Novavax Inc (NVAX) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Novavax fourth-quarter earnings conference call. This call is being recorded. My name is Tony and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference.

On today's call will be Gary Evans, Lead Director of Novavax; Dr. Rahul Singhvi, President and CEO; Jeffrey Church, Vice President and CFO; and Dr. Rick Bright, Vice President of Global Influenza Programs.

Statements herein relating to future financial or business performances, conditions, or strategies and other financial and business matters including expectations regarding future revenues, operating expenses, and clinical developments are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Novavax cautions that these forward-looking statements are subject to numerous assumptions, risks, and uncertainties which could change over time.

Factors that may cause actual results to differ materially from the results discussed and the failure by Novavax to secure and maintain relationships with collaborators; risks relating to the early stage of Novavax product candidates under development; uncertainties relating to clinical trials; risks relating to the commercialization if any of Novavax proposed product candidates; dependence on the efforts of third parties; dependence on intellectual properties; competition for clinical resources and patient enrollment from drug candidates in development by other companies with greater resources and visibility; and risks that may lack the financial resources and access to capital to fund our operations.

Further information on the factors and risks that could affect Novavax's business financial conditions and results of operations is contained in Novavax's filings with the U.S. Securities and Exchange Commissions, which are available at www.SEC.gov. These forward-looking statements speak only as of the date of this call and Novavax assumes no duty to update forward-looking statements.

At this time I will turn the call over to Mr. Gary Evans. Please go ahead, sir.

Thank you, Tony. And thank all of you for dialing in. We've had a lot of news here over the last week related to some of our leadership in the Company and I would like to say that this will probably be one of my last times moderating or opening our conference call. As you know, this morning we announced our fourth quarter and 2006 year-end financial results. We are going to go through that today with the management team of the Company.

But before I turn everything over to Rahul and his team, I would like to say a little bit about our new Executive Chairman, who was announced on March 8. This is a gentleman that we have sought after for quite a while and I very happily handed the Chairman role to John Lambert, who resides actually in London. For those of you that don't know John and his reputation, I'd like to take a minute just to give you a slight overview.

It would take me an hour to really go into depth as to how knowledgeable John is about the vaccine business. But John had previously been President of Chiron Corporation's vaccine operations from 2001 to 2005 and that Company and subsidiaries have more than 30 different vaccine products that are actually on the commercial market worldwide. Under his oversight, Chiron's annual revenues more than doubled to almost $1 billion and he also saw Chiron's acquisition integration. He oversaw that of the PowderJect.

Also prior to Chiron, Lambert was President of Aventis Pasteur, which is now Sanofi Pasteur, where he was responsible for all of the European development, commercialization of vaccines, developed by Pasteur Merieux Connaught, which is now [Aventis] Pasteur. He was also responsible for the joint venture partner of Merck.

John brings a depth of knowledge, reputation, and global context we believe in this business that are really second to none. He also brings a very strong commercialization knowledge that we think will benefit what Novavax is trying to develop in our growing pipeline, utilizing our VLP virus-like particle technology. So in having John come on board we think gives Novavax a depth that really takes us to the next level.

And that's what our job is, to continue to strengthen the management team and Rahul is going to talk today about all the new people that have agreed to come on Novavax's Company to help develop the VLP vaccines.

It is also when you look at 2006 and you compare it to our previous years, it was a tremendous year of transition and we've truly from a women's healthcare company to a vaccine development company in a very short order of time with a new corporate headquarters, new management team. And I am so excited about what we have in store for 2007, the work that Rahul and his team have done to get us in a position so that we can now take advantage of what we have been developing in the lab.

For the first time, I think that Novavax is in a position to really compete head-to-head with some very big companies and in order to do that we have got to do some partnering and collaborations with some other organizations. And that is another big reason John is involved. He has those contacts. He has those relationships that will enable us to further not only our influenza vaccines but other VLPs that are in our pipeline.

So with no further ado, I would like to turn the call over to Rahul so he will give us an overview of 2006. Rahul?

Good morning and thank you, Gary. Thank you all for joining us this morning. Before I begin, let me just take a moment to offer my most sincere thanks to Gary for his extraordinary leadership and dedication to Novavax in his capacity as Chairman and as a member of the Board. Gary assumed the Chairman's position at a very difficult time at Novavax and in a time of transition he has been a steady, thoughtful, and guiding force as we refocused the Company on vaccines and began laying the foundation for our long-term success.

Gary, you have been an outstanding leader and we are especially pleased that we will continue to benefit from your insight and guidance as Lead Director on our Board for a long time to come. I speak for all of my colleagues and our shareholders when I say thank you, Gary, for your unwavering support.

Now moving on, last year we built a foundation for creating a great vaccine company. Today we stand poised to validate our virus-like particle vaccine approach in the clinic. This morning I will review our progress during the fourth quarter and put that into context for all that we have accomplished over the past year.

In 2006, we focused on achieving five key objectives. First, we demonstrated the differentiating features of our VLP vaccines for both pandemic and seasonal influence strains in relevant animal models. These studies along with the strides we made in the manufacturing and testing aspects of product development have provided us a strong foundation for taking our first product candidate, the H5N1 pandemic flu vaccine, into the clinic.

Second, we have secured important intellectual property protection to strengthen our VLP vaccine technology patent portfolio. Third, we built a world-class vaccine development and senior management team. Fourth, we raised capital, which has allowed us to transition the Company and begin the execution of our value creation strategy without being held hostage by unpredictable capital markets. Fifth, we secured appropriate facilities to accommodate the current and future growth of the Company.

The substantial progress we have made on all five fronts has now put us in a position to turn the promise of our VLP vaccines and our innovative manufacturing solution into creating the next generation of vaccines.

We began 2007 with the bang. We licensed an important technology from the University of Massachusetts Medical School to expand our portfolio of VLP vaccines. We further strengthened our team by bringing on board John Lambert as Chairman. As Gary mentioned, John has an international reputation for his proven track record of bringing vaccines to market and with his industry expertise and knowledge, he will be an important resource to Novavax.

In addition as we announced today, I am pleased to welcome Jim Robinson as our new Vice President of Technology and Quality Operations. Jim joins us from Sanofi, where he led a combined team of 1000 and increased the production of various products by up to threefold. I just want to mention that Jim is one of several new people that have come into the Company including Penny Heaton, who came in as Chief Medical Officer late last year. I just want to mention that her work on development of a rotavirus vaccine that she did at Merck was published in the New England Journal of Medicine and was rated as the best paper in that journal in 2006.

This is just a testament for the quality of people that we have been able to attract in the firm and they all come here because they see the promise of the virus-like particle technology and an opportunity to change world healthcare.

As you may have heard, one of our joint development products with the NIH that had been licensed to GlaxoSmithKline was shown to be efficacious in protecting against hepatitis E in a Phase II study published earlier this month in the New England Journal of Medicine. This is an important validation of Novavax's capability to create and produce clinically relevant vaccines.

On our current development products, we are close to completing toxicology studies and manufacturing activities necessary to file an investigational new drug application with the FDA during the first half of 2007 for our H5N1 pandemic flu vaccine. This accomplishment will position us to initiate human clinical trials with our VLP-based vaccine in mid 2007. We have already begun manufacturing the vaccine for the study.

In addition to our pandemic influenza program, we have accelerated work on our seasonal flu vaccine. This decision to accelerate this program has been driven by an extensive market assessment that we undertook in the fourth quarter of 2006. This assessment gave us a very clear understanding of the competitive landscape and what we believe to be the key success factors to win in the marketplace. We anticipate initiating toxicology studies with this vaccine candidate in the second half of the year.

Our strategy moving forward is to differentiate our seasonal and pandemic VLP vaccines and thereby enhance their value in the marketplace. This includes developing the right formulation and delivery route as well as designing and conducting the most thorough and efficient preclinical and clinical studies. With our two lead vaccine candidates anticipated to be in the clinic in 2008, we are also turning our attention to early stage VLP products to add to our pipeline. We expect to announce these new candidates when we have secured adequate IP protection on them.

We are also moving aggressively towards demonstrating our innovative manufacturing process at scale. We believe the successful achievement of these initiatives together with positive human clinical data will position us to become a leader in the development of novel vaccines. It is an exciting time at the Company as we execute our strategy by leveraging our VLP platform technology and our innovative portable manufacturing solution to create highly differentiated value added vaccines that can uniquely benefit human health. This mission drives us in our work everyday and I am more confident than ever today that we are on the right path towards success.

Now I would like to turn this over to Dr. Rick Bright, our Head of Global Influenza Programs, for a more in-depth look at our R&D operations in 2006. Rick?

Thank you, Rahul. Last year and particularly in the final quarter of last year was a very good time for our R&D. I'd like to detail for you a number of our key accomplishments. We demonstrated that we have a broad and competent platform by designing and producing VLP-based vaccines for pandemic and seasonal influenza as well as for HIV. We demonstrated in the number of animal models that our influenza VLP vaccines are effective in eliciting robust antibody responses and we show that animals inoculated with our VLP vaccines are protected against illness and death after being challenged by a lethal dose of a highly pathogenic H5N1 virus.

New data collected during the last quarter show that when we inoculate mice with our clade 1 or our clade 2 H5N1 vaccine, not only are they protected when challenged with the same H5N1 virus, but they are also protected against other strains in the H5N1 virus family.

I would like to pause just a moment to emphasize the implications of what I just said. We have developed a vaccine for pandemic influenza and that vaccine demonstrates the ability to protect animals challenged with a killer dose of this virus not only against the virus in the vaccine itself, but also against other viruses in the same H5N1 family.

This is a tremendous achievement for any vaccine. If this result translates into people, that means that our vaccine will not only protect against strains of viruses that are circulating today, but also against -- has the potential to protect against viral strains that may emerge in the future. This supports how powerful our VLP vaccines are in animals and also gives us reason to hope for a similar response in humans.

To demonstrate these important qualities of our vaccines, we have established research collaborations with highly respected scientists and institutions. We are collaborating with the CDC influenza division with Terry Tumpey and Neal Van Hoeven; the University of Pittsburgh School of Medicine's Ted Ross and his team; the Southern Research Institute's Thomas Rowe. Each of these collaborations helps us to learn more about the potency of our vaccines while maintaining our key timelines and scientific rigor.

I would like to take a moment to discuss the collaboration with the CDC. This relationship began several years ago and is an ongoing aspect of our developing program. We have already published one manuscript in conjunction with the CDC and another one has been submitted both characterizing our avian influenza vaccines. Additional data should be coming out in the first half of this year further characterizing work that the CDC is doing with our VLP vaccines.

Our research has been the subject of numerous presentations at scientific conferences around the world as well as manuscripts published in highly respected peer reviewed journals. Sharing our data with the scientific community is an important validation of our vaccine, of our people, and our programs as we move forward towards clinical trials.

Speaking of clinical trials, as Rahul mentioned, Dr. Penny Heaton, our new Chief Medical Officer, has been working diligently on planning and organizing our first human trial involving our pandemic influenza vaccine that is scheduled to begin in the middle of this year. To that end, late last year we began a toxicology study that is required before entry into the clinic. We are awaiting these data to demonstrate that our vaccine is safe in animals which is a final step before going into the clinic. We have also assembled a clinical and regulatory team to guide us through the IND submission process.

So as you can see, we have made a tremendous amount of scientific progress over the past year and it is exciting to see all the pieces finally coming together. As we continue to move our influenza programs into the clinic, it is important to keep building our pipeline of other vaccines for important disease targets. We have been carefully reviewing a number of candidates and have a solid team of scientists who have already started working in this area. I hope to be able to report on this news very soon.

I will now turn the call over to Jeff Church for a review of the Company's financials.

Thank you, Rick. The Company ended the year with $73.6 million in cash and short-term investment, which includes a $2.5 million milestone payment received in the fourth quarter on the first anniversary of the license and supply agreement for Estrasorb signed in October 2005. Our current cash position should be sufficient to fund our clinical development programs and operations into the second half of 2008.

During 2006, we reported on several important transactions that significantly improved our financial condition and provided the foundation to implement our business strategy of developing novel highly potent vaccines against pandemic and seasonal influenza and other infectious diseases. We raised $58 million through two equity financing transactions during 2006.

In addition, our outstanding debt balance was reduced from $29 million to $22 million during the year after several holders of the Company's senior convertible notes voluntarily exercised their right to convert these notes into 1.3 million shares of Novavax common stock at a conversion price of $5.46 per share.

Our working capital on December 31, 2006 was $72 million, a significant improvement over the $32.7 million balance at the end of 2005.

During the fourth quarter, we reported a loss of $6.1 million. Our cash burn during the same period was $5.39 or approximately $1.8 million per month excluding the $2.5 million milestone payment mentioned earlier. For the full year 2006, the Company used approximately $14.8 million to fund its operation; $1.5 million for capital expenditures; and $700,000 to service our outstanding debt obligation. This represents a monthly cash burn of approximately $1.4 million during the 12 months ended December 31, 2006. As Rahul has mentioned, we anticipated that our use of cash will increase throughout 2007 as we execute our business strategy.

Revenues were $1.3 million for the fourth quarter, up from $1.2 million in revenue reported in the third quarter of 2006, but down from the $2.2 million in revenue reported in the fourth quarter of 2005. The decrease in fourth-quarter revenue over the prior year was primarily due to a $1 million license renewal fee which we received in December 2005 for rights on previously licensed technologies in specific fields.

Revenues were $4.7 million for the year ended December 31, 2006, down from $7.4 million in the comparable prior year period. The primary reason for this decrease in revenues was a divestiture of the Company's vitamin and AVC productlines in September 2005 and the licensing of North American marketing rights for Estrasorb in October 2005. Revenues last year included $1.6 million from products that were divested in 2005 as well as the receipt of the onetime $1 million license renewal fee in December 2005, which I talked about earlier.

Our net loss for the fourth quarter was $6.1 million or the equivalent of $0.10 per share, compared to net income of $6.2 million or $0.13 per share in the comparable period last year. Our net loss for the year ended December 31, 2006 was $23.1 million or $0.39 per share, compared with a net loss of $11.2 million or $0.26 per share in the comparable prior year period.

Bear in mind that the prior year periods include gains on sales of product assets totaling $11 million, which consisted of $10.1 million gain from the licensing of Estrasorb to Esprit Pharma in October 2005 and a $900,000 gain from a divestiture of product assets to Pharmelle in September 2005.

Research and development expenses increased $6.5 million and general and administrative expenses increased $3.1 million during 2006. These increases were necessary to support our strategic focus on creating differentiated value-added vaccines that leverage the Company's proprietary VLP vaccine technology platform.

As mentioned in previous quarters, the Company implemented FAS 123(R), which is the accounting for stock-based compensation which became effective January 1, 2006. The Company recognized a $1.8 million non-cash charge in 2006 with no corresponding charge in the prior year. Offsetting these higher expenses were significantly lower selling and marketing costs in 2006 due to our change in strategic focus.

Our ability to direct and focus resources on our highest value product candidates has dramatically improved, indicating that we are executing our new strategy. Validating our promising preclinical results for our VLP-based influenza vaccine in the clinic in 2007 remains our highest priority for the coming year.

I would now like to turn the call back to Rahul for some summary comments.

Thanks, Jeff. I just want to end by saying that we are very excited about where we are in the Company at this moment. We're committed to improving human health worldwide and to reach our full potential as a biopharmaceutical company. We have a great mission and we are confident that we will achieve this mission and overcome the inevitable bumps in the road. I believe we have the right team focused on the right strategy to achieve our goal.

I would like to turn the call to the operator to open for questions. Thank you.

(OPERATOR INSTRUCTIONS) Brant Jaouen, RBC Capital Markets.

Thanks for taking my question. Two quick ones. Can you give us any sense of what R&D spend might look like in '07? And also it looks like SG&A was a little less than $1 million higher than we had sort of expected for the fourth quarter. Is that mostly due to the move to the new facility? And is that an ongoing run rate?

This is Jeff Church. We have not put out any specific guidance on R&D and SG&A. To answer your questions on SG&A, we have taken steps particularly in the fourth quarter to do some substantial commercial assessment and IP work. That was one of the reasons why SG&A was up over what you may have projected.

As we indicated as we look to enter the clinic both from a research and development and an SG&A standpoint as we built the team, we do expect our cash burn to increases from what we realized in the fourth quarter of about 1.8. It will be running higher than that in the first quarter and continue to increase over the upcoming quarters as we enter the clinic in the mid part of 2007.

Thanks.

(OPERATOR INSTRUCTIONS) Vernon Bernardino, Rodman and Renshaw.

Thanks for taking my question. Just a few, if you could. Just wondering are we on track to demonstrate the -- or what is the status of the manufacturing at scale for the 500 liter scale? Is that what you are on track to try to validate by midyear this year?

And also just wondering if you could give a little bit of -- a few comments regarding the government's RFPs? And just also wondering what kind of IP do you still perhaps need to secure regarding current VLP technology and what it entails? Thank you.

Vernon, this is Rahul and I'll answer all three of your questions. The first one related to the manufacturing, what we are finding out is that scale at 100 liters may be sufficient for us. So we have been focusing on increasing our yields at the 100 liter scale as the primary strategy for manufacturing and commercial manufacturing scale up work. We may not need to go up to 500 liters but have just multiple units of 100 liters as the way to go. So that is what we are planning on doing.

The second question was regarding government RFPs. We know only as much as you do. There's nothing new there. We have always said that we are going to continue to move our pandemic flu program forward and validate that in the clinic and if the product works, there are incredible advantages of this product over what is currently being looked at. So we expect that governments around the world would be interested in our product at that time.

So at this moment we don't see any government RFPs on the horizon and we expect that as we get the product into clinic, we will get some traction at that point.

Regarding your third point about IP, I generally want to be cautious about commenting on our intellectual property strategy and at this moment all I would say to you is that we are securing all the IP and freedom to operate type of issues cleared up so that we have no issues later on. That is all I can say at this point. Thank you.

Great. Thanks, Rahul.

Scott Henry, Oppenheimer.

Thank you for taking the questions. First with regards to the toxicology studies, could you give any color in terms of how long they take from start to finish?

This is Rick Bright. The toxicology study is a comprehensive study that is set out and approved by our FDA regulators and generally they take several months to complete because you want to make sure you are looking at every aspect that it is required to go into our IND application. So in general I would say several months for toxicology.

Okay and then I guess when we modeled out the timelines for these vaccines, we had not heard a lot about the toxicology study need. I just want to make sure that we are thinking about these timelines correctly. With regards to a pandemic vaccine, do you still expect that following toxicology you'll need a one dosing study as well as a lot validation study? And then next up, do you think you could get through with one Phase II/Phase III study before filing?

Then similarly on the seasonal vaccine, are you still looking for one Phase I followed by two Phase IIIs prior to a filing?

Scott, this is Rahul. You are correct in your assumptions on the pandemic. We are going to do a dose finding study as part of our Phase I/Phase II study. Then after that we have a lot validation and potentially studies in special populations that will wrap up that particular program.

With regards the seasonal studies, it is going to be more comprehensive because our goal there is to demonstrate clearly that we have a differentiated product. I would like to hold off on my comments on the seasonal program until we have fully discussed internally as to what those plans are. I do have Penny Heaton here. Maybe she can put some color on that.

(OPERATOR INSTRUCTIONS)

Rahul, could I just --? I didn't know if Penny was going to --?

Actually she is not.

Okay, fair enough. I did just have one or I guess two follow-up questions. First with regards to the kind of lotion pipeline that we have heard a lot about, I was curious if any of those products have moved into Phase I that had not previously been in Phase I, for instance Androsorb? And as well, just a bookkeeping question. What is the total amount of converts outstanding right now and should we still -- should we expect those to be put to the company this July or how should we be thinking about that?

Let me speak to the second question. This is Jeff. Right now the current conversion price on the 22 million is $5.46 per share. There are provisions as it relates to redemption as well as conversion. I really can't speak to what the noteholders will or will not do in the upcoming months. Essentially the conversion would be at the $5.46. If in fact there is a redemption, the notes can be redeemed in cash one half as well as in stock for the other half.

What was the first question again?

The first question was just with regards to the kind of lotion pipeline, I think there's about six or seven compounds that we have previously had been told we had blood levels on. I was curious if any have moved into Phase I.

No, we as a company have decided that we are not going to focus on those type of products at this moment and we will not move them into clinic unless there is interest from any potential partners.

So those are all effectively on hold right now?

Correct, that's right.

Okay, thank you for taking all the questions.

(OPERATOR INSTRUCTIONS) [Bernard Bavalla].

Actually my original question had been intended for John Lambert, but he is not on the call. Had he been here, I would have asked him why at this point in his career and he has got a pretty storied one, he would have chosen to lead Novavax? But I will leave that for a different time.

Well maybe I can answer that for you.

Okay but before you do, just as a corollary to that, he has pretty much of a strong bent toward adjuvant aided vaccines and I'm wondering if his joining is going to lead to more of a push in that direction? But thanks, those are my questions.

I would not say that at all. I think he is very much enamored with the VLP technology we have and has been I think quite impressed by the team that has been assembled and sees a company of our size with the technology we have of being an entity that he could add tremendous value to by virtue of his business contacts throughout the world. So really it is a combination of enamored with our technology and our team and the ability for him to bring commercialization.

Yes, I guess maybe as a follow-up to that, is it the intention that he is to remain based in London? Because if so (multiple speakers)

Yes. That is where he resides, but as part of the agreement that we were able to negotiate with John, he is spending a minimum of one week a month in the Company's offices at its headquarters.

Okay, thank you.

So it is not just not a figurehead position, I assure you. It is a very focused and a position that he takes very seriously.

Thanks.

We are standing by with no further questions at this time. I would like to turn the conference back for any closing or additional comments.

Gary, I think if there are no more questions --

I think we're ready to wrap up.

Oh there's one more.

One more question, operator, I think.

Matt (indiscernible).

I'm an individual investor. I wondered if you could shed any light on the HIV vaccine? And then if you expect money coming from the government for that? Because it is the fourth year out of the 4.5 years if I remember correctly.

The HIV program is currently being funded by the government and we expect that we will continue to work with the government as long as they continue to fund that program. What we are seeing so far is that the product that we have developed with the help of the NIH and the University of Alabama at Birmingham is looking very good and we expect that the product is going to go into clinic, but we don't know the entire clinical timelines because this is a program that is controlled by the government and not by us.

Okay, thank you.

Again, I will turn the conference back for any closing comments.

I think if there are no further questions, we would like to thank everyone who joined us today at this call and we again want to thank you all for your support. We assure you that we will do our very best to achieve the potential of this Company. Thank you.

This does conclude today's conference. We do thank you for your participation. You may disconnect at this time.