Novavax Inc (NVAX) 2005 Q1 法說會逐字稿

Good morning ladies and gentlemen.

I would like to welcome everyone to the Novavax, Incorporated first quarter conference call.

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

Factors that could cause forward-looking statements in the 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.

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

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

Instructions will be provided for you at that time.

If anyone has any difficulties hearing the conference, please press the star followed by the zero for operator assistance at any time.

I would like to remind everyone that this conference is being recorded on Tuesday, May 10, 2005, at 8:30 a.m. eastern time.

I would now like to turn the conference over to Mr. Nelson Sims, President and CEO of Novavax.

Please go ahead.

Thank you, Jeff.

Good morning, everyone.

Welcome to our first quarter conference call.

Joining me this morning is Dennis Genge, Vive President, Treasurer and Chief Financial Officer, and Mr. Gary Evans, our new Chairman, who I will more formally introduce in one moment.

For those that would like to follow along on slides, they are available on our website.

As we go through the discussion this morning, we will try to note which slide we are on for those that are following can stay with us.

For example, I am now on page three of the slide presentation.

It is our agenda.

We plan to review for you this morning first quarter highlights.

And we will, or I will at that point in time have a more formal introduction to our new Chairman and he will make a few comments.

I will turn it over to Dennis Genge, who will review the first quarter financial report.

And then he will turn it back to me for a quick review of our priorities ahead and then we will turn it into a question and answer period.

On slide four I would like to cover some of the first quarter highlights for 2005.

First our product pipeline continues to evolve, even ahead of our expectations.

Free clinical tests have been completed for seven new drug candidates and we are extremely excited about the data that we see.

Second point is on the front of business development.

We have our first Micellar Nanoparticle co-development agreement signed in this quarter with the Ranbaxy Corporation of India.

That work is underway.

We look forward to those results.

Secondly, our ESTRASORB negotiations continue and are in advanced stages.

Thirdly, on the operational front, we, of course, announced earlier in the quarter that we restructured our sales force.

We went from approximately 100 sales rep to 40 sales reps to better align our expenses with our expected revenues.

We also announced just yesterday morning a revised agreement with the Cardinal Corporation in terms of a manufacturing agreement and we are quite pleased with the evolution of our manufacturing arrangement with Cardinal.

Thirdly, we have reduced operating expenses across the business again to further align ourselves with our cash flow required.

Fourthly, on a leadership front, we promoted Dr. Rahul Singhvi to our Chief Operating Officer.

He leads the functions of manufacturing, product development, sales and marketing.

Finally, the Board of Directors recently elected Mr. Gary Evans as our Chairman.

On slide five you can see a photograph of Gary.

Gary has been a director for Novavax for seven years.

He was the founder of an energy company, Magnum Hunter, which was recently merged with the Cimarex Energy Corporation for 2.1 billion.

Gary is an outstanding entrepreneur and certainly has been recognized in the World Hall of Fame for Entrepreneurs by Ernst & Young.

I would like introduce Gary Evans.

Thank you, Nelson, and thank all of you for dialing in this morning and giving us an opportunity to go over the Company's financial results as well as our product pipeline.

As Nelson said, I've been on Novavax' board for a little over seven years.

We've gone through a number of management changes and product development.

Of the years I've been on the Company's board, I have never been more excited about the pipeline and, more importantly, really the management team that Nelson has been able to assimilate around him.

And it's unfortunate that with our financial situation that the market isn't yet realized this tremendous pipeline of products that we have coming forward and the validation that, obviously, ESTRASORB and its delivery system gives this pipeline of products.

You will hear more about that today.

I am trying to be a right arm for Nelson in any way I can and my background as a former banker is in the finance area and I hope to try to give assistance in trying to get the Company's financial footing back in order.

Thanks, Nelson.

Thank you, Gary, and we are delighted to have you on board.

For those following the slides again we are now on slide number seven.

Like to begin the review of the first quarter 2005 financial results.

And my over arcing comment would be, please do not extrapolate the first quarter results throughout the rest of the year.

First our revenue trends, the gross sales trends, are improving.

We do have new sales programs that we are beginning to see results from.

On the expense front, of course, we've restructured our sales force and significantly reduced our operating expenses and, again, with the announcement of yesterday we've reduced our cost of goods sold for ESTRASORB.

Dennis Genge will review for you in more detail our cash usage.

On slide eight, we review specifically some comments regarding our product sales, first with ESTRASORB.

Our prescriptions are stable and growing following the sales force reduction.

In fact, in March we had a record month of 5,000 prescriptions.

It's the largest month that we've seen for total prescriptions.

Wholesale, our inventories have been a significant issue, even for ESTRASORB, as the wholesale market has changed their business model and, for all pharmaceuticals companies, are in the process of reducing their inventories.

We believe we are getting to a point where they are close to being stable and should not see a negative impact of our sales results from the result of inventory reductions.

March and April sales have improved and I will provide greater detail for you.

On the legacy product front our gross sales again are improving.

The continuing issue that we deal with are significant returns that were shipped in the calendar year 2003.

In addition, this quarter has an anomaly because the first quarter of 2004 we shipped a $1 million backorder from -- that was sitting at the end of 2003 but not ready for shipment until 2004 and it all came in the first quarter of '04.

So we don't have a good quarter to compare to from last year.

So that sort of sets up the next slide, number nine, so you can take a look at what kind of product sales we saw through the first quarter.

I would like to set it up a little bit.

Along the X-axis you have more than just the first quarter.

We also included April and it's a pretty accurate estimate.

So you have two bars for each month.

The bar on the left of each month are the actual gross sales.

It's a stacked bar so the lower part of the bar with the slashes across it would represent legacy product sales and then the green part of the bar, the top part, would be ESTRASORB sales.

So for gross sales before returns, or net of returns, you can see that from January we grew from a little over 250,000 sales to February just a touch under 400,000, in March a little over 500,000 to April, 600,000.

And it's also important to recognize the growth of ESTRASORB through that time period, which would certainly indicate that we are beginning to see boxing of inventories at the wholesaler levels and they are now beginning to reorder.

The bars for each month on the right side represent our net sales.

So the difference, of course, in the gross and the net are these product returns.

As you can see, it's mostly concentrated in January and February and it's certainly concentrated in our legacy products, the older products.

So I guess the theme here is gross sales look good.

We worked through the return issue and the Company's top line looks like it's in much better position.

You can see that March and April certainly look much, much more healthy than January and February.

So again, to reiterate, I think it would be dangerous for us to extrapolate the first quarter throughout the rest of the year.

Also on slide ten we have sources of revenue coming from our biological grants or our vaccines, which are primarily government grants.

And the point to make here is that 2005 will be a larger year of grant receipt than 2004.

The issue is -- is that the grants are loaded in the second, third and fourth quarters.

So in the first quarter of 2005 we saw grant monies of around 250,000, which is actually a little less than what we saw last year in the first quarter.

However, in the second, third and fourth quarter we expect to see grant monies around 400, 600 and 750,000 respectively, which certainly is greater than the previous year.

Those monies are committed.

We just hit the milestones and we will receive those payments.

So with that as a set up for the revenue line, why don't I turn it over to Dennis Genge now and he can pick up on slide number 11 and walk us through the financial snapshot.

Thanks, Nelson.

Good morning, everyone.

On slide 11 we have a snapshot of our Q1 results.

Additional details and comparison of these results are in today's press release and will be available in our 10(Q) which will go out later today.

Nelson has addressed our revenue line and I will review operating expenses, which were 9.4 million for the quarter.

But which will be much lower in the next few quarters.

I will also review the overall effects of our revenue projections and expense reduction programs on improving cash flow.

Our cash balance at March 31st was 9.2 million, with a shareholders equity of 24.4.

Moving to slide 12, this highlights the major cost reduction measures we have taken over the past few months which are substantially reducing our operating expenses going forward.

As Nelson mentioned, we announced in March we restructured our sales force to better align our sales efforts with current sales targeting.

This has reduced our quarterly sales expense from 3 million in the first quarter to approximately 1.3 million beginning in the second quarter.

This is a $1.7 million savings per quarter.

In addition, since the restructuring our sales for all products have been trending up.

In the first quarter we also saw the final expense and cash flow effects of the ESTRASORB marketing launch.

Those costs are now completed.

And yesterday we also announced the restructuring of our facility and packaging arrangements with Cardinal Health.

We've been working closely with Cardinal over the past few months and these agreements will have a very positive impact on both our fixed and variable costs manufacturing beginning in July.

On the R&D side we will continue to invest in moving our new product candidates through the development process but we do not expect any substantial clinical costs until 2005.

Dennis, this is Nelson, if I could I would like to comment on the slide, too, and thank the management team.

This is significant steps that have been taken.

They are proactive steps by our management team and I can ensure our shareholders that the ultimate end game is for Novavax to succeed for our shareholders in making certain that we are successful with our core technology, both in the biologicals area as well as our Micellar Nanoparticle.

But accolades to the management team for taking necessary steps to adjust our plans so that we could manage our cash flows effectively with, hopefully, minimal effects on the business.

Thank you.

Slide 13, then, graphically demonstrates the results of all our cost reduction measures.

As you can see our operating expenses, which in this comparison does not include cost of sales, have come down from a high in the third quarter of '04 of over 12 million to 7.4 million in Q1.

With all cost savings measures in place over the next two quarters, we are estimating a further reduction to approximately 5 million by the third quarter of this year.

This would be a $7 million reduction from prior year's quarter.

The graph on slide 14 further does the job to demonstrate the improvement in our cash used for operations as a result of these cost reductions, as well as some anticipated increases in revenues that Nelson referred to.

From a high of 3.4 million per month last year and 2.8 million in the first quarter, we believe our monthly cash for operations should drop to just over 1.5 million a month in the second quarter and under 1.2 million in the third quarter, not taking into effect any potential partnership arrangements.

In summary, on slide 15, revenues are trending up.

Expenses are definitely declining.

And we are continuing to pursue raising capital in conjunction with our partnership opportunities and or equity alternatives.

As we mentioned on our last call, prior to the completion of any capital transactions, we believe our current cash position is still sufficient through the third quarter.

With that I will turn it back to Nelson.

Thanks, Dennis.

On that same slide, I would like to embellish the fact that Novavax's technology, we believe, is so valuable and the opportunities are so significant that we plan to raise money to develop this pipeline.

I am personally committed to this Company and to our management team.

The management team has dealt with a very difficult situation and if anyone is up to the job ahead I certainly believe that they are.

On slide 16, our second quarter objectives just at the very high level.

First is to strengthen our financial position.

We hope to finalize an ESTRASORB partnership.

I can tell you that the timing of this event is primarily a function of the big pharma-process.

We are moving at as aggressive as a pace as possible for Novavax , but we do have to follow the guidelines of partnerships for the partners that we are, the potential partners that we are in discussions with.

Finally, we will assess our financial position post ESTRASORB transaction, as well as pre if necessary, to determine what steps need to be taken to make certain that we have cash to move forward.

Secondly, we plan to advance this new product pipeline.

We are focused on two new IND decisions by the end of the year.

We continue to develop new products in the Micellar Nanoparticle formulations and we are committed to a more robust biological program than ever before.

I will close my comments with slide 17, which continues to be updated but you've seen before, and it's the significant opportunities and the significant advancement that's been made in a very, very short period of time in the new product development arena for Micellar Nanoparticles.

Everything under the ANDROSORB line has been developed in a very short period of time.

We have, as previously noted, completed the animal work on seven products.

They would be NX 200, 201, 300, 301, 302, 303 and 401.

We are excited about the results that we see.

For the first time ever we've been able to determine that this technology works for products that are other than hormones.

And again, our plan ahead is to bring two products forward to INDs by the fourth quarter of 2005.

It could be possible given potential partnerships to take more, but currently our plan is for two.

With that, I would turn it back to Jeff to lead us through questions and answers.

Thank you very much.

[OPERATOR INSTRUCTIONS] Our first question comes from Ken Trbovich with RBC Capital Markets.

Good morning, guys.

I guess I wanted to get some further clarification on the Cardinal announcement from last night.

I'm just trying to better understand, operationally, how that works.

I know , obviously, the facility you have is embedded within a larger Cardinal facility and didn't know if that meant they're actually taking over the suites and purchasing the packaging equipment and then sort of as a sales lease-back situation or exactly what the structure is that's brought about the cost savings you mentioned.

Ken, we have an agreement with Cardinal that we will not disclose the details of the agreement.

I think Dennis Genge did a nice job of articulating exactly what we can disclose and that it does have both a positive impact in both our fixed as well as our variable costs.

The original agreements, of course, are available publicly on line.

The original agreements are in place with an addendum.

We continue to lease the facility from Cardinal but the leasehold improvements were primarily a function of Novavax and they remain an asset of Novavax at this moment.

And just out of curiosity, why the confidentiality in terms of the treatment considering that the other agreements were public?

A decision of a big partner.

Okay.

And then just with regard to the operating expenses and the charge-offs, I guess, for the legacy products, I'm somewhat curious, you mentioned that the, I guess, the returns for the prenatal vitamins, and maybe it's not prenatal vitamins maybe it's ABC, and I guess I'm looking for some clarification there, relate back to the sales or the stock in or load in from 2003.

Is that really sort of the ABC side, the prenatal side, a combination of both?

Dennis and I are at different locations and he's got the numbers in front of him.

But as I recall, and you can embellish, Dennis, but it's spread throughout the product line but it is certainly concentrated on prenatal vitamins.

It also -- there were some significant returns for the product that we have licensed from Barr, Gynodiol.

And I don't know whether the audience wants to get into the explanation, but as you know there's been a significant change in the business model for the wholesale distributors.

Whereas their revenue model was primarily driven by forward buys for price increases to bring revenue into the Company to one of actually charging a percentage of products shipped.

Certainly the former strategy required greater inventories, the latter strategy reduces the need for inventories.

So thus the inventory adjustment.

The by-ins, thus driving the returns, one would have to expect that that was largely driven by the guess-work of forward buys to price increases.

It certainly was not Novavax's pushing the product into the channel.

Nelson, I think it's important also to note that those returns were very, very limited ESTRASORB returns.

That's a good point.

No ESTRASORB and not -- they're not related to NovaNatal or NovaStart either.

Yes, it's not the new brands.

And just with regard to the prenatal side, have you guys made progress in identifying a component similar to what First Horizon succeeded with with Metafolin where you're able to sort of protect the brand and begin the process again of recapturing market share?

And I will take the rest of the answers off-line.

I appreciate it.

For strategic reasons we have not disclosed our strategy.

But we do have a strategy.

And we do have an option.

And we are in the final stages of developing an agreement for that option.

I think you will be pleased when you hear it.

We haven't signed it yet so I'm reluctant to disclose it.

Okay.

But clearly the direction of rebuilding the prenatal business is a relatively near term event?

It's certainly an option for us.

When you are going to develop a strategy to move into a proprietary position, the cycle time to bring a prenatal vitamin would certainly be longer than just changing the component mix of another prenatal.

So I think you could expect it to be a little bit longer than what you would have experienced between, for example, our Nestab line and the Novembernatal line.

But it is not a real long, it's certainly not a multi-year development cycle.

Our next question comes from Scott Henry with Oppenheimer.

Please go ahead.

Thank you.

Good morning, Nelson.

I just have a couple of questions here.

I guess first, do you have a cash number for today?

And along that line, in terms of the cost of goods sold, it seems like it is the fixed component of that roughly 2 million a quarter, just reading of the 1.5 million in idle capacity?

And then I just have a couple other questions on the pipeline after that, if you don't mind.

Dennis, do you mind if I throw you those first two?

Cash for today, I'm not certain Dennis is prepared to disclose.

No, it wouldn't be our traditional history to disclose current cash balances, plus it's the middle of a month, so it's kind of a -- it's not a number we would put out now.

Fair enough.

As far as the fixed components, we categorize three or four things as fixed components at the Cardinal facility.

That would include labor, rent and various vendor activities to continue to support the facility and keep the manufacturing operation running.

So there are various components there.

Those have been running about 1.5 million per quarter.

Between the cardinal agreement and other efficiencies we've identified, we have been able to reduce all those costs going forward.

And then just shifting over to the pipeline in the R&D -- or the pipeline in the partnership talks.

I guess first, is there any sort of timeline we can look at for the seven projects in development in terms of what should be our next milestones to focus on?

And then second, I guess, how many partners are you currently in discussions with on ESTRASORB or is it just one at this point?

And the final question, just relates to the ketaprophine lotion for pain.

I'm curious, is that a systemic transdermal lotion or does the technology allow for a topical lotion as well?

Let me take them one at a time.

Number of partners with ESTRASORB -- number of potential partners with ESTRASORB, Scott, it is multiple, okay?

As I have mentioned previously, one was in a significant lead versus others.

I would have to say that it's pretty much a tie now with two being in the lead in terms of late stage discussions.

I am not going to attempt to forecast when the deal might be complete simply because we've learned through what I would call the lessons of hard knocks that it is not in our control.

I wish it was, but it is not.

We would be prepared to go to contract and close it this week.

They have a process to follow.

They have committee structures, approvals, et cetera, et cetera, and we have to respect their process.

So again several companies are very interested, I would have to liken two in the lead.

You ask me about ketaprophine.

Ketaprophine is the newest addition to this list of new products.

The product has been formulated.

It has been tested for stability.

The product looks very good.

It actually is at the animal lab at this moment.

So, of this list, it is one compound that we do not have back the blood levels from.

It's our feeling that it will have both topical as well as systemic effect.

We will have to bring you more up to date and, in fact, our plan is once we complete the ESTRASORB deal to give our shareholders the confidence that we can do that and put the product in some very, very competitive hands with a big pharma-partner that's well entrenched into the women's healthcare field and committed to both physician promotion as well as direct to consumer, then we will come out for public disclosure much greater detail on what we have seen with these new products and there will be much greater understanding as to why we are so bullish and so excited about the potential of these products.

You had a third question and I didn't jot it down, Scott.

Nelson, it was really just in terms of the pipeline are there any milestones or events that we can be looking forward to over the next 30 to 60 days?

Probably not 30 to 60 days.

Okay.

Probably not 30 to 60.

I think that the next major milestone that you should look for is our pre IND announcements of which two of these products have we elected to take forward.

We are not prepared to disclose that yet.

Although it, from the feedback I have from the R&D team, I believe they are zeroing in on the two that seem to be the most exciting.

I do want to emphasize a change from what this current -- what I call a very, very talented R&D team made up of the inventor of the Micellar Nanoparticle, Dr. Wright, led by Dr. Singhvi, our clinician, Dr Steve Bandak and, of course, our head of biologics, Dr. Gale Smith.

They are working together as a team making very sound decisions and not only are we electing candidates to move forward, which we see as the most technically likely to succeed and those that are in the largest markets, but the third criteria of which ones provide a significant clinical advantage over existing therapies.

And that third criteria has heavy weight as we move forward with specific compounds to invest further in.

Thank you, Nelson.

If I could slip one separate question in on the financial end.

Certainly cash is becoming a key concern here.

Are you moving those discussions in terms of financing separate from the ESTRASORB partnership or are you looking to do those sequentially, because I guess the main issue is looking at the Company trying to figure out what types of plans are in place to raise that additional financing?

Clearly the partnership discussions and potential financing discussions are working independently in parallel.

Any prudent management team has to be prepared to implement the strategy or, in this case, tactic at the moment so that we make certain that the Company moves forward in a positive manner.

We, obviously, would prefer to close the partnership deal first, which would provide significant up-front money and certainly avoid the need for near-term financing.

On the other hand, any prudent management team has to be prepared to finance, if necessary.

So we are moving in a parallel path.

We are talking with multiple consultants to help us in that process and we are pretty confident that the money is there should we need it.

Thank you and thank you for taking the question.

Thanks, Scott.

Our next question comes from Terry Niver with Stifel Nicolaus.

Hi, how are you?

On the Cardinal deal, I'm still a little confused.

In previous discussions it was your hope that you were going to get to the bottle by the end of the year, or some timeframe like that.

Does this have anything to do with that or is the bottle now not a possibility?

No, the bottle program is still on track.

The bottle program was targeted for a second half of the year, probably early fourth quarter, late third quarter submission to the FDA for a packaging change approval.

The bottle certainly provides a lower cost of goods sold than the packetts, it was the driver, as well as offering patients a choice.

And so that is still on track and that would be independent of the discussions with Cardinal.

Whatever the deal is with Cardinal has to do with the fixed cost of the plant not the variable cost?

It has to do with both, actually.

It has to do with both.

And again, I wish I could disclose it to you but I can't.

I have to honor their request and I am contractually obligated not to disclose it for obvious reasons.

It's strategically important to Cardinal and they don't disclose specific agreements with their customers.

I understand that.

I have to honor that.

But I can tell you that the additive effect for Novavax is very favorable.

And we are grateful for Cardinal for being a good partner and helping us in a time when we did need it.

My second question is this has kind of been a long trek across a very dry desert with a diminishing water supply.

I heard you say just a little while ago if you saw what we see, if you could see what I see, you, like I, would be very, very bullish about our prospects.

Throughout this process it's been a surprise to me that your excitement hasn't been something that you could really share with us out here.

And as you approach this time when the water runs out, wouldn't it be a better idea to just be more forthcoming with everyone about what's going on behind the scenes, so you would have a higher price currency that you could turn to if you needed to do?

Right.

I have a lot of counselors, obviously, and the feedback that we have at the moment is the two most significant issues in the minds of shareholders is, one, the completion of the ESTRASORB deal and no one understands that better than I and, two, the current position of our balance sheet.

It needs to be better.

Certainly, since I've been on board for a little over 18 months, it's in a position where it does need to be enhanced.

For counsel that the good news -- all this good news that we see on early stage products will be much more timely and well-received following the resolution of the two larger issues.

Whether we're right or wrong, you be the judge, but that has been our approach.

And also, I mean, we have to be frank and say that although this pipeline is extremely exciting, it is preclinical work.

The animal work is pretty darn indicative of what we could expect to see in first human dose clinic.

And as what we need to do is move two of these products as quickly as possible to the clinic and we will begin to disclose much more detail about these products in the near future.

And I hear what you're saying because I see some small companies that have one to two announcements a week, if not more.

And at some point in time, shareholders become fatigued at reading news that really isn't news.

And we have taken an approach opposite of that.

If it's not right, I need to listen to you and we will make the necessary adjustments.

There's a Buddhist concept -- .

When we break the news, we hope to make it very meaningful news.

There's a Buddhist concept of the doctrine of the middle way, somehow there's a difference between hype and inadequate disclosure and it just seems like I've been living in a kind of an information vacuum for a long time and I haven't been able to understand why.

As you say you have your advisors.

Okay.

Well, I'm sure they are listening and we will certainly have more discussion on this following this call and I appreciate your input, Terry.

Thanks a lot, Nelson.

Terry, this is Gary Evans.

I don't think there's any doubt that we need to do a better job telling the public about this pipeline of products and the validation that we are getting from our pre clinical trials.

There's a couple of these products, like fentinol and e-selectant(ph), we are talking about multi $1billion markets.

The fact that we are being approached by some of the large pharmaceuticals to look at their specific drugs because of our delivery system is important and needs to be relayed.

And we are in the process of trying to get that story better told to the street.

We hear you loud and clear.

It's something that we have been discussing at the board level and there is a fine line of how much you go tell the public versus a lack of prudent information and we think we definitely need to do a better job of disseminating some of this data that we have to our investors.

I would think that if you are going to run out of cash, perhaps in four months perhaps not, we don't know, that it should be discussed in advance of any equity offering that's done at these prices, which are ridiculous prices compared to what the ultimate value of the Company is.

I agree.

Thanks a lot.

At this time we show no further questions.

I would like to turn the conference back over for any concluding comments.

Thank you very much.

I want to thank our shareholders for participating in this call.

Thank you for your continued support, your patience during these trying times.

You have a management team that is very committed to make this happen.

The tremendous opportunity and we have a plan forward to capitalize on and bring you greater shareholder value.

So back to work.

Thank you very much.

Thank you.

Ladies and gentlemen, this concludes the Novavax Incorporated first quarter conference call.

If you would like to listen to the replay of today's conference, you may dial (877)289-8525 and you will need to enter the access code of 21123709 followed by pound sign.

Once again, thank you for participating in today's conference.

At this time you may now disconnect.