Novavax Inc (NVAX) 2005 Q4 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Novavax fourth-quarter and year-end 2005 financial results conference call. My name is Anne-Marie and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of today's conference. (OPERATOR INSTRUCTIONS). I would now like to turn the call over to Mr. Gary Evans, Chairman of the Board.

Thank you, operator and thank all of you listeners for dialing in this morning to hear our Company's fourth-quarter and year-end 2005 financial results, which we announced prior to the market opening this morning. I would like to introduce the parties that are also on the call from the Company. Our Company's President and Chief Executive Officer, Rahul Singhvi, is online, as well as Ray Hage, our Chief Operating Officer; Rick Bright, our new Vice President of Vaccine Development and [Tricia Hall], our Controller, is standing in for our CFO who is ill today.

I would like to just take a few minutes and go over some of the significant events of Novavax and before that, read the Safe Harbor language that is necessary because we will be talking today about some forward-looking statements. So let me take a moment and read that.

Statements made in this press release and conference call today that state Novavax's or management's intentions, hopes, beliefs, expectations or predictions of the future are considered forward-looking statements. Forward-looking statements include but are not limited to statements regarding uses of cash, product sales, future product development and related clinical trials and future research and development, including FDA approval. Novavax's actual results could differ materially from those expressed in such forward-looking statements. Such forward-looking statements involve known and unknown risk, uncertainties and other factors which may cause the actual results, performance or achievements of the Company or industry results to be materially different from those expressed or implied in such forward-looking statements.

Such factors include, among other things, the following; general, economic and business conditions, ability to enter into future collaborations with industry partners, competition, unexpected changes in technologies and technological advances, ability to obtain rights to technology, ability to obtain and enforce patents, ability to commercialize and manufacture products, ability to establish and maintain commercial scale manufacturing capabilities, results of clinical studies, progress of research and development activities, business abilities and judgment of personnel, availability of qualified personnel, changes and/or failure to comply with governmental regulations, the ability to obtain adequate financing in the future through product licensing, co-promotional arrangements, public or private equity financing or otherwise and other factors referenced herein.

We obviously have additional information that is available on Novavax's annual report and Form 10-K and 10-Q have been filed with the SEC. Okay. I think that covers our forward-looking.

We had a very good fourth quarter that we announced this morning primarily related to our license agreement with Esprit that was completed during the fourth quarter, which allowed the Company to report a significant gain. We will talk about that in the financial section. Obviously this has been an exciting week with respect to the new equity capital that was raised on Monday from two extremely well-recognized venture firms, Prospect Venture Partners and Kleiner Perkins. These two funds, we believe, were negotiated appropriately and we are very excited about the principles of these firms and their involvement with the Company. We are already seeing immediate benefits to the business associations, the principals these firms have not only in the industry but throughout governmental relations and other countries as well. So we have not just raised capital; we have brought in two very strategic partners that will assist our Company in achieving our goals and objectives in 2006 and beyond.

With that capital raised, we have now completed over $38 million in capital raises just here in the last three months. A total $42 million has been raised really since the summer of last year. So we believe the Company is on the strongest financial footing it has ever been and obviously has some of the brightest future with respect to having done the Esprit deal on Estrasorb, the money that we anticipate continuing to be received from our royalties on Estrasorb sales and the milestone payments that are anticipated. And remember we only licensed out in North America.

We also, because our stock has been moving nicely, we have been fortunate to have some of our existing debt convert, which occurred in October and we anticipate more of that happening in the near future and the most exciting thing that is going on in the Company is obviously around the vaccine initiative. We announced in February the collaboration with the University of Pittsburgh. We have formed some strategic alliances on the manufacturing side with Wave Biotech and PacificGMP, which we believe will be extremely well-received once we are in the mode of commercial scale manufacturing and then we made a decision at the Board to form a special governmental relations committee to assist the Company in trying to seek governmental funding off a vaccine initiative that we have begun.

We also, to kind of expand and keep our financial flexibility open as much as possible, we made a decision in December to file a $100 million shelf registration statement. We actually used that shelf in the $20 million equity raise that we completed on Monday. So with that, we will get into some more specifics about where the Company is today regarding all of our business lines and go over our financial results in more detail. So I would like to turn the call over to Rahul Singhvi, our President and Chief Executive Officer. Rahul.

Thanks, Gary. I hope all of you can hear me. I am here remotely in Washington D.C. The agenda of our presentation today is going to be I will go over the redefinition of the Company, the new strategy that we have and how the various pieces of the Company's business fits together in a very strong integrated fashion. After that, I will give the mic to Tricia Hall and she's going to go over the financial results and then I will come back to talk about what is in store for 2006 in terms of our objectives and what milestones you can look forward to. And then we will open it up for question-and-answers.

So let me first begin. If you guys are following the slide presentation, this is a slide that shows the three circles. I think slide number 4, which shows the unique nature of the Company today and how the various pieces fit together. I think what we're trying to show here is that the Company has three key capabilities that are unique and when they come together, they form a unique set of capabilities that result in new value added products. As you all know, for those of you who have been following Novavax, that we have had very strong formulation science. This was the capability that we used to develop Estrasorb. Now we also have very strong capabilities in vaccines. And the combination of formulation science with vaccines gives rise to one of the key competitive advantages in the vaccine technology, which is the use of adjuvants and we think that we can create much better vaccines with the capabilities of formulation science of leveraging those capabilities and formulation science by creating novel adjuvants and thereby improving the antigens that we create from our vaccine technologies.

And lastly, we also want to emphasize that we have established ourselves as a company that can take a drug all the way to FDA approval as we did would Estrasorb and that capability is going to come very handy for us as we develop our new flu vaccines and other products using our formulation science.

In addition to the capability, we also have physical assets in terms of manufacturing capabilities or manufacturing plants that we will also be leveraging as we develop new products both for clinical supplies, as well as commercial manufacturing. So we believe that by having these three capabilities, we are well set up for success in the future to develop new products and generate cash.

The next slide basically shows how the two businesses, the drug delivery business, which relies on the formulation science and the vaccine business, come together. The drug delivery business, which is the Estrasorb technology and other products based on the same technology, the Micellar Nanoparticle technology, is in the mode of generating internal cash for the Company. We are, as Gary said, in the process of getting royalties from the sales of Estrasorb through Esprit and behind Estrasorb, there are a bunch of other products that we are actively seeking to license out and generate cash. We expect to take that cash and plow it into our new high value added products such as vaccines and in particular the flu vaccines and move those products forward so that the investment capital that you all put into the Company is best utilized in value creating activities.

So the next slide says what are the key attributes? Why are we -- why should you be continuing to invest in us? The three or four key points are that we find ourselves in a technologically leadership position in influenza vaccines. We are in the process of developing both pandemic and seasonal influenza vaccines and the platform that we have for virus like particles in our adjuvant technologies are suitable for other vaccines and therefore, we can create a pipeline of vaccines right behind these influenza vaccines. And as I said, the expertise we have in formulation science gives rise to the adjuvants, which help us in making better vaccines and they give rise to products, which can generate cash, which help us in applying the money into R&D.

The cash flow from this business is low-risk and in addition to that, we have a very strong cash position of about $50 million today with the most recent capital raise that we made. So we believe that the Company is well set up with this strategy. Move the talk to Tricia Hall who is going to go through the financial results and then I'll come back and talk about our 2006 objectives. Tricia.

Thank you, Rahul good morning to everyone. I think Gary Evans summarized it very well that we had a very exciting and active fourth quarter. I think top amongst that would be the licensing agreement with Estrasorb with Esprit. We received upfront cash payments totaling $10 million during the fourth quarter and we will receive another 2.5 minimum payment in 2006. We also will be receiving contingent royalties and milestone payments going forward.

We recorded a gain on the sale for that transaction of $10.1 million during the fourth quarter and we wrote off our intangible assets for the Estrasorb rights during that quarter, which resulted in a $2.2 million write-down. As part of this transaction, we also wrote down inventory to lower the cost to market. The write-down was $1.5 million. Part of the transaction we agreed to sell to Estrasorb at a price that is currently lower than our inventory carrying value that we had in the fourth quarter, as well as our manufacturing costs that we were incurring for the fourth quarter. We anticipate the cost to be lower in 2006 as the manufacturing facility will be more fully utilized to manufacture Estrasorb, as well as fulfilling our other manufacturing contract requirements.

Also in the fourth quarter, we had a financing deal that net $17 million in cash for us and we sold shares at $4.30 per share. That occurred in November. As Gary Evans also mentioned, $6 million of convertible notes converted during October and that converted over to 1,070,365 shares at that time. In December, we received a licensing payment for $1 million. Also subsequent to year end, as gave Gary Evans pointed out, we received $20 million of financing that we actually received the cash yesterday on. So in total, cash transactions for 2005, we received $28 million in the transaction I mentioned, as well as $20 million for the transaction yesterday.

If you go on to the next slide that is referred to as financial review fourth quarter and full-year financial snapshot. We will go over this profit and loss statement for the fourth quarter and the year. Revenues for the year were $7.4 million compared to $8.3 last year. For the quarter, they were $2.2 million compared to $2 million last year. The primary revenue for the fourth quarter came in from a combination of the $1.1 million license revenue that we received in the fourth quarter, as well as some sales from Estrasorb to Esprit. The significant variance for the full year is primarily due to the reduction in our sales for products considering we sold our noncore products in the third quarter of last year.

Cost of goods sold and inventory write-offs for the fourth quarter were $2.3 million compared to $1.4 million. That is a negative variance of $900,000. But this includes the $1.5 million write-down that I mentioned previously with the Estrasorb transaction. For the year, cost of sales were $7.3 million compared to $3.5 million for a negative variance of $3.8 million. But that variance does include $2.5 million of what we refer to as idle capacity. That is the cost to maintain the manufacturing facility when it was not at full production, as well as it also included the $1.5 million write-down that we took in the fourth quarter.

Operating expenses. For the quarter, they were $3.4 million compared to $10.6 million last year for a positive variance of $7.2 million. For the year, they were $20.2 million compared to $39.7 million for a $19.5 million positive variance. This positive variance is primarily due to a $16.7 million reduction in sales and marketing costs. As we have moved out of the product sales arena, we have considerably reduced these costs and we can now spend more money over in R&D since we do not have to dedicate it to sales and marketing (indiscernible).

One-time gains for the fourth quarter were $10.1 million, which is a result of the Esprit transaction that I previously mentioned and for the year, they were 11.0, which included both the Esprit transaction and the [Pharmail] transaction from the third quarter. You compare that to the 11.2 for the previous year, the previous year's one-time transaction was the gain on the redemption of debt that we had last year.

We had a net income for the quarter of $6.1 million compared to a loss of $10.3 million for the previous year. So that is a positive variant of $16.4 million. For the year, we had a net loss of $11.2 million compared to last year of $25.9 million for a variance of $14.7 million. Our gain per share for the fourth quarter is $0.13 per share compared to last year of a loss of $0.26 per share and our loss per share for the year is $0.26 compared to $0.70 in the previous year.

Moving on to the balance sheet. At the end of 2005, we had $31.9 million in cash compared to $17.9 million last year, a variance of positive $14 million. Our working capital is $32.7 million compared to $15.3 million, a much improved $17.4 million variance there. With the conversion of the note in the fourth quarter, our convertible debt is now down to $29 million compared to last year, it was at $35 million. Our shareholders equity is slightly under $50 million at $49.7 million compared to $33.3 million last year. All in all, the balance sheet is looking much, much stronger than a year ago.

The fourth-quarter operating expenses, if you look on to the next slide, there is a bar graph. This basically will give you an idea that our operating expenses have been and will continue to be decreasing in the fourth quarter. Our R&D spending was up over the third quarter and our G&A spending has been going down but it did include some significant business development transaction expenses that we don't really anticipate going forward will be as high. We do expect the R&D expenses to continue to rise though.

In summary for the 2005 financial review, if you go to the following slide. As I mentioned, our balance sheet has significantly strengthened. It looks much healthier than it did a year ago. The business has become streamlined and focused. We have, with the elimination of the sales and marketing functions and the licensing to Esprit of Estrasorb and the sale of our noncore products line, we have been able to streamline our focus towards R&D as we head into 2006.

Operating expenses significantly reduced. Once again with the elimination of the sales and marketing expenditures, we can concentrate on R&D going forward. For the fourth quarter 2005, G&A costs were high, but they should decline with the completion of several of the business development transactions that were ongoing in 2005. For going forward to 2006, what do we have to look forward to? As I have mentioned, we would be increasing our investment in R&D to progress the vaccine and MNP program. This is where we will be focusing on. We hope to increase revenues through contract research with our GMP manufacturing facility. We anticipate or hope to enter into new product development agreements throughout this year and we hope to raise revenue and milestone payments from both Esprit, as well as other new product development programs.

We will be addressing our manufacturing capacity with bringing in new contract research to that manufacturing facility, as well as the increased production levels that Esprit is already requesting from us. And it is very important to note with the financing that we received yesterday, as well as throughout the fourth quarter of last year, we have a significant amount of capital now to meet all of these objectives. I think that's it, Rahul. So I'll pass it back to you.

Thank you, Tricia. Let me now walk you through the strategic initiatives for 2006. We are now, for those of you following the slide, I think we're on slide 12 or 13, Novavax 2006 strategic initiatives. There are basically three key goals this year. The first one is that because we're in a technological leadership position for the influenza vaccines, we want to leverage that position first by competing on executing the development program to Phase I. So we want to get human clinical validation this year for both pandemic and seasonal influenza vaccines.

In addition, we want to take this leadership position to position ourselves to bid for the large amount of government funding that is available to help manufacturers develop good solutions to the pandemic influenza problem and we believe that we have a very good solution. So we expect that we will be very competitive in that bidding process. We also want to enhance our visibility in the international arena and not only serve U.S. but the entire world with the solution that we have with the pandemic influenza and in that regard, we want to garner international support, international collaborations and finally we want to attract very high-level investors, as well as recruits to come into the Company and help us succeed. So that is the first key objective or set of objectives.

The second key objective for us is driving the revenue. And this is going to be through our current products, which are Estrasorb and Gynodiol. Then the product candidates using the nanoparticle technology by licensing these products and then taking advantage of our drug development capability and infrastructure to generate revenue from that.

And lastly, we want to continue to develop our pipeline in [pathon] technologies and here we want to again invest very strategically in the right products and the right technologies so that we can fortify our intellectual property portfolio, as well as our product portfolio. So those are the three key strategic objectives moving forward.

I want to spend a few minutes with you to let you know why in the case of pandemic flu we have a very strong solution to the world public health threat and now we are on the next slide, which shows three diamonds that show the three key challenges in the area of pandemic influenza. The first one being that we are dealing with a situation where we have an emerging strain. So we cannot rely purely on stockpiling. Leadtime becomes very important as to when the pandemic influenza strain is identified to the point that we can actually create a vaccine that is important. It is also important to have high fidelity of the vaccine that we have with the virus that is in the field.

The second key challenge is that of immunogenicity. Most humans are not very immunogenic to avian viruses and so we have to create a vaccine that is very potent so that we can use small amounts of antigens and vaccinate a large number of people.

The last thing is that we have to create a [capacity]. We have to have a quick method of producing large quantities of the product. And there is no such thing as storage capacity with the current set of technologies and that is something that should be redefined. And the solution that we have, which is shown on the next slide, shows how we are addressing all three of these challenges. We are going (indiscernible) the capabilities of the Company.

In the case of the emerging strain, we are relying on our recombinant viruslike particle technology to reduce the leadtime. We believe that we can reduce the time that it takes from the date the pandemic influenza strain is identified to the date that we can create a vaccine by a matter of two if not more from the current technologies. So instead of taking six to nine months, we believe we can probably do this in less than three months.

The second thing is that by using recombinant technology, we can have an exact match to the strain that is in the field and therefore hope that we can have better efficacy of our product. By using viruslike particles and our Novasome adjuvants, we believe we have the chance of making a very potent vaccine and therefore reduce the amount of antigen or vaccine required per person and therefore we can expand the number of citizens that can be served with our technology to large populations. And when it comes to producing large quantities of our products, we have relied now on what we call portable manufacturing by using technologies from Wave Biotech where we can use disposable equipment to take the technology of production to multiple locations within the U.S. or even outside the U.S. and commission these production facilities very quickly and create large amounts of product when the demand requires.

So that is the reason why we believe we have a very, very good solution to address the pandemic flu initiative or pandemic flu problem and that we can not only serve the U.S. but the entire world with this solution and we're moving aggressively in proving that our vaccine actually works in people. We are not just relying on our own capabilities. But where we believe we can get others to help us, we are making strategic alliances with them. As we have already disclosed, we have talked to Wave Biotech. We have an alliance with them. We have of an alliance with PacificGMP, both in the case of production. We have an alliance with the University of Pittsburgh to help us with some of the characterization work. We have an alliance with some CROs for preclinical as well as clinical work. So in all, we're trying to get the capabilities from outside where we think -- which can fortify our own capabilities.

In terms of specifics on government funding, which is something that we're very aggressively moving on, there are at least four opportunities that we see there we can have a competitive bid. We expect that there is going to be an RSP that is going to come out shortly on what is called antigen scaling technologies where the use of the viruslike particles and our adjuvants can be competitive. We believe that there is going to be another RFP that is going to come out to address advancing recombinant flu vaccine (indiscernible) recumbent viruslike particles. Hopefully they will be very competitive and later this year, we expect an RFP on A universal flu vaccine where again we think that we have a possibility to become competitive.

Lastly, we believe that there is also a possibility of putting together an unsolicited proposal to the HHS because of the compelling nature of our solution to the pandemic influenza problem.

The last two -- second to last slide shows and the key milestones that you can look forward to in terms of the influenza vaccine program. We believe that our R&D will be submitted in the fourth quarter this year and we will initiate our Phase I clinical trials in the fourth quarter. We are going to try very hard to actually get data back in the fourth quarter so that we will have some results to show whether or not our product is working.

We expect in terms of driving revenue to bid for government funding in the second quarter, but it depends on when those RFPs are actually -- when the RFPs become available. So that is a little bit outside of our hands. But we do expect to complete some product development licensing deals and that is going to go on between now and the end of the year and that should generate some revenue. And then of course Estrasorb -- we will support Esprit in the launch, as well as improve their profitability by going to a better packaging solution. Again that is going to go on for the whole year.

And lastly in terms of our pipeline, we expect to give you a progress report on the HIV vaccine development in the second quarter of this year. For the last slide shows -- so do we have the resources to do all that we say? And I believe today we are in a much better position than we ever have been. We have $50 million in cash. We have the right facilities in terms of labs in GMP manufacturing and most importantly we have the human resources, we have a strong management team, we have very strong investors backing us and we have very good partners around us who can make us successful. So we're very optimistic as we move forward and look forward to 2006. With that, I would like to stop and take any questions.

(OPERATOR INSTRUCTIONS). Ken Trbovich, RBC Capital Markets.

Great presentation. I just wanted to follow-up with a couple of questions. Obviously it sounds like you guys are seeking some human resources to help you on the vaccine side. Can you give us a sense in terms of how much additional staffing you think is required and then within that, what is your R&D budget we should expect would be for the year?

Sure, Ken. I think we have already been quite strong with the hiring of Rick Bright who is on the call today and you can ask him also some questions but I think it is not unreasonable to think that we will add another maybe 10 scientists in the R&D area mostly in the process development and manufacturing area and some in the protein chemistry area. And we expect that, with those 10 people, we should have the critical mass necessary in going to move forward. As you also know that we have PacificGMP and Wave Biotech who are virtual arms of the Company that are going to continue to help us.

In terms of the budget, primarily the budget is going to be driven by clinical trials. So depending on how far we can go this year in clinical trials, you can expect somewhere in the $15 million range.

Then just to follow-up on the RFP process, the last time that I am aware of that Novavax was involved in an RFP, you guys ended up having the highest scientific score, but lost on a technicality because of the inability to get a waiver or an insurance liability waiver. Do you expect that the government is going to provide that waiver to all manufacturers or do you think you're going to have to go out and get a commercial quote the way it occurred with smallpox vaccine?

Well, I think that, as you know, the whole indemnification issue has been kind of put aside by the government for vaccines. So I think they (indiscernible) in 2000 I don't think really exists at this point. Thus we believe that, if necessary, we will do whatever it takes to not only have the right scientific but all the other technical issues addressed this time as we go afford.

And then one final question and I apologize, just in terms of the RFP process, how competitive do you expect that to be?

We always keep our guard up. We never underestimate our competition. So we will do whatever it takes to make sure that our RFP looks the best and that is the best we can. We don't know what the competition is going to do, but we will obviously assume that they will try to do very well and so therefore we have to do the best we can.

Navdeep Jaikaria, Rodman & Renshaw.

Just a quick question to follow up. Can you provide some more color on the manufacturing front, especially with the deal at the PacificGMP? What sort of partnership will that be, can you detail that out? Can you also provide some guidance as to when can we see validation of the manufacturing process as you scale up to the 500 liter scale?

Very good. Sure. PacificGMP, we believe, is a very strong partner for us. They are the industry experts in terms of the disposable manufacturing chains that we are working on. That is the kind of process we are putting around our product and the kind of alliance that we have with them is that they are going to create efficiencies and -- first of all, they will optimize the process and second, they will put efficiencies around it such that we can use the least amount of equipment, disposable equipment, that is necessary to get the whole process done. So they are not just in contract manufacturing but they are helping us in designing the right kind of equipment so that we can be most efficient and we can truly make this into affordable manufacturing. That is why we call this a strategic alliance.

The second question you have regarding validation, we expect that we will have scale-up data around the same time we have clinical validation. So by the end of this year we should have that as well.

Thank you. And can you also comment on your collaboration with the University of Pittsburgh please? What exactly is that?

Sure. Rick, are you on the line? Maybe you can take that since you did that collaboration?

Yes, I am on the line. Hello, everyone. The University of Pittsburgh and they are well-known for their success in developing and characterizing vaccines. In fact, that's where the polio vaccine was developed about 50 years ago and our collaboration with them allows us to really characterize our vaccine and the immune response (indiscernible) to our VLP vaccine. We believe that we are making, by using a VLP approach, we can make a stronger and broader protective immune response to influenza and a number of other viruses that we will explore there as well. So by collaborating with the University of Pittsburgh, we are gaining a lot of expertise and experience and capabilities that we can use to evaluate our vaccine approach in a more quickly or more I guess aggressive timeline that we could do internally. So I look forward to the success of that collaboration.

Great. Thank you. And one final question, financial. You did give us the R&D guidance. What about the G&A? Should we view it as a flat rate from here this quarter onwards or is it going to go up or down?

I think you should assume a flat, which I think in the last year we spent around $8 million in G&A.

David [Croft], a private investor.

(technical difficulty)

Operator, I think we need another caller.

[Bernard Favala], a private investor.

Good morning, gentlemen. First of all, you're all to be commended for the job you're doing. I had two questions; one specific and one general. Number one, I noted from the last conference call that there was a reference to the hepatitis E virus and I know that's basically under the purview of GlaxoSmithKline but I have since seen in print that, according to what I read, that the vaccine was successful and that GlaxoSmithKline intended to go forward with it. I realize that is not necessarily something that could be a financial bonanza, but I was interested in it more in terms of the validation of the technology that Novavax provided, number one.

Number two, I am just wondering as experts in the field if there is a reaction or a surprise as to just how rapidly the virus has spread over the last several months as opposed to what it had done in the prior years. And I'll leave it at that. Thank you very much.

Maybe I can comment on the Hepatitis E and then Rick can comment on the virus spread.

Thank you.

On the Hepatitis E, that agreement was made by Novavax several years ago, and it was a three-way agreement between NIH, Novavax and GlaxoSmithKline. And in terms of financials, I think it's for a very small royalty that Novavax will receive if the product is ever commercialized.

But when you ask me in terms of validation, I think that is a good question because it was a vaccine that was produced by Novavax in the [baccular] virus [insect] cell system, so if nothing else, it provided the assurance that the material made or vaccines made with that system, which is the system that they are using for influenza vaccine, has been safely administered to thousands of patients that have received the Hepatitis E vaccine, and in addition that vaccine has been proven to be effective. So I think insofar as that kind of validation is concerned, certainly that brings a fair amount of value to the company.

Now, I will ask Rick to address the issue of the spread of the virus.

I really don't want to take on the hat of an expert in Hepatitis E or the virus spread. I will echo what Rahul has said in assuring that VLP and our approach to making the vaccine for this looks to be very successful and for --

I think the caller may be asking about the spread of the influenza virus.

Yes, yes. Thank you.

Okay. I'm sorry. I misunderstood you then. The spread of the influenza virus in terms of the bird flu --

Yes.

Avian influenza. Yes, it does appear to be spreading. It is still spreading to new countries and breaking out of Asia, spreading through Europe. We do know that there are two significant different clades of influenza, avian influenza H5N1, that is spreading. And a number of companies have focused on making a vaccine for this first initial clade 1 of the H5N1 virus. We are familiar with the second clade. Of course, I have private experience with avian influenza and H5N1 from my many years at the CDC, and we are working aggressively with the CDC to stay on top of the spread of the virus and getting information as quickly as we can so we can also accommodate a vaccine for the second clade of H5N1.

Katherine Xu, Pacific Growth Equities.

Could you describe the regulatory pathways going forward for the flu vaccine, both the pandemic and endemic?

Sure. The regulatory path for the endemic or the seasonal flu is pretty well set, which is you have to go through the regular Phase I, Phase II, Phase III process. The Phase III process there involves the efficacy trials during a flu season where you have to have a placebo-controlled trial to demonstrate that your vaccine is effective. So that regulatory pathway is pretty well set.

Now in the case of the pandemic, it is a little bit different because you really cannot do an efficacy trial with the pandemic vaccine without a pandemic as you know. But what I think will happen is if there is a pandemic. If we demonstrate safety and efficacy in a Phase I/Phase II, then I think we will become a source of the vaccine and that we will get approval to supply the vaccine under our R&D. But if there is no pandemic, then our thinking is that we will have to demonstrate that our platform -- that we demonstrate efficacy with our platform by perhaps doing the seasonal influenza and influenza trials and then fortifying our Phase I/Phase II immunogenicity and safety data with our pandemic vaccine with efficacy off the seasonal flu data to create the full dossier.

So theoretically you can apply for the potential full of a product, which, in the absence of a real pandemic --.

Like I said, we will not apply for regulatory approval, but we will be ready to supply the world without approval if we can demonstrate in Phase I and Phase II that our product is immunogenic and that it is safe. But if there is no pandemic then we will have to demonstrate efficacy of our seasonal flu and fortify the immunogenicity and safety data of the pandemic influenza vaccine with the efficacy data from a seasonal vaccine to get approval from the FDA.

Great. Thanks. And another question is regarding the adjuvant. (indiscernible) We understand that your dedication to have your own adjuvant -- I know your VLP together in the product -- just curious, have you looked at other adjuvants, some are newer, for example the TR9 or TR4 [adjuvants] and then in comparison with your Novasome.

I will just say that we are constantly investigating and looking at adjuvants that continue to become available. We are very aware of the new specific adjuvants that target these PLRs that you mentioned and I'll just leave it at that.

So just I guess to --.

We are actively looking for adjuvants that are not in our portfolio but are outside, which can be more safe or more effective.

Operator, we will take one more call.

Navdeep Jaikaria, Rodman & Renshaw.

Thanks for taking my question again. Rahul, can you give us some more color on the if you were to do the Phase I/II study, how large would that need to be in the case of a pandemic and also could you further elaborate your strategy regarding the seasonal flu going forward?

Absolutely. With the pandemic, I believe the Phase I/Phase II trial, you can expect within 300 to 400 subjects. That is what we think right now but obviously that will have to be vetted through the FDA. And with regard to the seasonal, we believe that the strategy there for us is going to be one where we can take advantage of our more immunogenic products to get efficacy in gross populations, which are currently underserved, such as (indiscernible) and so we will be targeting those populations to get better claims on our label and therefore make our product more attractive.

And you expect to be in the clinic by the end of year?

Yes.

Thanks a lot. Congratulations on a great quarter.

Thank you.

Okay. I think that will finalize our Company's fourth-quarter and year-end conference call. We appreciate everyone's interest and we are extremely excited about where Novavax has repositioned itself and the opportunity that we have ahead. We have a big job to do, but we have the resources and the people and the desire to get it done and we look forward to reporting to all of you our activities in the near future. Thank you.

Thank you all for your support.

Once again, ladies and gentlemen, thank you so much for your participation in today's conference. This does conclude the presentation and you may now disconnect. Have a great day.