Novavax Inc (NVAX) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Novavax fourth-quarter and year-end 2012 earnings conference call. At this time all participants are in a listen-only mode. Later we will have a question-and-answer session, and instructions will follow at that time.

(Operator Instructions)

As a reminder today's conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. John Herrmann. Sir, you may begin.

Thank you. Good morning everyone. This is John Hermann, Vice President and General Counsel of Novavax, and thank you for joining us on today's fourth quarter and year 2012 financial results conference call. Both the earnings release from this morning, and an archive of this earnings call, are available at the Company's website, which is www.novavax.com. On today's call are Novavax President and Chief Executive Officer, Stan Erck; our Chief Financial Officer, Fred Driscoll; Dr. Greg Glenn, our Chief Medical Office; and Dr. Lou Fries, Vice President of Vaccine Development.

Before we begin our prepared remarks, I need to remind you that we will be making forward looking statements during this teleconference, and that those statements could include financial, clinical, or commercial projections. Statements relating to future financial or business performance, conditions or strategies and other financial business matters, including expectations regarding revenue, operating expense, cash usage, as well as clinical developments and anticipated milestones, are all forward looking statements within the meaning of the Private Securities Litigation Reform Act. We caution that these forward looking statements are subject to numerous assumptions, risks and uncertainties which change over time.

Further information on the risk factors that could affect Novavax's business, financial condition, and results of operations are contained in Novavax's filings with the SEC, 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 such statements. With that over, I will now turn the call over to Stan.

Thanks, John, and good morning everyone. Thanks for joining us this morning. As usual, I will first discuss our recent accomplishments and expectations for 2013, then I will turn the call over to Fred to summarize the quarterly, and year end financial results. And after that we will take questions. Over the last year, Novavax has made significant progress across our entire business. We have generated positive clinical data for our key programs. We have entered into important partnerships, and strengthened the balance sheet, [considering] our cash flow [way into] 2015. (technical difficulty) Building on this success we have significant momentum heading into 2013. And we are in the strongest position ever, to realize the clinical and commercial potential of our pipeline programs, and vaccine technology platforms.

Turning to specific programs, I'll start with our RSV program. We have two clinical trials underway now. We expect to report top-line clinical data in April for our Phase II dose-ranging study in women of childbearing age. We made significant progress in this program during 2012. In the past year, we have presented clinical and pre-clinical data at several meetings, including the 8th Annual International Respiratory Virus Symposium, and the International Society For Respiratory Vaccines. Importantly, we were able to show that the levels of neutralizing antibodies, which is the benchmark of a vaccine's immunogenicity, were up to eight-fold higher with our vaccine candidate than those levels identified as being protected.

We also demonstrated that the immune response to the RSV-F vaccine targeted the clinically validated palivizumab binding site. These palivizumab antibody levels, induced by our vaccine, appear to be well in excess of the levels of those shown to prevent hospitalization in high-risk premature infants. As a reminder, palivizumab is a monoclonal antibody marketed by MedImmune as Synagis, which is effective in the prevention of RSV. The demonstration of this combination of immune measures is the first for a clinical stage RSV vaccine, and provides a strong rationale for moving forward into more advanced clinical trials.

In July, we entered into a research collaboration with PATH, an international, non-profit organization whose goal is to transform global health through sponsorship of innovative technologies. PATH is committed to the development of an RSV vaccine, which will be given to the mother to protect the very vulnerable infants from RSV during the first few months of life, an approach better known maternal immunization. Maternal immunization is standard in health care, in current health care practice, to protect both mother and/or infant from influenza, pertussis, and tetanus. Our collaboration with PATH provided approximately $2 million of non dilutive initial funding to support our Phase II dose-ranging clinical trial of women of childbearing age. The study was initiated in early October, and was fully enrolled in less than two weeks.

The trial is a randomized, blinded, placebo-controlled Phase II clinical trial, designed to evaluate the safety and immunogenicity of two dose levels of our RSV vaccine candidate, with and without aluminum phosphate as an adjuvant. The study enrolled 330 non-pregnant women of childbearing age, who received either one or two intramuscular injections at each dose level of vaccine, or placebo, at day zero and 28.

Safety and immunogenicity will be evaluated over a six-month period. From the study, we expect to determine the appropriate dose to be used in our vaccine. We anticipate reporting the results from the trial, through day 56 observations, in April. Although PATH's initial funding was just for this trial, our expectation is that PATH will continue to support the ongoing development of our RSV vaccine candidate for maternal immunization. As part of our agreement, PATH can elect to continue to collaborate on additional phases to develop the vaccine for maternal immunization, potentially funding 50% of Novavax's external clinical development costs through to licensure.

We also initiated a Phase I dose-ranging clinical trial of our RSV vaccine in elderly patients, and this study is also fully enrolled as well. This trial is a randomized, blinded, placebo-controlled study that will evaluate the immunogenicity and safety of two dose levels of our RSV candidate, with and without aluminum phosphate as an adjuvant. The study enrolled 220 adults, 60 years of age or older, who will receive a single intramuscular injection of our RSV vaccine, or a placebo, plus a single dose of a licensed influenza vaccine or placebo at days 0 and 28. Safety and immunogenicity will be evaluated for up to one year, and we expect to report top-line results of the study next quarter, the second quarter of 2013.

We would also like to highlight two recent peer-reviewed publications. First, in December, data from our Phase I clinical trial were published in the journal Vaccine. This publication had a more in-depth look at the data we presented, in September, at the RSV 2012 meeting I mentioned previously. Also the journal PLOS ONE recently published data from three clinical studies, which indicated that immunization with the Novavax RSV-F nanoparticle vaccine produced high levels of specific palivizumab, and neutralizing antibodies, that provided protection from this [challenge model]. As you can probably tell, there is tremendous excitement, both internally and externally, around our RSV program. We believe that we're ahead of all the companies in the development of a vaccine that will address this major unmet medical need.

Moving now to our pandemic influenza program. The highlight of the fourth quarter was the positive top-line results from two Phase I clinical trials conducted under our contract with BARDA. These two trials were identical, other than using two different adjuvants. A total of 666 healthy adults, 18 to 49 years, were enrolled in the two trials. So, these studies provided statistically significant data [recounts]. Although these were Phase I trials, it's important to note that they were large Phase I trials, which improves our confidence about the results. We were able to demonstrate a number of characteristics about our pandemic influenza vaccine candidate that we believe to be very important.

First, we met our primary objectives, which were to demonstrate that all vaccine-adjuvant combinations, and non-adjuvanted vaccine had a suitable safety profile, and generated robust immune responses. Important that the unadjuvanted vaccine at 45-micrograms per dose, induced immune responses that exceeded the FDA criteria for approval after two doses. An unprecedented result, compared to the unadjuvanted H5N1 vaccines.

In addition, the administration of the adjuvanted VLP vaccine formulations resulted in high antibody responses, and significant antigen dose [parity], down even to the lowest dose of 3.75-micrograms, at which over 90% of the subjects developed immune responses considered likely to be protective. We also saw activity which suggested our vaccine may be protective even when the vaccine strain did not perfectly match the pandemic virus, which is an important consideration in the emergent response to a pandemic.

So, in summary, with these trials we have demonstrated we can produce antigens from candidate pandemic influenza strains that are at least as, or more, immunogenic as any described in the medical literature to date. We believe the results are sufficiently positive to allow us to advance our pandemic influenza vaccine program to later stage clinical testing, and are working with BARDA on developing that clinical pathway forward.

So, moving from our pandemic to our seasonal vaccine program. In July, we announced positive top-line results from the Phase II dose-ranging clinical trial of our quadrivalent vaccine. We reviewed these results in detail on our last call, so I'll just remind you that our quadrivalent vaccine met the FDA's zero protection requirements for all four viral strains, with zero conversion levels for three out of the four strains, with a good safety profile. Prior to entering into late stage clinical trials, we are taking the time to optimize our upstream and downstream manufacturing processes and optimize our portfolio of analytically assets.

We are going to continue to work with BARDA to define our clinical pathway for licensure and begin GMP manufacturing of our quadrivalent vaccine, with the expectation that we will return to the clinic once we improved the B strain immunogenicity. Importantly, BARDA recently completed an in-process review, or IPR, of Novavax's contract, covering our seasonal and pandemic programs which, as you know, is a $179 million contract. A team of US government experts, including representatives from BARDA, the FDA, NIH and CDC reviewed the program. Based on the results of the IPR, a milestone decision has been made to continue the contract for both the seasonal and pandemic influenza programs. This was an expected decision, but it's always nice to have the positive feedback on the progress we have made to date.

Now looking forward into 2013, we expect to achieve several key milestones. First, as I discussed previously, we will announce top-line results for our ongoing Phase II trial of our RSV vaccine in women of childbearing age in April. This will be followed by top-line results of the vaccine in the Phase I study in the elderly, later in the second quarter. Data from these two clinical trials will determine the future path of both of these programs.

As a result of the January 2013 IPR with BARDA, we will advance our clinical -- our research activities, and move our seasonal influenza and pandemic vaccine candidates into later stage clinical trials. The timing of these trials will be based on the data generated over the next couple of months. These data will help us define the timing and pathway that our final candidates will take towards licensure. We expect to report on these results, and timeline, at mid year.

I am pleased to report that CPLB, our joint venture partner in India, is expected to initiate a clinical trial for a recombinant nanoparticle rabies vaccine candidate in India. The vaccine candidate has passed toxicology parameters, and we are now waiting final regulatory approval before trial initiation. Rabies is a huge problem in India, China, and other countries where it is not common practice to vaccinate pets. Our hope and expectation is that our recombinant vaccine candidate may have significant benefit over current treatments. Beyond that, we expect to continue our research collaboration with CPLB in India, LG Life Sciences in Korea, and we expect to complete our expansion into manufacturing and office facilities in Gaithersburg, Maryland.

So before I turn the call over to Fred, let me leave you with the following key takeaway points. First, we believe our RSV vaccine candidate is in the lead clinical development position in the industry today. And with the clinical data to be soon released, we plan to maintain that lead throughout 2013. Second, we are confident that we will complete our manufacturing authorization, and improve the B strain immunogenicity for seasonal influenza candidate by mid year, and be prepared to advance it into later stage clinical trials.

And finally, and most importantly, we believe we have made dramatic advances in the development of our team. Over the last two years, we have assembled a highly proficient, scientific, medical and operational team. It's hard to overstate the importance of our new human infrastructure. We are now poised to advance and broaden our product pipeline, and thereby enhance shareholder value. With that, I'll turn the call over to Fred to review the fourth-quarter and year-end 2012 financial results.

Thank you, Stan. For the fourth quarter of 2012, we reported a net loss of $8 million or $0.06 per share, compared to a net loss of $3.7 million, or $0.03 per share, for the fourth quarter of 2011. For the full-year 2012, we reported a net loss of $28.5 million, or $0.22 per share, compared to a net loss of $19.4 million, or $0.17 per share, in 2011. The primary reason for the increased net loss in full-year 2012 was primarily a result of higher R&D spending, increased costs relating to our RSV clinical trials, higher related employee costs, and expenses associated with our new manufacturing facility. Revenue in the fourth quarter of 2012 was $4.6 million, compared to $5.8 million in the fourth quarter of 2011. And for the full year, revenue increased by 50% to $22.1 million primarily as a result of the BARDA contract.

Fourth quarter operating expenses were $14.1 million as compared to $10.1 million in the fourth quarter of 2011. For the full-year 2012, operating expenses increased to $51.7 million, compared to $36.3 million in 2011. The increase in operating expenses, for the full year, was primarily due to increased costs related to our BARDA-related clinical trial costs, our two RSV clinical trials that Stan mentioned earlier, hiring-related employee costs, and expenses associated with our new manufacturing facility as we previously mentioned.

As of December 31, 2012, the Company had $50.3 million in cash, cash equivalents, and investments, compared to $18.3 million as of December 31, 2011. The increase in our cash position in 2012 primarily resulted from the successful completion of two equity offerings, and the use of our ATM during the year, which generated approximately $54 million in net proceeds. With the BARDA contract in place for the full year in 2012, as well as the non-diluted funds we received from PATH, and the tenant improvement allowance on our new facility, we were able to continue our efficient use of cash.

To highlight that point, cash used in operating activities, a key financial metric that we closely monitor, dropped from $23.6 million in 2011 to $18.2 million in 2012, or a 23% reduction. Overall, from a liquidity perspective, we have entered into fiscal [2000] in the strongest financial position ever, with the available resources to move our programs forward into 2015. That concludes our prepared remarks, and operator, we will now open the call for questions.

(Operator Instructions)

Kevin Degeeter from Ladenburg.

Good morning, guys. Congratulations on the progress. A couple of things here. Could you try to characterize for us some of the parameters that you would evaluate when determining whether or not the Phase II RSV data is sufficient to move forward with a single dose in the Phase II B? Dosing immunogenicity -- just can you put some numbers on how we should frame expectations as we look for those two studies to read out?

Hi, Kevin. This is Greg Glenn, Chief Medical Officer. How are you?

Hi, Greg.

So, as you know, in December we published our Phase I results in vaccine. And I think they provided a very good benchmark for our target, in terms of immunogenicity. And in those measures, we took, I think, two important derivatives from the sera that would be considered important for protection. One was to neutralize the antibody, and secondly, was the palivizumab-like activity. So, in those studies, I think we defined a rate, a level of immunity that would be sufficient for going forward with the maternal immunization program.

And so, the current trial -- as you may know, we have taken the dose that gave us a very good response, 60 micrograms with alum and without alum, and into this trial. And then we also did a one- and two-dose regimen, and we also increased the amount of antigen in the regimen. Our expectations are that we will reproduce the data, and review these different aspects, that is one- or two-dose immunization, increasing the dose, alum no dose, to see where we stand with reference to that data.

So, that will be, I think, in terms of our reference point, judging what we take forward in terms of these different questions we've asked in this trial. We think that immunogenicity we showed in Phase I was very good, and we're really expecting to reproduce that, and possibly improve on that.

And as a related follow-on, can you give us an update on your thinking with regard to business developing, and potential partnering with regard to RSV? Do you envision potentially looking for, at least, a regional partner prior to a II-B study, or just an update on your thinking there would be helpful.

Yes. This is Stan. And so, as we have been for the last year, we take inbound inquiries from companies interested in the program. And as you suggest, we've taken [both]. We are -- well, let's back up a second. All companies interested in vaccines have an interest in an RSV vaccine. Either they have an internal program or they are looking to license something [in]. They've all come to talk to us. I think that it's fair to say that we've talked to the global partners, and we've talked to regional partners.

We will make the decision to partner when we find the right deal, and the right partner. We are not expecting to partner until we have the right opportunity. We're prepared to take the program through to -- perhaps to licensure, but at least through proof-of-concept trials next year. And we think that that allows us to control our own timelines, and manage the program most efficiently. We raised money last year so that we could keep control of this project. And that's the game plan right now.

Terrific. And maybe just one housekeeping question here on the quarterly financials for Fred. Fred, gross margin in the quarter looked pretty good. Were there any one-time catch-up items from BARDA in terms of payment for work done in earlier periods? And how should we think about the relative flow-through, some of the catch-up? Specifically I am thinking of at least some of the Phase II expenses for which the Company was not immediately reimbursed for.

Okay. Yes. Good morning, Kevin. Yes, so, as I think we've reported in our public documents, as everyone knows, that our S205 trial, the Company has borne the costs of that trial. And once we move back into the clinic with our quadrivalent, with a quadrivalent IND, then BARDA will relinquish the funds that we spent in that trial. So, that is still outstanding; that has not happened.

And again, the expectation, and I think what you should be thinking about there is, is that those monies would come back into the revenue line once the IND has been filed. And as Stan mentioned earlier, we expect to have results on the pre-clinical work we're doing mid-year, and then we will make a call from there. So, I think that's the best guidance I can give you on that.

Great, thanks so much. I will get back in the queue.

Greg Wade from Wedbush.

Good morning, and thanks for taking my questions this morning. Greg, with respect to the pandemic flu program, you guys haven't disclosed the adjuvants that are being explored here. But there's been some recent reports on squalene and narcolepsy. And I was wondering if you could confirm for us that you are not using squalene in that program?

And also, along that line, with respect to two versus one injection. Obviously, the government is concerned about people returning for their second injection, and would prefer a single administration schedule. Is there any chance you could give both injections at the same time, on opposite arms, in order to potentially elicit the protective immunity that you are seeking.

And then I'll just ask my next question after that.

Greg, I'm going to pass this on to Dr. Fries, who is the expert in flu in our Company.

Yes, good morning. Let me first start with the adjuvant question. I'm not prepared to discuss the adjuvants that we've evaluated yet. The business discussions are still ongoing. And so, I'm not really at liberty to discuss the contents of the adjuvants at this time.

The narcolepsy question that you referred to is an exceedingly complex one, which has undergone a lot of investigation to this date. And I would only note that there are layers and layers of potential causal effects involved in that investigation, which the implicated vaccine is only one. So, I would caution you about leaping to any conclusions about squalene one way or the other.

Now, as regards one dose versus two, there have been trials in which double doses of influenza, of pandemic influenza vaccines, not ours, but other sponsors, have been given together. And while you can have some improvement of the immune response by doing that, you have to realize that the reason pandemic influenza is a problem is that humans are profoundly naive to the Avian virus antigens. And so, humans are really unprimed. And giving almost any amount of drug at the first dose won't reverse that.

It is possible to give time-compressed regimens down to about 10 or 14 days. But at time intervals below that, they are just not effective, no matter -- well, they are effective, but no more effective than one standard dose, no matter how much antigen and adjuvant you give.

Great, thanks.

It's been the experience of most pandemic programs, including ours, that to get a really robust response, you need two doses. You do get some response after one dose. And in many of our treatment groups we certainly clear the seroconversion criteria, and we're closing in on the seroprotection criteria after one dose. But to fully satisfy the criteria that the FDA has articulated, most vaccines are going to -- well, all vaccines that I'm aware of -- are going to continue to need two doses.

Great. Thanks. And just a follow-up question. Fred, can you just remind us what your cash burn guidance is for 2013? Thanks.

Greg, we've, as a policy of the Company, have not provided guidance -- future guidance on burn rates. What I would say is, what you will see disclosed in our filings, and what we've said on this call, is that there will be a substantial increase in our research and development costs, year over year, in 2013. And that's, again, to support primarily the RSV programs we have moving forward. So, I think that's the best guidance I could give you as far as the cash burn rate for next year.

Maybe you can help us back into it, and just let us know what you expect cash revenues and cash expenses to be would be then?

I am sorry?

I am kidding. Thanks for taking my question. (laughter)

Okay. Thanks, Greg.

Ted Tenthoff from Piper Jaffray.

My thanks, too, for a thorough update. Good progress you guys are making. And again, my thanks, too, and good progress. My question has to do a little bit more on the BARDA funds that have been held up as we're waiting IND filing. Is there any way you can share with us what this -- and I'm going to use the term, at risk, although I kind of use that lightly. But what is the receivable to BARDA right now regarding the quad program?

Yes, Ted, this is Fred. So, first let me say, the Company does not view the repayment of those costs as a risk. BARDA has clearly indicated to us that upon the filing of the IND quadrivalent for the dose confirmatory trial, that those funds will be released. And I should add, the relationship with BARDA is very, very good.

So, we don't view this as a risk at all. And neither have we booked any form of a reserve on the books for it. We would expect that that number is around $3 million; that's what we publicly disclosed in our documents once -- again, once we start the quadrivalent trial.

So, I am trying to get a better sense, because as I try to model this, I know that the first phase of the BARDA contract is worth $97 million or so. And that probably, to date, and again, I mean, I'm trying to pull this together. But you probably maybe received, I don't know, like maybe $30 million, probably not even that much. So, how should we be thinking about these dollars? It sounds like it's not going to be that much different in the first half of 2013.

So, is this going to be very back-end loaded in 2014, or the first half of 2014? Because my understanding is that the three-year timeframe is up in the middle of 2014. So, we're really down to about 18 months and probably $50 million-some to receive. So, how should we be thinking of that, especially if the first half of this year is probably going to be still relatively modest in terms of monies received from the contract?

Yes. So, you're right. The amount of revenue that we have booked is in between $30 million and $40 million in revenue since the inception of the contract award. What I would say is -- you're also correct -- is that until we have identified and moved forward with the optimization of the B lineage, and then moved back to the clinic, the spending is clearly going to be -- is going to be back loaded. And clearly, the real big funding starts when we launch the Phase III. So, you are correct in that.

Okay. That's really helpful. And I do appreciate you clarifying the Company's view that this really isn't at risk, that it is not at-risk funding. I appreciate that clarification as well. Thanks, guys.

Yes, you're welcome.

George Zavoico from MLV.

Hi, everyone, good morning. Thanks for the call and the notes, good quarter. First question to Fred. You mentioned that your operating expenses have gone up since '12 -- from '11 to '12. And your net cash use, however, has gone down a lot. That's sort of opposite of what one would expect. Is that because of the one-quarter payment in arrears for the BARDA, or is there any other reason for that?

I think, one of the things you have to note is we also have received a substantial amount of cash from -- of course, from the BARDA contract. But secondly -- that offsets those expenses. But secondly is we have a tenant improvement allowance on many of the improvements that we're making on our new facilities, have also, from a non-dilutive perspective, have improved the cash flow.

I also would add to that -- we've, as Stan mentioned earlier, we have been funded almost $2 million from PATH, for the Phase II clinical trial in the women in childbearing age. Again, non-dilutive funding. That also has offset the cash situation. So, that's really what's driven it, George.

Okay. What's the magnitude of the tenant improvement allowance? And is that coming from state of Maryland?

No. It's about $4 million, and it is actually part of the deal we negotiated here on the lease of the new facility. Those costs are being borne by the landlord. And the cost of the lease doesn't really start until April of 2014. So, net-net, it is actually a cash benefit to the Company.

That's a great lease.

It was a great negotiation.

Yes. (laughter) So, as Ted was speaking, the first part of the BARDA allowance, the first three years is up next year. So, this IPR that just happened is not part of the first -- it's sort of an interim look. When you get to the same point next year, is there going to be another similar sort of analysis --

No --

-- on your progress?

So, no, that's a really good question. The IPR was actually in the actual contract award, which is in the public domain, and it stipulated at 18 months, that the government -- and I should note that this was a panel -- a very large meeting that was held with our scientific experts from the CDC, from the NIH, from the FDA, and from BARDA. So, it was a full panel that reviewed our program. It was an 18-month. And, in essence, George, it's a go/no-go decision based upon the progress the Company has made. And we were very pleased to get the go. But there will not be a second one. It was a one-time event that, again, was in the contract.

So, you'll go seamlessly from the first three-year period into the second two-year period then next year, presumably?

No, George. This is Stan. How are you?

Hi, Stan.

What the [adgar] does is, it's a [mid] period for the first three years. It takes us through that three-year period. And that three-year period is probably going to be extended by some point in time -- some months to eat up the full $97 million. And then after the end of that $97 million period, after the end of a Phase II, end of Phase II meeting with the FDA as we look at Phase III, that will then kick in the decision to go into the option period. So, there is another decision to make, based upon going into the option period. But the only decisions on going forward now, for the base period, are the decisions of what we and BARDA see [or envision] the project going forward, what the FDA says about moving into later-stage phase trials.

Oh, okay. So, in other words, the base period is not time limited. It's limited by the $97 million. You got to spend that, and then you move into the option period. And the base period could then be 3 years or 4 years or 4.5 years, whatever it takes to get to that Phase III?

Yes. And so-and-so details, that's basically right.

Oh, okay. That's good. So, you have a little bit more runway with that $97 million, then, I guess. Whatever time you need, you have it.

Yes.

And in that regard, I guess this is a question for Lou. I mean, last quarter you said there were a lot of things you were going to be doing to try and improve and optimize the B strain. In this call, it sounds like everything is pretty much on track, and until you have the data -- I think we have to wait until you get the data before we get an update then. Is that fair to say?

Yes, I think that's fair to say. We have done a lot of preliminary analytical work, and we focused on three or four potential hypotheses, and things that we can do to either manipulate the genetic construct for the B strains, in fact, for all strains. Any change we would make, we would homogenize across all strains, so that there would be one regulatory package supporting all the strains. But changes that could involve how we manipulate the genetic construct; changes that might involve the exact timing and concentration of reagents we use to inactivate baculovirus; changes that might involve different excipients or different formulations. And potential changes in the process that might free up excess lipids that would block some of the antigens.

So, we focused on those areas because we have preliminary data pointing us in some of those directions. And now we're just completing those experiments til we have a definitive answer that suggests we should go forward with one, or more, of those. And we don't rule out the possibility that we could use several of them. But we will determine that they benefit us with the B strain, and we will determine also that they are not deleterious to any of the other strains, so that we have a uniform process.

I don't recall whether the CDC changed any of the strains this past month. And if so, do you have to make those adjustments as well going forward?

Well, the US recommendations, in point of fact, aren't published yet. The WHO recommendations are -- and I suspect the US recommendations will be closely similar. One of the B strains will carry over from the past. There is a new B strain that has been recommended for the Yamagata lineage, and we will be working on the master virus seed for that.

There has been an adjustment in the H3N2 strain. But one of the very nice things about our system is that we can pick and choose whether we use cell-derived virus, or whether we use egg-derived virus sequences to produce our antigens. And so, we're comparing the sequences for the new H3N2 antigen that has been recommended by WHO, and will probably be recommended by CBER, with the materials we already have, and it may well be that we do not need to change. But if we do, we will pursue making a master virus seed for that one as well.

I see. Okay, great, thank you very much. Looking forward to the results of the RSV trials in the next quarter.

Thank you, George.

Vernon Bernardino from Brinson Patrick.

Hi, thanks for taking my question, and congrats on the progress. Look forward to further progress this year. Just a few housekeeping questions. Looks like, if not for the higher than anticipated R&D expenses, the Q would have come in line. Can you comment on whether it was RSV or manufacturing that was a driver? And if it was manufacturing, can you comment on what the drivers of those costs were, and what else needs to be done with the new facility?

Hi, Vernon. This is Fred. No, it was clearly clinical trial-related costs, specifically with RSV, that drove that increase.

Okay. Okay, great. And so, then, I know your practice is not to comment on burn going forward. But lastly, if then it was driven by RSV, and you had already mentioned that clinical trial costs would increase in 2013, what kind of a run rate do you think we could anticipate for R&D expense going forward?

That sounds like you're asking me for a projection, Vernon, (laughter) and we are not going to give guidance. As I said, we do expect a significant increase year over year in our R&D. But we are going to be -- moving forward, as you've heard today, we still have the two ongoing trials that moved from the fourth quarter of 2012 into 2013. So, those costs are still coming in. But that's really as far as I want to go.

Okay. Just to narrow the focus though, then, most of the new facility costs are passed?

Well, the facility costs will really be flat year over year. As I said, we really don't -- from a cash perspective, we don't really start to bear those costs til 2014. But rent and facility costs, which we have to, actually, on an accounting basis, are straight-lined over the term of the lease. There will be no change, year over year, in that.

Okay. And this is actually going back to a comment, I believe, if I remember correctly, that Stan had made, but perhaps Lou could also comment. If I recall correctly from previous calls, there were a few things that still needed to be ironed out regarding the RSV vaccine. Sort of a go slow R&D approach, going at your own pace, because you have some financial flexibility. And the reason is because you want to advance the best candidate and generate the best data possible. Are there any update on those efforts as far as the RSV program? For example, any work need to be done, as far as discussions with the FDA on use of the pali as an assay for RSV going forward?

This is Stan, Vernon. Let me put some color on this because it's important. So, 2012 we conducted -- we initiated five clinical trials. We have a lot of data. We are getting more data in the next quarter; we are a data-driven company. We take that data, and then we sat down -- I think we reported this probably six months ago. We decided that we would look at all the approaches that we could do to optimize our process -- our manufacturing process, that would give us a product that we could use, take in late-stage clinical trials, and through to commercialization. This is both for RSV and for our flu programs.

And it's a great place to be, because we identified a matrix of dozens of different experiments that we would attempt to conduct over the following six to nine months. We are six months into it. I think we have taken those dozens of potential pathways of optimization, narrowed them down to the final, probably, two or three approaches that we think have the most potential, and we're getting data from those experiments over the coming couple months.

And at that time, we will be in a position, both with the data from the two RSV clinical trials, the data from nine months worth of work of optimizing our process both for flu and for RSV, so we can have the later-stage manufacturing process. And that will allow us to design, plan, execute on clinical manufacture, clinical trials, and then ultimately going back into the clinic on both programs. That's where we are. It's a good place to be.

Okay. Can you comment or provide any color on discussions with FDA regarding palivizumab as part of the assay for RSV?

This is an exploratory assay at this point, and they are not going to be commenting specifically on this. We see it as an important potential pathway for healthiness. Understand that the vaccine could work, because it's related to a licensed product of the same kind of activity. But in terms of CBER, et cetera, we expect in the long run to do an efficacy trial. And this is an assay that allows us to think about how to de-risk the final efficacy trial. Unlike flu, this won't be an immune correlate in advance of doing an efficacy trial. But it does indicate, very strongly, is the vaccine is likely to work. And so, it gives us guidance on designing the trial, designing the program, making sure we preserve that activity, and know how to measure it.

Great. Thanks, Greg, Stan, and Fred. Look forward to the data coming up soon.

Thank you, Vernon.

Ted Tenthoff from Piper Jaffray.

Can you guys hear me okay?

Yes.

Excellent. I just, since the K hasn't been filed yet, I just wanted to ask, where were year-end shares or where are current shares?

Yes, Ted. Total shares outstanding will be about 148 million. Fully diluted, about 160 million.

Okay. 148 million and 160 million. Excellent, thank you very much.

George Zavoico from MLV.

Thanks. Fred or Stan, one quick question that occurred to me. It's March 1, and the sequester begins, and you do have government funding. Is there going to be any adjustments from BARDA with regard to that, do you know? Or do you know yet?

Yes, George, that's another good question you've asked today. We had a recent BARDA quarterly site visit. As you know, we do that once a quarter. It's an in-person meeting, and they were here. And I actually asked that question. And they said that, because of the monies to this contract are basically committed, that they are not expecting any kind of a problem with sequestration. So, we did ask that question, and their answer was no major effect.

That's great. That's great news. Thanks, Fred, thanks, Stan. Thanks, everyone.

(Operator Instructions)

Okay, I would like to turn the conference back to Mr. Stan Erck for closing remarks.

Okay, thanks a lot. Thanks, Fred. So, let me take the opportunity -- for those who are interested, we will be at the Roth Capital Partners 25th annual Growth Stock Conference, March 19. We thank you for your time and attention this morning, and look forward to the next call.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may all disconnect at this time.