Novavax Inc (NVAX) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Novavax fourth-quarter earnings conference call.

At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session with instructions following at that time. (Operator Instructions). As a reminder, this conference call is being recorded.

Now I would like to turn the call over to John Hermann, please begin sir.

Good morning. This is John Hermann. I am Novavax's Executive Director of Legal Affairs and Corporate Secretary. I thank you for joining us on this conference call to discuss our 2010 year-end and fourth-quarter financial results.

Both the earnings release from this morning and an archive of this earnings call can be found on the Company's website at Novavax.com. On today's call are Novavax's President and CEO, Dr. Rahul Singhvi, and Vice President and CFO, Fred Driscoll.

Before we begin our prepared remarks, I need to remind you that we will be making forward-looking statements during this teleconference that could include financial, clinical or commercial projections. Statements relating to future financial or business performance, conditions or strategies, and other financial and business matters, including expectations regarding revenues, operating expenses, cash burn and clinical developments and anticipated milestones, are all forward-looking statements. We caution that our forward-looking statements are subject to numerous assumptions, risks and uncertainties which change over time. Further information on the factors and risks that could affect Novavax's business, financial conditions and results of operations are contained in Novavax's filings with the SEC. These filings are available at www.SEC.gov. Novavax has no duty to update any forward-looking statements that are made on this call at a later date.

I will now turn the call over to Rahul.

Thanks John. Good morning everyone. Just in this last month, we announced two major accomplishments for the Company that we believe are transformational for Novavax. First, we received a major contract award from the US Department of Health and Human Services, in particularly BARDA, or the Biomedical Advanced Research and Development Authority. Valued at up to $179 million for the advanced clinical and manufacturing development of our recombinant virus-like particle vaccines for the prevention of both seasonal and pandemic influenza.

Second, we entered into an agreement to license our proprietary recombinant (inaudible) influenza vaccines to LG Life Sciences of South Korea. I will review both of these agreements with you in greater detail during today's call.

Soon after receiving the BARDA contract, we were honored to welcome to Novavax the Governor of Maryland, Martin O'Malley, US Congressman Chris Van Hollen, and other distinguished local leaders to help celebrate this award. Their presence at our headquarters was not only gratifying for me and my colleagues, it marked a turning point in our efforts to becoming a leading vaccine company.

Let me now provide more details around the BARDA contract. This $179 million five-year contract will provide Novavax funding for advanced clinical testing of both our seasonal and pandemic VLP influenza vaccines. Here I would like to note that BARDA has requested that we include an adjuvant with our pandemic vaccine while our seasonal vaccine will remain un-adjuvanted. This strategy will provide BARDA and the US government with tremendous flexibility to deal with potential pandemic strains with varying immunogenicity. As part of this effort, we will test our own proprietary adjuvant in the clinic. This contract award will also provide us funding for manufacturing scale-up so that we are positioned to provide up to 50 million doses of flu vaccine within a six-month period after the declaration of a pandemic outbreak. The $97 million that we can receive during the base period or the first three years of the contract will fund the clinical development of a seasonal influenza vaccine candidate through Phase III trials and potential FDA licensure, and it will take us through Phase II trials of our adjuvanted pandemic vaccine candidate.

Our specific plan in 2011 under this contract is to launch a Phase I trial of our on adjuvanted pandemic flu vaccine candidate, continued clinical development of our seasonal flu vaccine with a Phase II dose confirmatory trial and prepare for the "end of Phase II" official meeting with the FDA, which as you know is a key meeting prior to initiation of the Phase III program in 2012. We will also continue development of our final manufacturing process. Finally, we will develop a detailed plan for a manufacturing facility that can eventually be used to produce at least 50 million doses of finished vaccine within six months of the emergence of a new influenza strain.

Now let me turn to the LG Life Sciences agreement and describe that in greater detail. As I said earlier, through this agreement, we have licensed our flu VLP vaccine technology to LG Life Sciences exclusive for the Korean market and nonexclusive in several other emerging markets. As part of our agreement, Novavax will receive upfront and future milestone payments from LG and double-digit royalty payments from commercial sales of the vaccine. This agreement with LG Life Sciences reinforces our commercial strategy to develop regional partnerships and in-country manufacturing solutions with leading pharmaceutical companies around the world.

As you know, LG Life Sciences is a global company with sales of almost $300 million and it is a major player in Korea and several other markets in the world. They are also a leading provider of vaccines to super-national health organizations such as UNICEF and the Pan American Health Organization, or PAHO.

Our specific plan in 2011 will be to work with our partners at LGLS to transfer them a VLP vaccine technology and provide them with manufacturing support. LGLS will be responsible for funding their own clinical trials and for the licensure of VLP-based influenza vaccines in South Korea and other emerging market countries.

LGLS will also be constructing a new VLP vaccine manufacturing facility at its Osong campus. I've just returned from a meeting with the LGLS team in Beijing and was delighted to hear about their progress and plans.

In other regional partnership news, our CPL Biologicals, our joint venture in India with Cadila Pharmaceuticals has completed a number of important steps, including completion of construction and initiation of validation testing of our state-of-the-art vaccine production facility in India. In addition to continuing progress on the influenza program, CPL Biologicals has started working on a VLP-based rabies vaccine. I should note that Novavax holds the rights to this rabies vaccine candidate in all territories around outside of India. This effort is a great example of how we are leveraging our partnership with Cadila to create value for our shareholders.

The BARDA contract and a collaboration with LG Life Sciences are both game-changing events for us. First, they validate that the recombinant vaccine technology we have been developing over the past several years is relevant in solving major unmet medical needs. Second, they provide multi-year nondilutive financing to support vaccine development and production. Finally, these deals allow us to focus our resources and accelerate the development of our pipeline.

Speaking of our pipeline, since our last quarterly call, we have published positive results from preclinical studies of our VLP vaccine to prevent Respiratory Syncytial Virus, or RSV. We also launched the Phase I study of our RSV vaccine, the earlier results of which we will report later this year. The launch of this Phase I trial was a major accomplishment for Novavax. We now have one of the few clinical assets in the RSV vaccine space.

In addition to RSV, we presented final results of our H1N1 study in Mexico at the World Health Organization meeting on pandemic flu vaccines in Geneva. These results showed that our VLP vaccine was both well tolerated and generated robust immunogenicity at all dose levels. Recall that last year we reported positive clinical results from our Phase II seasonal trivalent influenza VLP vaccine in older adults.

As a result of these accomplishments and achievements, we have now reached an important inflection points in our Company's history. With the BARDA contract now in place, a new development partnership launched in South Korea with LG Life Sciences, Phase I clinical testing underway for our RSV vaccine, and funding to support these programs, we are now in an excellent position to advance our pipeline and commercial strategy. We now have the talent, resources, and opportunity to execute our clinical programs, develop vaccines for people around the world, and create sustainable long-term value for our shareholders, partners and future customers. I congratulate my colleagues on reaching this milestone and thank our investors for their patience and continued support.

This concludes my prepared remarks. Now I'll turn the call over to our CFO, Fred Driscoll.

Thanks. Before I review the 2010 and fourth-quarter financial results, let me first comment on the restatement of our financial statements as set forth in the Company's annual report on Form 10-K for the year ended December 31, 2010.

In July of 2008, we completed a registered direct offering raising approximately $17.5 million in net proceeds. Each unit consisted of one share of common stock and a warrant to purchase 0.5 share of common stock. The warrants represent the right to acquire shares of common stock at an exercise price of $3.62 per share, and are exercisable between January 31, 2009 and July 31, 2013. The Company previously had recorded the fair value of the warrants in stockholders equity.

Recently, our audit committee determined that the previously issued consolidated financial statements included in our annual reports on Form 10-K for the years ended December 31, 2009 and 2008, and in our quarterly reports on Form 10-Q back to September 30, 2008, should have treated the warrants as a liability, and therefore could not be relied upon, which we reported under a current report on Form-8K filed on March 17, 2011. My following remarks on the financial statements of the Company include the effects of this restatement.

For the fourth quarter of 2010,we reported a net loss of $6.3 million, or $0.06 per share, compared to a net loss of $10.3 million, or $0.11 per share in the fourth quarter of 2009. For 2010, the Company reported a net loss of $35.7 million, or $0.34 per share, compared to a net loss of $40.3 million, or $0.47 per share, for 2009. The decrease in the net loss in 2010 compared to 2009, excluding the $3.6 million favorable impact from the change in fair value of the Company's warrant liability, is primarily due to lower professional fees, the receipt of a therapeutic tax credit, and reduced interest expense resulting from the payment of the Company's convertible notes in 2009, all of which was partially offset by increased employee related costs. The decrease in the net loss for the fourth quarter of 2010 as compared to the same period in 2009, excluding the $3.8 million unfavorable impact from the change in fair value of the Company's warrant liability, is primarily due to lower research and development spending associated with the Company's clinical trials related to its H1N1 and seasonal influenza vaccine candidates.

At December 31, 2010, Novavax had cash, cash equivalents and short-term investments of $31.7 million, compared to $43.0 million at December 31, 2009.

That concludes our prepared remarks. Operator, we will now open our call for questions.

(Operator Instructions). Bill Tanner, Lazard Capital Markets.

Thanks for taking the question. Rahul, a few questions for you, just as it relates to the BARDA grant and I guess the development of a pandemic vaccine. What are the antigens that you will be initially developing a vaccine against?

So for the pandemic, we have chosen H5N1, which is the most dangerous of all pandemic, pre-pandemic strains at the moment, and it happens to be not very immunogenic. So it kind of represents a very good case for a pandemic vaccine candidate, particularly using an adjuvant so that we're prepared that, if in the future, either we have H5N1 or something like that, that we have a plan to address that kind of a strain.

So this is mainly just going to be like a prototypical?

Yes, it's going to be a prototypical pre-pandemic strain.

For the seasonal, we are going forward with whatever the WHO or CDC recommendations are for the seasonal strains. I think the unique thing about this contract is, since you ask me, I'll just mention it now, is that the BARDA is supporting us not only for a vaccine like the pandemic vaccine, which is primarily going to be used for stockpiling, but they'll support us for developing a seasonal flu vaccine, which is a commercial product which is I think a very unique opportunity for Novavax.

Right. As it relates to LGLs collaboration, how do you see that potentially providing opportunities for other collaborations with other countries, certainly in that region?

Yes, so this -- firstly, as you know, LGLS is a major company. It's a conglomerate base (inaudible) scoured the entire world to look for technologies (inaudible) they were thinking about influenza vaccines. And you know, we are really grateful that they picked us for their future growth. So, I think it kind of clearly gives a validation that the VLP approach to making influenza vaccines is very promising, and I think provides a good balance of risk and reward. I think it will attract players and other customers in other parts of the world to look at us favorably. So, I think that's really the impact of this deal.

I guess the last question as it relates to the RSV -- I know you mentioned results from the Phase I later this year. What's the expectation for sort of the types of data that would come out of that, and the ability to I guess extrapolate as to the potential efficacy in subsequent trials?

Sure. Right, so as you know, this trial is being conducted in healthy adults. As you know, most people are already exposed to RSVs, so they have pre-existing antibodies for RSV. So I think what we will be looking for in this trial is first that there should be -- it should have a absolute squeaky clean safety profile because, first, I think for the FDA to take us anywhere either -- in any of the more susceptible populations, either in older adults or younger folks, I think they have to be absolutely convinced that this product is safe in healthy adults. So that's one.

Second, we will be looking at antibody titers, so zero conversion may be a term that you may want to use here. It's like from the baseline titers how much additional antibody, neutralizing antibody are we able to generate using this vaccine. That will be a critical parameter for us in terms of developing a future clinical strategy in our target population as to where we want to take this vaccine. As you know, RSV vaccines have had a very checkered history in the past with very few clinical candidates that have really emerged. So, we are really excited that we are one of the very few companies in the world that currently have a clinical asset in this space.

Then as you think about the commercial utility of a vaccine, and I guess you'll know more once you see the data, is it -- do you contemplate that this will be something useful in preemies that might be getting synergist or more so in more full-term babies and in elderlies?

So this is a very good question, and I think largely going to depend on the data that we will receive from the Phase I trial. So I think it could go in both directions, but at the moment, I will -- all I can tell you is that, firstly, I think it's probably not going to be used for preemies I think because those kids have really poor immune systems and they may not be able to elicit an active immune response. But for very young kids and for the very old folks, which is where there is a significant unmet medical need, I think this vaccine could go in both directions or either one of those directions. That will all depend on how the Phase I data comes out.

Great. Thanks very much and congrats on the progress.

Thank you Bill. I appreciate it.

Vernon Bernardino, Dawson James.

Thanks for taking my questions and congrats again on the progress. Could you provide more details on perhaps details on the BARDA grant performance schedule and your discussions with BARDA? And also if you could provide further details on the economics. I know you've chosen not to disclose, but the economics on the LGLS agreement. Perhaps if you're ready for -- to disclose upfront payment, perhaps timing of milestones, and what are LG's initial responsibilities. I know you already mentioned that they will construct a (inaudible) manufacturing facility, but what should we look for next regarding that agreement? Then also you mentioned the pandemic flu vaccine will -- BARDA [asked] for adding an adjuvant. What is the development status of the adjuvant? Thanks Rahul.

Sure, thanks Vernon. So I'm going to handle the BARDA questions and I'm going to ask Fred to take on the LG question.

So the first question was around schedule, right? So, I think what we submitted to BARDA is -- in the proposal -- is to conduct a Phase II and a Phase III trial for our seasonal vaccine through -- in the base period. Under that schedule for the seasonal vaccine, we expect to file in 2013 and get license in 2014. I think that's the schedule, so for the seasonal vaccine.

For the pandemic vaccine, the schedule is to conduct Phase I and II trials in the base period and then get license in option period, which is after the first three years.

So now one thing you have to understand is that proposal is going to be looked at again as part of our work with BARDA, so in the first 90 days of the contract, we have to fine-tune that proposal and have meetings with BARDA folks. We've already had a kickoff meeting with them, and they will provide some input and we will tweak this development plan. That will be the final plan that we'll be executing against, but what we provided in the proposal is what I just shared with you.

Great. Thanks.

Now, the second question around the use of pandemic or the adjuvant in the pandemic vaccine, here we've got agreement with BARDA that we will test two different adjuvants. One is going to be our own adjuvant, and the other adjuvant is we will be actually getting from a third party. Both of these adjuvants have shown good preclinical work efficacy and they actually show activity in preclinical models.

The third-party adjuvant that we are looking at has also been in the clinic, so that has already shown the adjuvant effect in humans. So I think we will have two very good candidates that have been vetted by the experts within BARDA to really take our pandemic vaccine to a very good end. Either one of those adjuvants I think if we can take it home would be very, very valuable.

Thanks Rahul.

I guess -- Vernon, this is Fred. I'll take the LG question. I think we -- this came up at the conference call when we announced the deal. It's basically -- one of the parts of our agreement with LG under confidentiality was to specifically not disclose the terms of the agreement. I think we're going to -- we obviously have to follow those guidelines, so at this point, there's really not much that we can say. As things unfold possibly down in the future, we possibly could but right now we are bound to confidentiality.

Okay. But no plans then for any disclosure regarding timing of any progress?

With respect -- well, there certainly would be announcements on progress with respect to the what I'd call substantive portions of the agreement, i.e. the construction of the manufacturing facility, etc., things like that, but certainly not on the financial side.

Great. That's what I was looking for. Thanks.

(Operator Instructions). George Zavoico, McNicoll, Lewis & Vlak.

Thank you. Rahul, Fred, congratulations. The first question is about the Phase II dose ranging trial that you're planning to start this year. You've already done some dose ranging trials. So could you go into a little more detail as to why -- is this going to be a repeat, some modification to the trial? What's the rationale behind the Phase II dose range?

Sure. No, I think that's a great question. So you, absolutely, we have done essentially three Phase II trials already with our seasonal vaccine. The whole point of doing this dose confirmation trial is to bridge the new manufacturing process, which is a fully scaled-up commercial manufacturing process, with our -- the previous materials or the previous result that we have received from our previous or the more earlier-stage manufacturing process. So we want to make sure that, before we enter into pivotal studies, that we have tested material produced with our final commercial process. We're doing that in a dose range regime to make sure that we define the dose based on this final process.

Are you ready to disclose what the doses -- what doses you're planning on doing? Is it 15 (multiple speakers)?

So, we will do that at the right time but I think, at the moment, we are still in negotiations with BARDA on the actual trial.

Okay, and so the different manufacturing, the previous batch was with [a wave], and this is going to be with the large (multiple speakers)?

1000 liter tanks, and then it has some modifications that we made in the downstream manufacturing as well, all for improving yields and better quality product.

Okay. So it's almost like a new product altogether.

Not necessarily a new product. I think it's -- we've done a tremendous amount of characterization of the product in terms of the VLP itself and what's in the VLP, what it looks like and everything. We've, of course, done some preclinical work already on material produced in this. So it's not like a new product, but it is a product that is produced at this larger scale, and it provides us the opportunity to increase yields because we can control the bioprocess much better in the reactor, we can get a higher-yielding process in the upstream, and then we put some downstream steps in place to clean up the product more so that we have a better quality product. This locks down our manufacturing process so that we can now be confident in taking this process to the end of Phase II meeting and get FDA to agree to pivotal plans for the Phase III clinical trials.

Now, are you going to go into Phase II, like you said. You're going to go with the current WHO recommendations for the three strains. (multiple speakers)

(multiple speakers) they are same from last year.

Same as last year? Okay. With a successful trial, hopefully it will be a successful trial, when you go into Phase III, if the WHO changes the strains, are you going to do with the new strains for the Phase III?

Yes.

Okay. You mentioned, in the BARDA agreement, the first three years is going to be the development of manufacturing facility plant for the three years.

Plans, not plant. Plans.

Plans.

Yes, not actual facility itself.

Okay, so the construction validation then would probably be an option period in the two years following then?

Actually, this particular contract doesn't pay for the bricks and mortar and the actual construction of a new facility. That funding is likely going to come from a separate solicitation.

A separate solicitation to the government?

We hope to get it from the government, yes.

This is Fred. Just to add on to that, so in the base period, the contract calls for us to work with BARDA to develop a firm plan, architectural drawing, things along this line, as to what a facility would look like to produce the 50 million doses that Rahul mentioned earlier in his prepared remarks. But it is simply that. As Rahul said, it would not include the construction of a new facility. It's simply the costs to go out and do all of the significant work around putting a plan together for our facility.

Does it also include finding a location?

Well, I think that's -- that may come up in the negotiations with BARDA. BARDA may have its own ideas in terms of what they want to do with this plan. So, I think there's going to be a lot of back and forth with BARDA on the eventual design and also location of this facility.

Finally one last question (inaudible) about Phase II. What do you have to do before the trial actually commences?

We have to make the material.

Okay. Everything else --

And of course get agreement with BARDA on the design of the study.

Okay, so the protocol design is still going to be negotiated with BARDA. All that -- so in terms of starting the trial, probably the earliest end of 2Q or 3Q, or what's more likely?

I think at the end of 2Q, early 3Q is what we are thinking.

Good. All right, congratulations again.

Thank you George, appreciate your interest.

Bill Tanner, Lazard Capital Markets.

I just had a follow-up, and I apologize if you've addressed it, Rahul. Just as it relates to -- how do you view the feasibility of -- or the challenges of 50 million doses, providing that in six months, or is that something that really is not of concern, given the manufacturing process?

No, it is one of the reasons why BARDA has invested so much money in this technology is because I think it is a huge challenge, but I think -- and it's not straightforward. I got to tell you this. But I think with the yields we are getting, the scalability of our process, I think we are within the realm of reasonableness to be able to produce this product. Remember the asking was to make finished product. So you have to make the bulk and then you have to fill it and then test it. So, it's a great challenge, but I think this technology has the potential. We've done enough work to have enough data to have a credible approach to actually accomplish that challenge.

Then what would be the alternative technologies? Clearly, time is of the essence, I would suspect, as it relates to pandemic vaccines, so clearly your (inaudible) VLP technologies appears to be pretty rapid. What would the alternative technologies be that might also --?

I think, as you probably heard, that BARDA has invested in other recombinant approaches as well, so they are taking a portfolio approach to this. They're spreading the risk by putting some stake in us and some other technologies. Eventually, I think they will have one or more of these technologies to support what they want to eventually get.

Okay, thank you.

This concludes the Q&A portion of today's call. I would like to turn the call over to management for any closing remarks.

Thanks again. I want to close by saying that we have come a long way in the past several months in fulfilling our quest to becoming a premier vaccine company that is able to solve major public health problems. Now, we are well positioned to move the Company to the next level.

I want to thank you all for your patience for all these years and your time and attention this morning. I appreciate your interest in our progress. We look forward to providing you updates on our programs in future calls. Thanks again and have a great day.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Have a wonderful day.