Novavax Inc (NVAX) 2004 Q4 法說會逐字稿

Please stand by for Novavax conference call.

Good morning ladies and gentlemen.

I would like to welcome everyone to the Novavax fourth quarter and year end 2004 conference call.

If anyone wishes to follow the slide presentation they may do so by logging on to www.novavax.com listed under the title of today's call.

Before we start, the Company has asked me to remind you that forward-looking statements can obviously differ from actuality and relying own them is subject to risk.

Factors that can cause forward-looking statements in this conference call and webcast to differ materially from actual results are discussed in the company's Form 10-K and other periodic forms with the SEC.

Presenting on the call today will be Nelson Syms, President and Chief Executive Officer, as well as Dennis Genge, Chief Financial Officer, and joining on the question and answer session will be Denis O'Donnell, Chairman of Novavax.

At this time all participants are in a listen-only mode.

Following the presentation we will conduct a question and answer session.

I would like to remind everyone that this conference call is being recorded on Tuesday, March 15, 2005, at 830 a.m.

Eastern time.

I will now turn the call over to Mr. Nelson Syms, President and CEO of Novavax.

Please go ahead sir.

Welcome to the 2004 conference call.

Again, for those following the slides, on page three will you find our agenda.

For today's presentation we have three areas of focus for this call.

First, Dennis Genge will report our financial results for 2004 and provide for us the outlook on 2005.

Then I will touch base very briefly on our operational highlights of 2004 and then spend most of the call focused on our opportunities and goals for this year.

On page four you will find the financial drivers, and at this time I will turn the presentation over to Dennis Genge.

Good morning, everyone.

On slide five there are what I would consider three drivers to our 2004 financials.

The first is our investment in the Estrasorb launch which included medical, marketing and sales expenses of approximately $16 to $17 million, manufacturing distribution start up costs of $2 million, and inventory sample builds of approximately $4 million.

We had a total estimated launch expense of between $22 and $23 million.

Strengthening our balance sheet, we terminated the King agreement and raised approximately $40 million, resulting in the re-acquisition of all rights to Estrasorb.

A gain on notes, the redemption of the King notes of $11 million, reduced our debt by $5 million, and increased our cash position by $23 million.

On the sale side, generic competition of our prenatal vitamins continues to surprise us, and wholesaler forward buys in Q3 and Q4 of '03 on all products resulted in lower-than-planned sales in 2004.

We also had returns of $1 million from expired products, and we took a one time reserve of $1.3 million which we booked in the third quarter.

On the positive side, we feel these product issues are behind us.

We have better information on wholesaler inventory levels, and we are expecting to increase these product sales in '05.

On slide five is a summary of our financial results which further highlights the drivers I just received -- I'm sorry, reviewed.

Revenues for the quarter and year-to-date are down compared to '03 due to the reasons previously discussed.

But we expect product sales to normalize in '05 and increase, and vaccine revenues to increase also in '05.

Operating expense increases for the quarter and year-to-date were due to the one- time launch expenses, again, which totalled about $22 million.

We'll look at our projections for '05 expenses in a minute here.

We ended the year with cash of $17.9 million, and stockholders' equity of $33.3 million.

As expected, our use of cash remained high in the fourth quarter as we wound down our Estrasorb launch costs.

For further detail on our 2004 results, please refer to our press release and our 10-K which will be filed later today.

Moving to slide six is a review of our projected 2005 operating expenses, which we believe are very conservative at this point, as we are assuming no Estrasorb partnership which could lower our sales and marketing expenses and increase our cash.

We are also assuming no drug delivery co-development partnerships even though we currently have co-development close to completion.

And we have included enough funds to advance our internal development of MNP product candidates.

Slide seven sums up these conservative assumptions, and you can see the savings compared to '04.

The majority of this $11 to $15 million reduction range will occur in the last nine to 12 months of this year, now that our Estrasorb launch programs are completed.

On slide eight are our 2005 key financial management targets.

We are definitely committed to the reduction of operating expenses.

We believe we can optimize the value of our Estrasorb assets.

We will increase legacy product sales and vaccine funding revenues.

We are confident we will obtain co-development partners on MNP technologies, and we are working very hard to continue to improve our cost-to-goods-sold.

I am very encouraged about our 2005 opportunities, and particularly with the management team that has been here over the last year.

In summary from a capital resources viewpoint, if we complete and Estrasorb partnership along with our financial management target, we should have sufficient funds to make us well into if not through 2006.

In the absence of a partnership, we will probably need to raise capital in the Q3 time frame.

With that I would like to turn it back to Nelson to further review of 2004 and 2005 activities.

Thank you, Dennis.

Just to embellish on a couple of things that Dennis said--I mean the assumption slide that he went through and his note of conservatism was just what we decided to use for the drivers of creating those forward-looking numbers.

And we certainly want to emphasize that our intent is to not let those assumptions happen, and we think there is a great possibility that it won't.

And I will touch base on that as I address 2005.

On page nine, I will just use one slide to provide a very quick overview of operational highlights.

And I want to do that in the spirit of thanking the organization here at Novavax for their hard work and significant accomplishments in 2004 to put this Company on a solid foundation so we can build in the future.

We have built a significant management team that's extremely talented.

We completed and validated an FDA compliant manufacturing facility that was a huge task and took us nine months.

We terminated the King agreements in the most favorable terms that one could have possibly hoped for.

We successfully launched Estrasorb with solid marketing programs and a sales force that had just been put together at essentially the month of launch.

Those were the cards we were dealt.

We improved the financial position at the launch of the product and the termination of the King agreement, as Dennis noted, and put $23 million new dollars in our treasury.

We consolidated our facilities.

We improved our operational efficiencies.

We had six facilities here at Novavax and an inefficient operation.

We are now down in number of facilities and have centralized our drug delivery organization in the greater Philadelphia area.

We focused new product development.

We now have an organization, although it is small and building, that is very capable of building new micellar nanoparticle candidates.

Today we have created five new candidates.

I will speak more about those in a moment.

Our vaccine programs have new -- has a new leader.

He's an exceptional scientist.

We are extremely focused and moving forward at a much faster pace.

Finally as the government has required, we have spent an enormous amount of time preparing for our Sarbanes-Oxley 404 implementation, and I'm proud to note and thank our financial organization for a stellar job.

And in fact we just passed with flying colors the SOX 404 test.

For the rest of the call I would like to switch to a focus on 2005, and you can find the first slide on page ten.

We have significant issues to deal with.

I would categorize them in three categories -- first, our Estrasorb sales results.

They have clearly not met our expectations.

The persistence of the impact of the women's health initiative lingers on.

We have an extraordinarily competitive environment, and resources required for success are significant.

In terms of business development, the timing of the completion of a deal is long.

The average biotech deal is 18 months.

Because of the King agreements, we could start -- we could not start negotiations with a potential new partner until the September-October time frame.

Obviously this is early March.

That's a five to six-month time frame.

No one is more anxious to complete and announce an Estrasorb deal than this management team.

The resources required to implement this deal management is significant .

It has not only consumed our dedicated resource of our Vice President of Business Development, Ray Hage, but also significant time from the rest of the senior management team.

We are pleased with our progress.

We are disappointed we can't announce the deal today.

I will address it more.

We do have significant progress and expect a deal announcement in the near term.

We also have a significant issue of balance sheet management.

We must, and I will emphasize must, manage our operating expenses very prudently.

We also need to keep an eye on our capital resources required, and as Dennis mentioned, we believe that the Estrasorb deal will bring in the necessary cash to give us a longer runway.

If not we would be focusing on capital raise in the third quarter.

Slide 11 sets up what we view as the foremost significant assets here at Novavax.

In the top right-hand corner is our most significant asset, and that is Estrasorb.

It was developed here.

All the clinicals were managed at Novavax.

It's been marketed by Novavax, and it is a significant asset.

I will address it specifically.

Down on the bottom right-hand corner is our second most significant asset, and it's our drug delivery asset.

We have a terrific patent position for micellar nanoparticles and other drug delivery mechanisms.

We have a team in place.

I will demonstrate to you in a moment that is it is moving forward and developing new products at a very rapid pace.

In the lower left-hand column would be the asset of our commercial organization.

We have an outstanding sales organization, very capable of selling pharmaceuticals to OB-Gyns.

That asset has value.

And up in the top left-hand corner are our vaccine technologies.

We have patents and a very, very talented vaccine development organization.

Again, I will address that in a moment.

On page 12 let me address the first of what we see as the significant opportunities in 2005, and that would be Estrasorb, a very significant asset.

It has an excellent product profile.

We have tested it post-launch and obviously pre-launch.

Patients that are on Estrasorb are very satisfied.

We have low switch-offs, and prescribers that have prescribed it are very satisfied with the technology.

We need to, and we have made, strategic adjustments.

We are obviously dead-focused on an agreement with a larger partner to help us market Estrasorb both in the U.S. and abroad.

We have reduced our operating expenses in sales and marketing so that it is in alignment, in better alignment with our current sales results.

And we continue to focus on manufacturing cost improvement, both in our processes and especially with our bottle program, which would significantly reduce our manufacturing cost, and that program is on track.

Finally we need to focus on strengthening marketing.

We need that large company affiliation highly recognized in the ob-gyn community and the postal menopausal health marketplace.

We need to focus on top-prescribing physician penetration, and we need targeted-direct-to-consumer marketing issues -- excuse me -- marketing programs.

As Estrasorb remains a significant asset, we continue to focus our selling organization, and we are very focused and highly active in developing an agreement with a larger partner.

I would turn to page 13 for our second, what we could classify as significant opportunities.

This is a snapshot or a pictorial of our drug delivery development process.

First is obviously target selection.

As we've mentioned before, we are focused on products that are approved by the FDA.

Safety and efficacy is not an issue.

They are products that have alcohol solubility.

They are of appropriate molecular size--we prefer small molecules--and they are potent drugs, thus requiring lower dose, and not so much drug to push through the skin.

Once we have identified those targets, we actually develop the product in a micellar nanoparticle.

Then we test it for stability in incubators.

After we've made multiple concentrations of different solutions, we select the right one, then we move it to the animal clinic.

And we've chosen a rabbit model that has been developed by Charles River that closely mimics what one could expect in a human being.

It is highly predictive of human success.

This process is fast.

It is inexpensive, and again highly predictive.

Once we have seen blood levels in a rabbit model that we are comfortable with, we will make the decisions which products we will prioritize to move into the clinic.

On page 14 you can see our current pipeline.

We have brought greater clarity for you on this call.

Five of these products are now labeled, with the actual product, not just the area of use.

The first is Androsorb, which we're all well aware of.

It is testosterone for female sexual dysfunction.

We've previously announced that we have completed Phase I. We await to start our Phase II trials until we better understand where Proctor & Gamble is with the FDA with its patch product, Intrinsa.

Once we see a clear path that the FDA is prepared to approve a testosterone product for female sexual dysfunction, we will quickly follow the same path that we did with Estrasorb to fast follow for a second entry.

The second product, NX-200, is Noriphendrone[ph] for post-menopausal health.

That's the progestin.

We have completed the blood level studies.

We have -- The blood level studies currently with the pharmacokineticist , to provide us a clear picture of exactly what we think we could expect in a human being, but the preliminary results are very, very good.

The third product is NX-201, which is a combination of ethanol estradiol and noriphendrone[ph] for contraception.

Again, just like NX-200, we have the blood levels complete.

The preliminary results are extremely favorable.

The pharmacokinetic analysis is underway and we should have it shortly, but it looks very positive.

he fourth product is NX-205.

We have completed the blood work on one formulation.

We actually went back to Charles River a month later, ran two more formulations for this particular product.

It is a breakthrough product.

It is a significant product and one that we are anxious to tell you about,, but we just have not seen the blood level data yet.

As soon as we do you will be the first to know.

The fifth product is for pain, NX-300.

We previously announced it is fentanyl.

We have completed the animal blood work, we have seen the preliminary results, and they are no less than outstanding.

The data is with the pharmacokineticists again.

We will receive that in a few short weeks, and again making a decision on whether or not to move to Phase I. The preliminary results are excellent.

The next product is NX-301 for nicotine, smoking cessation.

We are working with experts in this field.

The patches are being generisized at this time.

OTC companies are looking for alternatives to come to market.

The blood levels again that we received for nicotine are very, very good.

We will have final data back again from the pharmacokinetic results very soon, but it looks positive.

NX-302, 303 and 401 as you can see, would be an anti-hypertensive, a product for bladder control, and a product for allergy.

Again, the blood work is complete.

We just do not have the data back yet but expect it in the near future.

I want to make an over-arcing comment about this portfolio.

For the first time in the history of this company and the micellar nanoparticle technology, we have demonstrated that products that are not hormones work with this technology.

Fentanyl and nicotine prove that point.

Prior to this date we had only put hormones in the technology and were completely unaware of its applicability beyond hormones.

The other thing that we've proven just in the last few months, is we validated the fact that again non-hormones work, the speed of development is impressive, and the low cost for each product to prepare for the clinic is very, very low--under $150,000 a molecule.

With that I would turn to page 15 which is what we see as our third significant opportunity as we focus in 2005.

And it's for our vaccine platform.

We have a virus-like particle-based technology.

It is unique.

It is a scalable manufacturing process.

I know some in the marketplace question whether or not it's scalable.

Our scientists have proven with pilot plant levels it is extremely scalable.

It has the advantage of being safe, in that it is a non-infectious virus-like particle.

The technology is simple.

It is aseptic and has an extremely low cost manufacturing, with shorter development times than the traditional egg-based vaccine manufacturing process.

Our VLP vaccines are proven effective.

We have a much greater focus today than we did a year ago.

We focus only on high-value projects, projects that we believe have a great opportunity to improve shareholder value.

And we are seeking intellectual property protection on each one of our programs.

I would move to the next slide to explain what we see as our three priority vaccine programs.

The first is for influenza, both pandemic as well as the trivalent seasonal flu.

We do have pre-clinical funding from the NIH.

The pandemic flu virus-like particle, Novavax Vaccine. has successfully been tested in animals by the CDC.

Novavax and the NIH are currently collaborating to develop a clinical program to take this forward.

Novavax scientists are presenting in April and July at international meetings.

And patents have been filed for functional flue VLP vaccines here at Novavax.

The second program is E-Selectin Tolergen.

The NIH has contracted Novavax to manufacture the E-Selectin VLP fragment that we have identified.

Phase I trials for the prevention of stroke and secondary heart attacks are to begin in 2005 and will be conducted by the NIH.

Patents have been filed for our recomitant[ph] E-Selectin Tolergen fragment..

HIV, AIDS, VLP vaccine.

We do have NIH funding and approval to accelerate the pre-clinical development of this important vaccine.

Primate studies are underway by the NIH to evaluate novel HIV and AIDS VLP vaccines.

Obviously the vaccine program is a higher risk set of programs than our drug delivery programs, but ones that could pay significant dividends to our stockholders if successful.

We are excited about these opportunities.

So that takes us to slide 17 and my concluding remarks.

To summarize our 2005 goals.

First, optimize Estrasorb.

We must adjust our marketing and sales strategy.

We must stay focused on completing our partner agreement.

We have a high level of focus on our operating efficiencies to make sure that our operating costs are in line with our cash reserves.

And we must stay focused on lowering manufacturing costs for the future.

Secondly we must continue to advance our drug delivery pipeline.

We have formulated new products using micellar nanoparticles.

We need to file INDs on two to three products by year end.

We are continuing to interview and strengthen our development organization for our drug delivery pipeline.

And obviously we need to advance our partner opportunities, not only for Estrasorb but for other products.

Our third area is--advance our vaccine pipeline.

We are optimistic that funding will continue to increase throughout 2005.

We do need to upgrade our facility to meet all GMP requirements, and we must focus and advance our pandemic flue, our seasonal flue, and our E-Selectin and HIV programs.

And finally we must strengthen our financial position.

We must implement the marketing and sales strategy for Estrasorb as well as our legacy products; complete the partner agreement, not only for Estrasorb but for other products, which should bring in a good amount of cash; again stay focused on our operational efficiencies and continue to improve our manufacturing costs.

Before I turn it back to the operator for questions and answers, I would like to say that we would like, in the question and answer period, to refrain from answering questions about an Estrasorb partnership.

I have to tell you we are in very late-stage discussions of an agreement, and in no way do I want to risk compromising those discussions.

What investors can expect, I believe, throughout 2005, is for us to complete an Estrasorb agreement, for us to announce MNP development agreements with other partners, and for us to significantly progress our micellar nanoparticle product development.

We will announce to you specific blood level results for each one of the products from the animal clinic, and then we will prepare INDs for those products that we've decided are our top priorities to move into the human clinic.

With that I turn it over to the operator for questions.

Thank you.

The first question comes from Elliot Blanc from RBC Dain Rauscher.

Please go ahead with your question.

Good morning.

Nelson, since you've come on board you've given us a litany of areas which would benefit the company.

Meanwhile the market cap is down some 65% since your arrival.

Why should we have any confidence in this management to achieve any of these goals, especially based on previous history?

Elliot, I appreciate your concern.

I think one of the issues -- in fact I could articulate it as, we were dealt a hand of cards.

You have to play with the cards you are dealt with.

In October of 2003 Estrasorb was approved.

From September when I joined, to early in 2004 when the management team was put together, following the Estrasorb approval we had no marketing personnel on staff.

No plan or no market research had been completed post Women's Health Initiative.

We had no clinical publications, and obviously they had not been published. e were locked into a co- launch agreement with King.

By contract we were completely unprepared, with King, to launch the product.

We had a manufacturing facility that was beautiful but not completed, validated, did not have demonstrated capacity, and drastically needed experienced manufacturing leadership to prepare for an FDA approval.

The sales force was excellent but not trained for the transition of a relationship-based sale to a clinical-based sale.

The new product development for micellar nanoparticles had been shut down and all those resources had been focused on helping Estrasorb manufacturing.

We had six facilities at a high cost which also created poor efficiencies at the company.

In summary, we were dealt a hand of cards that was most difficult.

I am not certain that shareholders had clarity of understanding of that situation.

This is a very talented management team.

They have worked around the clock to create the platform for this Company to succeed in the future.

Unfortunately the work that had to be done is not recognized by shareholders. and noone feels worse about that than I do.

I think we finally have the Company in a position that we have a chance to establish a partnership for Estrasorb so we can optimize that asset and move this Company into the development stage for many, many new products with the micellar nanoparticle-based technology.

The market wants results immediately.

I am sensitive to that.

We are working as hard as we can to deliver those results.

I'm not sure if that answers your question, but that is what we have been focused on.

Thank you.

Your next question comes from Cole Eckard from C.E.

Unterberg, Towbin.

Please go ahead with your question.

Nelson, good morning.

A couple of questions on the Vaccine Division.

You mentioned that -- could you flush that out?

My understanding was that really the only thing you've announced was some money from the NIH on the SARS vaccine, but you seem to indicate that there there were other fundings available for influenza and the stroke and heart attack product.

Is that true?

That is true.

Actually, Cole we think that in 2005 the Vaccine Group is positioned very well to be completely close to if not completely self-funding from its outside funding resources, which are predominantly government agencies.

I can tell you that we have experts working with us in Washington to make certain that we are in a position to take advantage of all the new government funding, especially for flue.

When Chiron experienced its shut down of its operations in Europe and was unable to produce flu vaccine for the year, the government created significant new monies available.

We have expert help in Washington, and with the credibility of Dr. Gale Smith and his leadership, we are well along the way we think to hopefully securing significant new fundings for flu vaccine.

As I mentioned earlier, the NIH is pretty excited about the pandemic VLP vaccine that Novavax has been able to create.

They have put it in animals and were very pleased with the results.

We are moving that program on very quickly, and we think there will be even more funding for it.

Just one other -- so, in essence, I mean this Division can operate with very, very little expense, and the pay off can be very large.

That's right.

And the second thing is Estrasorb.

The name has been lost in antiquity and are you getting the sense that perhaps Proctor and Gamble is getting closer to -- since you brought it up-- are you getting the sense that Proctor and Gamble is getting closer to getting some kind of ruling from the FDA on this?

ole, obviously we are not privy to the discussions between Proctor and Gamble and the FDA.

So, all I could do is speculate the same as anyone else on this call can speculate.

One would have to assume that they need to make a decision on whether they are going to move it forward or not, and so those discussions must be underway.

But other than that I wouldn't want to speculate.

I can tell you, though, that we are prepared to move very quickly toward an FDA approval of our micellar nanoparticle emulsion for female sexual dysfunction if we see Proctor and Gamble have good results.

Otherwise it's an extraordinarily expensive program, in that it would be similar to applying to the FDA for a new chemical entity approval, and Novavax does not have the resources to do that.

So I thought the wisest thing to do is to put it on hold until Proctor and Gamble clears the way for us.

And make it attractive to partner up with somebody?

Exactly.

And in fact if Proctor and Gamble gets a clearance I am sure we will have many of the partners that have--potential partners--that have mentioned it to us enter into active discussions with us.

On the market for Estrasorb, [inaudible] we are dealing with, I've heard estimates, $3, $3.5 billion kind of marketplace.

Is that accurate?

For the Premarin drugs, those types of things?

The current estrogen-only market, not counting combination products, is about $1.5 billion.

It was, pre-Women's Health, above $2 billion, around $2.5 billion, in fact.

So initially, after the Women's Health Initiative results were released, you saw a significant erosion of the market.

Right at about the time we launched Estrasorb, we were seeing the market--what we thought--level off and then it has continued to slowly erode in the past 12 to 18 months.

But I would emphasize that the transdermal segment of the market versus the oral is slightly increasing -- not rapidly but slightly increasing.

So it's around a $250 to $300 million market.

That's the market we are participating in.

We think the patchless alternatives offer a significant advantage, and if we can complete this deal with a partner that has much greater presence in the women's health market, that has obviously greater financial resources to capitalize on a unique technology such as Estrasorb, we think it will be successful.

They have completed their due diligence.

They have done extensive market research, and further validated that this market -- this product should be very well received in the market if appropriate resources are put behind it.

Nelson, let me clarify that just a little bit.

They did their own marketing research on Estrasorb?

That's correct.

Good.

Okay.

Real quick, one other quick question on Estrasorb.

Could you help me remember the efficacy in the safety profiles of Estrasorb, I recall were superior to the estro-gels of the world and a lot of the transdermal other products.

Am I right about that?

In terms of estrogen as the active ingredient, it is the same.

It is the same?

It is the same.

Now what's different is--if a physician or a patient select a transdermal delivery vehicle versus oral, then you have the options--one, of a patch; two, of a lotion or our emulsion, and three would be a gel.

We believe that the emulsion or the lotion offers the patient a superior delivery vehicle.

Patches can fall off.

Patches have proven to be irritating because of the adhesive substance.

Patches are worn for a prolonged period of time, develop dirt rings around them and are not aesthetically appealing to patients.

The gel is over 60% alcohol.

Alcohol is the actual driver of the estrogen through the skin.

As we all know alcohol is a drying agent.

On the other hand, Estrasorb is a moisturizing agent.

So, we believe, again, if appropriate marketing resources are put behind this product it will be very successful.

And just one other question.

If and when you do conclude the deal is it somebody we would be proud of?

Yes, any partner that we are talking to you would be proud of.

This is Denis O'Donnell.

Let me just expound on a question that Cole had regarding our Vaccine Group which, when I talk to shareholders we are given close to zero in terms of market value for our Biologics Vaccine Group which is headed by Gale Smith and just a fabulous group of scientists.

We really need to have shareholders start to focus on the potential opportunities of that group.

As Nelson mentioned, we've been talking about seasonal flu.

The pandemic flu, for those of you who may not be aware, is what we are talking about--that extra flu that comes every so often like swine flu or Hong Kong flu.

And what we are talking about now is a bird flu which is apparently very, very lethal for the people who have contacted it.

Just in the last couple of months we've had the first documented patient-to-patient transmittal of the disease.

We are not looking at this on the blackboard stage.

We have actually put together a pandemic flu vaccine which our government has tested in animals, and the results have been terrific.

So this is something the government is very eager to work with us.

It's potentially a huge health problem on a worldwide basis, and our government is very concerned about it.

The second thing that Nelson mentioned is our E-Selectin E-Selectin, again, is another project that we are working with the NIH.

And remember, again, this is not a theoretical molecule.

E-Selectin with a virus-like particle mechanism attached to it has been tested in the NIH model -- animal model.

They have a rat hypertensive model which is extraordinarily predictive to human cardiovascular disease and you are looking at in a placebo-controlled study.

The E-Selectin product that was tested by the NIH in their animal model had close to a 30-fold, almost a 3000% reduction, in strokes in the model that we are looking at.

These are potentially, potential is the word, we haven't had them in humans, but these are enormous potential products that the government is very interested in.

These would not be things that Novavax shareholders would be funding.

It would be funded by the government.

But Novavax would have rights, or certain rights, to these potential products.

The third and last thing that I will mention about the Vaccine Group, is I hear from shareholders about our virus-like particles which -- There have been research efforts at many companies, notably Glaxo Smith Kline and Merck, regarding production of virus-like particles, and there has been an issue with scalability.

And I often here from people saying, "Gee, you know you can make it but can you ever make it in quantities that would be commercializable?"

The answer is yes.

We think we can make it in quantities that are commercializable.

And Dr. Gale Smith--as we are using the baculovirus expression system with our VLP technology-- to remind the shareholders Gale Smith is the inventor, the creator of the baculovirus expression system which is used by pharmaceutical companies, universities, research centers on a world-wide basis.

So we don't talk about it.

Nelson appropriately has focused on the commercial efforts, the restructuring of the Company, a partner to work with us to get Estrasorb to the appropriate commercial levels that we believe, and the partners that we are discussing this with believe that it should be at; but have I to tell you that we have an extraordinary diamond in the rough in our vaccine program and don't talk too much about it.

But I would be remiss if our shareholders didn't have a better understanding of the opportunities we face in that area.

Nelson I will turn it back to you.

Thank, Denis.

Any more questions.

Yes sir.

We do have time for a couple more questions.

Your next question comes from Ken Turbovich from RBC.

Wanted to ask a question of Dennis Genge, with regard to legacy product sales.

I guess I'm a little confused about the upward or optimistic expectations for '05 given the experience we had in '04.

It looks as though revenues for those products were $4.5 million for the year with about half of that coming in the fourth quarter.

Could you explain which products contributed in the fourth quarter to that number and which products you expect will make a contribution in '05 on the legacy side?

Ken, it was pretty much all across the board on the legacy products in '05.

We had -- it had been a while since the wholesalers had restocked those items. and so--maybe it was October, November time frame, the NovaNatal, AVC and Gynodiol all had orders.

Primarily -- so it sounds like it was primarily then AVC and the prenatals then?

Yes.

I guess the reason for the confusion is the prior quarter we had had this reserve where, when we look at the quarterly revenues it look like a negative revenue for the vitamin side.

How much confidence do you have in the vitamin business that you can actually secure and stabilize those revenues with regard to '05?

Ken this is Nelson.

One of the biggest issues we've had to deal with are loading of the marketplace back in the 2002 time frame.

And we've had all these returns.

So our sales have been offset by returns.

So it's returns of the old products offsetting the new sales of --

Returns have killed us.

And so one thing that we are spending significant resource on is determining how could we possibly stay in the prenatal vitamin business because we are in the ob-gyn space, but with a more proprietary prenatal vitamin.

I can tell you that we are working with a company, and we think we have a strategy to get that done at a very, very low cost.

So --

Now does that mean we are going to see a new formulation with proprietary component launched in '05, or is that too optimistic?

No, that's too optimistic.

We think, if we elect to move forward with this program, it would be a Q1 '06 event.

With regard to Estrasorb, could you provide for us what the formulary status is, the number of covered lives that you have, if any at this point, for this product.

And then maybe speak to where you think the similar status of Estro-Gel might be?

Yes.

I probably cannot -- I probably can't bring it into quite the clarity that you would like to have.

But with managed care, they place products on tiers--Tiers 1, 2, 3.

As a general rule, Tier 1, or priority products, are generics--the cheapest products available; not necessarily the most efficacious therapeutically but certainly the most -- the least expensive.

Most new products are actually put in the queue for Tier 3.

They are reimbursed but with the higher co-pay.

The ones that would be an exception would be a new product that meets an unmet clinical need.

They will go on formulary faster.

If the product doesn't do that, and obviously Estrasorb would not fall into that category, those products essentially not even looked at by the payers for six to seven months.

So we are in the same boat as Estro-Gel in that case.

We are just passing that time frame where payers are putting it on the agenda to look at.

So we feel pretty certain that we are not disadvantaged versus Estro-Gel and we are getting reimbursed.

It's just an issue of co-pay and we are on Tier 3.

We have hired an outside firm to help us with managed care.

We do have -- I don't have it in front of me, but we obviously have the status of Estrasorb with each one of the major managed care organizations.

And we continue to work that process so that we are not disadvantaged.

Those decisions are obviously largely price-driven decisions, and we are certainly competitive in price with the patches and Estro-Gel.

So we should not be disadvantaged.

I think, Ken, as long as I've been in this industry, it's probably one of the more significant changes that we've seen over the years.

Prior to the extensiveness of managed care you had a much quicker adoption of new products and enjoyed success much earlier.

Managed care does create a hurdle that one has to jump over, and we are in the process of doing that.

Are there any contracts from a managed care perspective that might be coming up whereby you can get access to a fixed number of patients in terms of covered lives through discounting, or is that something you are hoping to avoid.

We have really developed a strategy not to get into discounting.

That is a downward spiral.

And then with regard to the pipeline of formulations that you described, and in particular I guess the ones for which we've never heard previous detailed discussions, whether it's fentanyl, nicotine or the three unnamed molecules in antihypertensives, bladder control and allergy--were any of these pursued with the encouragement of prospective partners who have indicated any interest at all in partnering once you have blood data and an IND, or are these true venture efforts to sort of create a project and then seek a partner?

I would have to say it's some of both.

Okay?

We obviously selected the molecule based on the technical probabilities of success, and molecules that had a large market.

We have had preliminary discussions with potential partners regarding some of the products, not all of the products.

I will tell where you we are going to wind up, Ken.

We are going to wind up--if you went to that slide 14, it says between the animal blood level data and phase one is a staged review.

And the process there as we take a deeper dive into the market opportunity, the partnering opportunity, make certain that we've prioritized the products that had positive data back from the animal clinic -- in terms -- probability in terms of technical success in humans.

So a lot of factors go into that decision.

We are going to have to make decisions as to which ones to choose and which ones not to choose even though we probably would like to choose more.

But it's a function of financial resources unless we are partnered.

an tell you that we are--we thought we would have by today a signed agreement for a partnered product.

It has been approved by a Board of Directors of a large company.

It's sitting on the desk of the CEO who has to sign every partnered agreement.

And I would be pretty disappointed if we can't release to you fairly soon an announcement on a partnered product on this list.

Thank you.

Thank you, Ken.

Your next question comes from Austin Hall from Credit Suisse First Boston.

Good morning.

Thank you for taking my question.

I was wondering if you could comment on, in regards to the vaccine technology, if you could comment on any progress you may or may not have made with large pharmaceutical companies and working on a partnership with the company in that category on the vaccine technology.

Actually, Austin, we have had some very preliminary discussions with some large pharmaceutical companies.

We have felt like -- because we are funded for these programs, we felt like if we took them a little further, we would see much more shareholder value than we would if we partnered at the moment for each one of our programs.

So I would have to tell you that we have not aggressively approached big pharma.

Obviously there aren't a lot of choices in terms of who you would approach because not that many companies are in the vaccine business.

But we feel like we need to take them a step or two further before we would aggressively approach partnerships.

And to be quite honest with you, the other thing that we've had to deal with are limited business development resources which are largely focused over on the drug delivery side of the business than on the vaccine side for the moment.

Thanks for answering my question.

That's all the time we have for questions to today.

I will now turn the conference over to Mr. Syms.

Please continue.

Okay.

I want to thank everyone for attending this morning's call.

I can tell you that we are a focused company on some very important priorities.

I appreciate the patience of our investors.

I realize that we need to deliver results to you very soon on the priorities that we've outlined.

I do believe we have great opportunity to do that.

And so you can rest assured that as soon as this phone call is hung up we will be back at work , to work toward increasing shareholder value.

Thank you for attending, and I look forward to reporting the results that I've keyed up for you hopefully soon.

Thank you.

Ladies and gentlemen, this concludes the conference call for today.

Please disconnect your lines and thank you for participating.