Greg, I'm assuming he's here. As it relates to the H7N9 and Stan touched on what the expectation is for going forward, I guess, into a Phase 3, but it maybe just describing a Phase 3. I'm assuming that it's still going to be in healthy volunteers. And the extent that you view the program as being relatively de-risk, since I guess you're not going to really challenge anybody with the virus and then maybe how you view the competitive landscape and where you guys are relative to competition.

This is Stan, I’m going to turn it over to Louis fries who is our head of flu program and also our Chief Medical Officer. Greg is here and [Technical difficulty]. Louis F. Fries III The H7N9 program is based on immunogenicity. You don't do efficacy with potential pandemic vaccines. So what we will do going forward is after establishing the least dose necessary of both antigen and the adjuvant in young adults, we used to do a trial in elderly subjects, because it's important to public health authorities to cover the elderly population and especially where a pathogen like H7N9, which has a predilection to be most lethal in the elderly population. So we will do dose finding in young adults and in older adults and then move forward with those into a Phase 3 trial that allows us to get a safety database several thousand subjects and also show that our immune responses robustly fulfill CBER's criteria for accelerated approval and would more importantly make us eligible for emergency use authorization. Our Phase 1 data was quite robust for H7N9, which is a notoriously difficult virus to immunize against. And I believe that we should have no difficulty in continuing to show robust immunogenicity, which is the name of the game for avian influenza.

And at the end of the day, I think you'd anticipate a more muted immune response in the elderly. I mean would this still be registerable for a viable vaccine if it's only for adults if the immunogenicity of the safety profile was viewed as maybe non-acceptable on the elderly?

First of all, with adjuvanted vaccines, generally the safety profile is usually superior in the elderly. So I don't have any particular concerns residing there. It's not uncommon for both unadjuvanted and adjuvanted influenza vaccines to have a lesser immune response in the elderly. I would say that in our first study in which we enrolled individuals 18 to 64 years of age, we did look specifically at the stratum between 50 and 64 and their immune response was pretty good. And over age 64, we have the option of adjusting the adjuvant or the antigen dose to get a better response. We are not necessarily required to use the same formulation to address young adults and over adults. And so we would do that if necessary, so that we have a product that could provide protection in both age strata.

Just on the RSV, I don't know if anybody can provide any more granularity on the timing in the second quarter. But I guess more importantly really is what would be the key data points to look for. Clearly safety is one of them. But just in terms of trying to get some better insight into other potential efficacy indicators, how should people be thinking about the data when they come out?

Yeah, we expect to release that data in the second quarter this year. And it's an important trial. As you know, it's important data that will allow us to go to the FDA and get permission to enter into pregnant women. So the safety data is very important here. As you know, to date, we've had quite good safety. We expect that to continue. We also would be looking at the dosing regimen very carefully. And we've done, I think, a very good job of looking at the design trial to allow us to look at immune kinetics, so that we can dose the regimen during the pregnancy to provide peak antibody titers for them. So we plan on immunizing in the last trial of pregnancy which would span from about 28 weeks just to 40 weeks. So that when we immunize is going to be extremely important to decide, so that we can time immunization and get peak antibody titers. And we do expect to look at the palivizumab antibodies, which again is very important. We'd like to reproduce that we had before. And the palivizumab, as you know, levels are important, we have indication what would be protective and we'd look to maximize those, so that when infants are born, they have the greatest chance of having protection and high palivizumab like antibodies. So this is a very key trial. We expect it to be our last trial in women of childbearing age before entering pregnant women.

Our next question comes from the line of Kevin DeGeeter with Ladenburg.

First off, I just want to offer my congratulations to John. Welcome back to the team. Good to have you back. And maybe two-part question on RSV and manufacturing process development. Can you just sort of walk us through, I guess, with some granularity on the key steps on scale-off between now and say initiation of a potential Phase 3 for RSV vaccine and just sort of your updated thoughts on a reasonable range for commercial COGS for an RSV standalone vaccine.

So essentially the same production process as for our flu program. And then the question, just like in flu, to treat RSV is another strain and all the strains have different levels of production and of course there's different doses in a vaccine. So take those two and account how do we predict scalability and the commercial profitability on that. So in flu, as you know, the flu vaccines sell from the wholesaler at somewhere in the range of $10 to $12 per dose and it's been a trivalent dose with the cost of goods sold in below $5 for the three strains. If we treat RSV similarly, but assume that the dose is going to be higher, it'll be more like a quadrivalent dose or perhaps a six-valent dose in terms of micrograms per dose, you can get an idea of what we expect for our cost of goods sold. The production levels at the scale that we've been doing this now are higher than any of our individual flu strains. So there's great potential for a standard pharmaceutical barge-in for RSV vaccine.

And maybe on a separate question with regard to the pentavalent respiratory vaccine, how do we begin to think about potential regulatory endpoints and what that means for the size of potential Phase 2 and Phase 3 studies? Specifically, I'm assume an accelerated approval under immunogenicity endpoint is unlikely for pentavalent vaccine. So how do we think about relevant clinical endpoint and what that might mean for clinical trial?

I think the most relevant clinical endpoints for a multivalent respiratory vaccine are going to be efficacy. I think we may be able to, for example, independently show efficacy with the influenza vaccine and then build off of that to demonstrate a correlate of reduced risk, which is immunologic, and then do a separate efficacy trial which involves efficacies for RSV and immunogenicity for flu. Alternatively, we could do a large single trial that look the best to see for both in influenza and the RSV components. We're going to have to look at efficacy of both components of the influenza and the RSV in the combination product. But whether it's most opportune to do that sequentially or in one trial, I don't think we've determined yet.

Do you anticipate the target population for pentavalent vaccine being similar to the RSV elderly population or more akin to an influenza product label, including a broader continuum of age groups?

I think that the potential target population for the combination vaccine could be any of the population that we're pursuing in the RSV spectrum. Certainly, the elderly would benefit from the vaccine that covers both influenza, which you've seen as the major pathogen in the elderly, but which also covered RSV which is a covert cause of hospitalization. We know already that pregnant women benefit markedly from influenza vaccine. And if we could add the RSV component to that, then both mothers and infants would be likely to benefit from that. And both RSV and influenza are significant causes of morbidity in children. They have different age peaks within children, but both viruses are important in children, both in terms of causing serious illness and hospitalization and also causing relatively minor ailments, but that have tremendous economic impact based on the burden that they place on parents. So I think a combination vaccine could be a player in any of the segments where we're looking at RSV vaccine.

Your next questions comes from the line of George Zavoico with H.C. Wainwright.

I have a question regarding the H7N9 since tomorrow. The Chinese announced that they're preparing H7N9 vaccine seeds for mass production in case of human-to-human transmission occurs, which I suspect as it seems that they're getting ready for human testing eventually. Does Novavax have a footprint at all in China, because you're ahead of the Chinese in this regard? And along with that, you have the Korean efforts going as well. So perhaps they're involved with the pandemic as well. Can you sort of triangulate China, Korea and Maryland here?

So we've had several tropes and tropes planned in the near future to talk with various parts of China. As you know, there're a lot of different moving parts. But we've had conversations with the Chinese, FDA, the Chinese CDC and continued to have those. And I think it's in our part of matter of educating them as to who Novavax is and showing them the data, showing them now that we've got credibility with the US government, we've got publications in the New England Journal and showing what our capabilities are. I think they would be a potential customer. We would be a potential supplier. I can't predict how that will go. Chinese companies have been working on H7N9 with the traditional egg-based method. And so I think we're an additional player there. Right now, without an emergency, the need for emergency use vaccine, you have to manufacture vaccines in China to be able to distribute them in China. And we've also evaluated that. So we're working all the angles in China. But there is also a lot of other countries that border China that I think have the problem of not having capacity of making H7N9 vaccines, and those are equally likely customers. With respect to Korea, our partner in Korea, LG Life Sciences have a license to both seasonal and pandemic. And of course if there were a need for H7N9 vaccination, they would come to us for the vaccine for the time being. And their expectation, their plan is to build a manufacturing facility in Korea to supply that market in the future. But we're the only source of that right now.

I would like to point out, to date, we're the only group to have published any clinical data on the H7N9 candidate. It's March. We published at the beginning of November. So I've seen various groups making claims that they have an H7N9 vaccine at various stages of development. And no doubt, someone will publish. But to date, there has been no publication of H7N9 data. We have a very good data set.

And so you're easily about six to nine months ahead of anybody else I presume at least?

That's right.

And then the Chinese said that there was a dramatically engineered vaccine, which I suppose (inaudible) it's not egg-based, right?

That's correct. That still could be an egg-based or artificially constructed strain.

I'm told it's actually there never will be from a health standpoint a pandemic H7N9 pandemic that never gets to human-to-human transmission state. But right now, there really is no customer for it or is there a plan for stockpiling regardless of whether it's called a pandemic?

As I say, right now, without emergency use being demanded, our plan is to take this product on to the BARDA contract through to licensure. And once we have licensure, that's when BARDA could make their plans to start file. BARDA in the past, eight or nine years, has stockpiled a couple of billion dollars worth of vaccine. On a yearly basis, it's averaged in $100 million to $200 million. And it's difficult to predict from year-to-year how much BARDA plans to stockpile. So we can't predict that.

And the final question regarding Isconova or Novavax AB and the nature of Matrix-M. Genocea has had successful results of the trial. Are you still marketing this as a potential adjuvant to other companies and do you expect much revenue from this regard or pretty much all your resource is directed toward, you've been talking about all afternoon so far?

It's part of our plan to evaluate that. But right now, we have purchased Isconova for the primary purpose of having access to an adjuvant for our vaccines and that justified the entire acquisition. I think that what we've found since we've acquired the company is if there is a store of preclinical data and some clinical data suggesting that it might have many applications and we over the next year or so will evaluate how to exploit that.

Our next question in the queue is a follow-up from the line of Bill Tanner with FBR Capital Markets.

Stan, just on the registration, I mean it sounds pretty clear and feasible that the company can do what is necessary for registration in the US. As you think about global registration and have to confess a bit of near fight in terms of what might be required by other regions such as Europe or the rest of the world, to what extent would you entail having a partner for that at least just to do the registration purposes? I mean as you look farther out, to what extent would you need a partner really at all except for maybe ex-US in terms of commercialization?

We'll need partners for commercialization clearly. And I think ex-US is the obvious choice for looking for partners. It's possible we'd find someone to co-market within the US, but we haven't made that decision yet. Going back to registration, as part of this great group I just told you about, we have people who have registered products globally in Europe, in the US both with our Head of Regulatory, Amy Fix, and Lou Fries have been involved in registrations outside of the US. And so we have a lot of expertise in it. And so we can do that. And the question is the timing of when we run those clinical trials and collect the data and file the registration. And so that's something we'll look at over the next year. We already have the team in place that can lead that effort.

But at least as it relates to Europe and the ability to leverage the data set from US clinical trials might be limited or not?

I don't know it's limited.

Our next question comes from the line of Vernon Bernardino with MLV & Company. Vernon Bernardino - MLV & Company: Just wanted to follow up on one of Bill's questions. I didn't quite catch if you had actually given an update as far as the competitive landscape in RSV.

I can give that to you. So the competitive landscape to which you're referring is the one that was sponsored under a grant by the Bill & Melinda Gates Foundation and PATH, which is a not-for-profit, an NGO in Seattle, to put together an RSV landscape. I think it was December of 2012, which showed basically that every company globally that is working on vaccines has some sort of RSV vaccine candidate program, all of which were in preclinical trials, with two exceptions. There was Novavax, which was in Phase 2s back in December of 2012, way ahead of the industry at that point, and MedImmune, which has had a Phase 1/2 trial with an RSV vaccine largely working in conjunction with the NIH. And so we were basically out there by ourselves. I think the only update that I have right now is that GSK has registered on clintrials.gov that they started to trial in August of last year with the expectation that they would report results at the end of this year or something like that. So it's a trial in healthy, adult men.

It's a sub-unit trial in healthy adult men. They don't really disclose the dosage of formulation, but that's what they tried to start their trials in adult men.

So I never underestimate the competition. But there are two points from that landscape. One is, is that this is such an important area that everybody is working on some approach to RSV vaccination, number one. And number two that we remain out and front of the pack and that's largely why we've chosen to not barter the program, because we think we can progress the vaccine candidates faster through our own efforts than through partnerships. Vernon Bernardino - MLV & Company: And as a follow-up, part of my thinking is that as you had described there are different approaches to this market as far as RSV, there're some market share gain effort and so perhaps just wanted to see how (inaudible) healthy adult men, for example, for now what is the approach to shaping this market as far as the market opportunity?

So we've mentioned the three different areas that we're going into. We have RSV vaccine. I think what we're looking to do and that with a novel vaccine and the only vaccine that is approved at the time of launch, I think the market we've brought on now for the first time a commercial guy to help us do all the pre-commercialization activities to prepare the market by educating the thought leaders, the KOLs, physician community, the insurance companies and payers help to design an acceptable target product profile that enjoys marketing input and then educating groups like the Advisory Committee on Immunization Practices, for instance, and the ACOG, the gynecology group, so that we can have marketing price analysis. So that's the effort that we're going into right now and take it for an RSV vaccine alone and then factor in having a pentavalent respiratory vaccine. Not only it builds not only the RSV potential demand for market, but it encroaches upon this $3 billion flu market too. So that's what we're going to be designing. Vernon Bernardino - MLV & Company: And bottomline, going forward, do you think everyone will have to at least generate data that shows palivizumab like antibody generation?

Well, I think it's possible via maybe other approaches. Like just would point out, our approach is highly de-risked and it's unique and novel to any vaccine development program. But it's been an activity that's been identified, evaluated in randomized clinical trials and licensed with a level that's known to be protective. So that is completely unique. And I think we felt about an important way to de-risk our programs. So at this point, that's our view that the best way forward is to follow this well proven route that has I think been a very successful product as well.

And I'm not showing any further questions in the queue. I would like to turn the call back over to the speakers for any closing remarks.

Good questions. Look forward to talking with you in 90 days. Thanks.