Valneva SE (VALN) 2010 Q2 法說會逐字稿

Good morning, good afternoon ladies and gentlemen and welcome to the Intercell conference call. At this time, all participants are in listen-only mode, until we conduct the question and answer session, and instructions will follow at that time. (Operator Instructions). And just to remind you, that this conference is being recorded.

I would now like to hand over to the chairperson, Mr. Gerd Zettlmeissl, the Chief Executive Officer. Please begin your meeting, sir, and I will be standing by. Thank you.

Hello, everybody. It's Gerd Zettlmeissl speaking, from Intercell. Welcome to the quarter two call of Intercell. Good morning to those joining from the United States; good afternoon for those joining from Europe.

I'm here with my management Board colleagues, Thomas Lingelbach, our Chief Operating Officer; and Reinhard Kandera, our Chief Financial Officer. The agenda of the call, you will see on page three of your pre-reads, is that I will start with some introduction and highlights. Reinhard will continue with the financial performance of the quarter, and of the half year. Thomas will continue then to specifically announce Japanese Encephalitis, plus the advanced pipeline product. And last, but not least, I will give you a short outlook on next steps and timeline.

If you just would move, please, to page four. And I'm very happy to report to you that we got record sales for our Japanese Encephalitis product in the second quarter, for the best quarter since product launch. The increase in sales was significantly driven by the travel market. And this means that also the activities by our partners in this segment of the market showing more and more benefits.

We hope that and we expect that growth will continue in 2010, and especially driven by new vaccine recommendations, and increasing marketing and sales efforts.

With the military sales, and Thomas will also come back to that, we certainly will depend in 2010 on the use or not use of product stocks of JE-Vax by the military in the United States.

And we are doing a couple of activities, as you know, in extending the label for traveling children, progressing according to plan; and also, with the start of a Phase III trial in children in endemic countries, so extending the product, with our partner, Biological E, into Asia endemic areas.

If you please move to page five. A few words on our GSK pandemic H5N1 program, with a vaccine enhancement patch. As announced already before, we are planning two further clinical trials with the vaccine enhancement patch, now using the GSK H5N1 bird flu vaccine. And we are currently in the planning stage for the next trial, together with our partner GSK and our partner, the HSS, in the United States.

When it comes to the other clinical programs, as you know, we expect key data in a couple of important programs still in 2010. And we are very happy to announce today, that we have been able to complete recruitment for our Phase III study for travelers in the diarrhea field, with a vaccine patch. We expect data by late 2010/beginning 2011.

The same is true for the Phase II study we are currently doing in India, just to have another territory. We can show efficacy -- or pilot efficacy of the vaccine. Here, we expect data by Q4 2010.

In the Pseudomonas program, we're also progressing very well. This is, as you know, not an easy study to be conducted because we are vaccinating intensive care unit patients, who are intubated. Here, we expect data, depending on data analysis, process and how fast we can do that by the end of Q3/beginning of Q4 of this year.

No news on Staphylococcus Aureus vaccine. We had announced already last time, that the interim analysis, surpassing futility will move into 2011.

And we have announced, also in this quarter, the data on the Pneumococcus vaccine, where we are currently, with our partner, PATH, evaluating design and timelines for the next clinical trials, which now will take place in children. Phase I was in healthy adults.

The Tuberculosis program is moving forward nicely. We also expect Phase II data to -- Phase II studies to start. This could happen end of the year, early next year, according to current plans of our partners. And please be reminded that our partners here are Sanofi Pasteur and the Statens Serum Institute. And the program is funded by the Aeras Foundation.

We are still on track with finding a partnership for our Hepatitis C vaccine, where we want to combine the vaccine approach, which has been showing promising data before, with a small molecule approach. We still expect that we can close such a collaboration in 2010.

We have seen before that we have acquired the antibody technology from Cytos. We have started the program. The integration of the team worked very well. And we have started to work on specific targets in the bacterial field, using the synergies between our AIP program and this very specific antibody technology.

All the collaboration with Boehringer Ingelheim, on developing bacterial animal vaccine has been kicked off very productively this year already with successful activities in this program.

I would now like to hand over to Reinhard, who will give you details of the financial performance of the quarter and of the first half year.

Thank you, Gerd. I want to start my presentation of the first half-year financials, on page nine, with giving you a broad overview on our key numbers.

Looking at revenues, we had EUR9.7 million in revenues in the second quarter, which compares to EUR14.9 million in 2009. Revenues included EUR5.2 million in product sales, which is significantly more than in 2009.

On R&D expenses, we have a relatively stable spending, around EUR17 million. Also, an increase compared to 2009 reflecting the progress that we have made in our late stage clinical programs, especially in the travel area program.

Our net loss in the second quarter was EUR8.3 million compared to EUR3 million in 2009. We have to estimate that we had some help from currency effects in the second quarter of 2010; mainly currency effects, but also some R&D tax credits reflected in other operating income, which was EUR9.5 million in the second quarter.

In terms of cash flow, looking at the first half of 2010, we had EUR26.5 million net operating cash used. Our cash balance is still very solid, with EUR127.8 million at June 30, 2010, coming from EUR158 million approximately at the end of the first quarter of 2010.

Page 10 of your presentation gives you an overview of the quarterly development of our key financial drivers. As you know, and as you can see, our top line, our revenues largely depend on milestone events; on meeting milestones from our collaboration and partnering agreements, but also from the timing of these milestones which, given the nature of other business, is fluctuating and there are, obviously, uncertainties in timing that we cannot influence.

On the R&D spending side, as I mentioned already, we are currently stable at spending roughly EUR17 million per quarter. As a result of the fluctuating top line, our profit loss situation is also fluctuating. And our cash balance, since we have been making losses in the last couple of quarters, our cash balance has also decreased.

Let me turn to page 11 of your presentation, and give you some more background and details of the second quarter, and first half-year numbers. Our revenues were EUR14.4 million in the first half compared to EUR20.3 million in the first half of 2009. This first half-year of 2009 included a milestone payment from Novartis in connection with the approvals of our Japanese Encephalitis vaccine.

In the first half of 2010, we did not have any significant milestone events. And, therefore, our revenues have decreased, despite an increase in our IXIARO/JESPECT sales revenues, which were EUR5.2 million. And Thomas will provide you with some more background on the IXIARO sales situation.

Our cost of goods were EUR6.1 million in the second quarter of 2010. They still exceeded the product sales. Why is that? Because we have a high portion of fixed costs included in our cost of goods due to the fact that the product, as you know, is manufactured in a single product manufacturing facility in Scotland, and with the currently still low sales volume, the costs -- well, those are still significantly high.

Our R&D expenses are currently driven by late stage programs, mainly our Travelers' Diarrhea product, which is in Phase III. But also, by pandemic flu, Pseudomonas and Pneumococcus vaccine trials.

Our SG&A expenses have somewhat increased in the second quarter. This was mainly due to the Cytos acquisition costs that are included in this EUR5.2 million. There were roughly EUR0.5 million of costs associated to that acquisition.

I mentioned already that we had significant other operating income. In this large extent, we expect this to be a one time effect, mainly resulting from fluctuations in the euro/dollar exchange rate. We have significant financial assets denominated in US dollars. With the increase of the value of the US dollar versus the euro, we are posting gains from that position. To a minor extent of about EUR2 million, this position also includes R&D tax credits that we received in Austria for our spending on research and development.

Our net loss as a result was EUR8.3 million in the second quarter and EUR23 million in the first half of 2010.

With this, I want to turn to the financial outlook on page 12. For the rest of the year, we still expect product sales to continue to increase. We also expect some milestones and partnering events, giving us additional revenues in the second half.

We expect that with an increase in capacity utilization and increase in the sales level, our cost of goods relative to the sales will go down.

Our R&D expenses for the full year 2010 are expected to be higher than 2009, given the progress in our pipeline, mainly driven by the Travelers' Diarrhea product.

We expect to keep tight cost control on our G&A expenses. A moderate increase in SG&A expenses is expected to come mainly from sales and marketing activities of IXIARO.

Bottom line, we expect that our net loss for 2010 will be between EUR20 million and EUR40 million. So this means that our loss is potentially higher than in 2009 as a result of some milestone shifts, especially the announcement by Merck that they now expect interim data from the Staph. Aureus Phase II/III, which is triggering a milestone in 2011, previously expected in 2010; and increased uncertainty on the timing of some of our other milestones and potential partnering events. This led us to provide a broader range for our net loss expectation for the full year.

We have a comfortable cash position of EUR127.8 million in cash and marketable securities at the end of the second quarter, which we think provides a comfortable basis for our late stage development pipeline.

With this outlook, I now want to hand over to Thomas to give you some operational update.

Thank you Reinhard; ladies and gentlemen, it's a pleasure to complement Gerd and Reinhard's presentation with a couple of more details with regards to our product and our programs.

I would like to start with page number 14; it's a slide you have seen already a couple of times in our previous quarterly presentations.

What's new? We are continuing to launch the product in additional territories in countries within Europe through our partner, Novartis. Specifically, we have launched the product right now in countries like Canada but, also, Switzerland in Europe. And we are in the process of preparing new launches, for example, in countries like the Benelux.

On our Asian activities, in connection with our partner, Biological E, where we target product development and licensure in endemic areas, we are well positioned and progressing nicely towards the Phase III entry towards the latter part of this year with a planned first licensure in Asia, meaning India, in 2011.

I think we will come back to the military situation, but the rest of the commercialization structure remains unchanged and is still actively leveraged.

Let's turn to page number 15 and talk a little bit about our sales experience. You have heard me talking about the need to build the market for a new disease, for a new vaccine for which previously markets have not existed many times. And it's important to look a little bit into the sales structure and history.

When you look into the net product sales for 2009, you can see that roughly 47.7% of the total sales, in terms of revenue. Also, this is slightly different, because there is a different price structure in Europe and the US when talk doses. But in terms of revenue, the majority for 2009 net product sales took place in the United States, primarily driven by US military.

We see now a shift when we look into the first half 2010. In the United States and Canada a little bit from the military into the private, so the majority of this first net product sales in 2010 are linked to private business. Australia more or less stays the same, stays at the same level in terms of percentage. And Europe is steadily growing and we expect this growth to continue.

In terms of -- in terms of vaccine usage and in terms of market development, it is always important for vaccines to look into the penetration. We are talking here about a Travelers' Vaccine, and there is an interesting graph you can see on the right side of your page. This is data from our commercialization partner and respective marketing study, where you see, for example, for the United States, how the JE Vaccination right now compares to other classical travel vaccines in the market.

And you see that with a penetration rate right now significantly below 1%, there is a lot of room for improvement. And when we talked previously about our expectations in terms of market size for JE Vaccine, please be reminded that the underlying assumption has always been a vaccination rate in the order of magnitude 5% to 6%, which is in line with the other vaccines. And there's still a lot of room for growth.

And how do we want to manage this growth? Page number 16, first of all, we've got to build on our product strength. And we know that we have got a great product. There is an unmet medical need. We are -- we live in a competitive free environment now and, at least, for the next years to come. We have a very safe and effective and efficacious vaccine, with a stable manufacturing process and good shelf life. These are all features that are very important for a state of the art modern vaccine.

And we know that in terms of building the commercial value of this product, we've got to build on a strong strategic positioning. First of all, we've got to get the basics right, which means we need to address the product into the key Western European travel market. And this means full penetration, launch in all countries where the product is registered and building up the right marketing and sales effort. This is ongoing.

When it comes to military, we need to get, first of all, the military to accept the uptake of this vaccine. This is very critical because, as Gerd alluded to before, the US military, as the single largest customer for such a product, is still using up its old inventory stock of JE-Vax, a product that was previously registered in the United States. And once this shift has been managed, obviously, we expect significant revenue. And we are currently hopeful that we will be able to completely manage this transition in the short-term.

Then obviously, as a next step, we will complete penetration by targeting specific core customer groups; further expand in the military arena; and gain additional country approval in countries like, for example, Israel or South America.

And then last, but not least, the last part of the value chain and growth of this product can only be achieved through access to Asia, both in the public and private arenas by maximizing some premium segments in other Asian territories, like Japan and Korea. And, obviously, by having standard immunization and recommendations across the border. And I think that we are really on a good path to achieve those recommendations and active immunization requirements, not only in the private segment, but also in the military.

With this I would like to turn over to page number 17 and give you an additional information on our programs. As Gerd mentioned during the highlights, we have two Travelers' Diarrhea studies ongoing; one pilot efficacy Phase II in Asia, specifically in India and a Phase III pivotal efficacy trial in South America.

Both studies are completed as far as the recruitment is concerned. And we will go into data logging and data analysis with first data expected towards the end of this year, for sure, as far as the pilot efficacy study is concerned, because it's a small study.

As far as the phase III is concerned, it might slightly slip into the beginning of next year. But, as you know, in an earlier Phase II field trial, we have shown that this vaccine candidate has shown good immunogenicity and even first signals on efficacy. And hence, we are quite hopeful that we can progress this program successfully into its next steps, which will be, obviously, then the respective Phase III safety and consistency trials, followed by regulatory licensure; which means this licensure we expect right now, based on a filing assumption towards 2012, as you can see on page number 18.

The next advanced program in the field of patch based vaccines has to do with our Pandemic Influenza program. And this is a distinct activity and a distinct program that has nothing to do with the Travelers' Diarrhea patch program, because here we are talking about the patch used as an external adjuvant. And please be reminded that this Pandemic Influenza program is based on an injectable H5N1 vaccine and then the patch being put on top of the injection site as an adjuvant.

We had -- on page number 20, we had key results of an initial Phase I result -- a Phase I trial that did indicate very successful -- successfully the potential for a single dose and a single application protection rate above 70% seroconversion.

We tried to replicate this result in a Phase II setting and unfortunately, it did not meet one of the end points, in that we have not seen a statistically significant difference amongst the different study groups with or without the so-called Vaccine Enhancement Patch. However, we met also some endpoints, such as safety or we could see that the adjuvant, the LT in that case, uptake has been dose dependent safe and in line with what we were expecting in terms of consistency on patch delivery route.

Why have we not been able to meet the primary endpoint? We believe that, and as a likely root cause, we have identified an accumulation of the areas variabilities within the trial, starting from the vaccine as such over the population, the trial conduct, the [SA] systems we have been using; and last but not least, the data evaluation and statistics.

And hence, based on that, we have agreed with our partner GSK to enter into a next clinical development stage trying to evaluate, in a different setting using GSK's vaccine, using a different infrastructure and different systems, the opportunity of external adjuvantation in connection with Pandemic Influenza H5N1 vaccine here from GSK.

We expect that the next clinical steps will be commenced towards the end of this year/very early next year. And this is a discussion we have been initiating with our partner GSK on the one hand side, but also with HHS on the other hand.

As Gerd mentioned already, page number 21, no news so far on Staph. Aureus; nothing has changed with regard to the program conduct and the two expected trigger for the so-called interim analysis, which is now guided by Merck for 2011.

When we look into page number 23, Pseudomonas -- on the Pseudomonas program, which we successfully concluded clinically under Phase II protocols in ventilated ICU patients, we are expecting the data analysis to commence very soon. And this will lead to a final data reporting towards the end of quarter three/very early quarter four and this depends a bit on the decree of data analysis.

Why are we a little bit vague on this explanation? We are a little bit vague because there in no precedent. No one has ever conducted such a trial in such a setting, with such a level of analysis where things like immunogenicity and safety are being evaluated, but also very detailed analysis on [pituitary] infections are being reported and need to be assessed. And, therefore, we have currently not a precise estimation in terms of exact time points for those data reports.

In terms of outlook and next steps with regards to Pseudomonas, I think post this Phase II and, hopefully, upon the successful outcome of the study we will enter into discussions with our strategic partner, Novartis, on next clinical and development steps towards Phase III and a future licensure.

There are a whole series of other attractive vaccine programs in our clinical development.

And just to repeat one more time what has been stated towards the highlights session, we have our Pneumococcus vaccine candidate that had shown good Phase I safety and immunogenicity data. And we are currently working with our partner, PATH, on the next clinical development strategic steps, which means somehow the entry into the target population, meaning children.

On Hepatitis C therapeutic vaccine candidates we are actively working on establishing a partnership to conduct combination studies with a small molecule approach. And we are hopeful to get such a partnership still lined up this year.

And Tuberculosis with Statens Serum Institute on the one hand and Sanofi on the other hand, under the Aeras foundation roof, we are progressing according to the clinical program right now, focusing and targeting the next clinical entry, which means Phase II.

With this additional set of information on our products and programs, I would like to hand back to Gerd Zettlmeissl to give us the outlook and next steps.

Thank you very much, Thomas. I think you have seen from the presentation we have made that we are looking back to many positive events in the last quarter for our Company.

We have seen the sales of Japanese Encephalitis moving in the right direction. We have also been able to really move all clinical studies in the context of Japanese Encephalitis post approval, but also for the endemic areas, according to plan.

We were, and this is really remarkable, in a position to recruit in time two very difficult clinical studies for our Travelers' Diarrhea Vaccine patch; studies, which have not been made in a similar conduct in the past for any other vaccine. This shows really our operational excellence in conducting and moving forward such a product and clinical trials towards approval.

Same holds true for the Pseudomonas program where, again, we have been able to really conduct in time -- and here also recruitment is fully completed now -- in time a very complicated and very complex clinical study.

I don't want to go in the details of the milestones, because we have mentioned each individual point at least from the late stage and near-term value trigger points in detail before.

But thank you, at this point in time, for listening and asking you really to get your questions across to all of us. We're looking forward to that. Thank you very much. I hand back to the operator.

(Operator Instructions). Andrew Baum.

Afternoon, it's Andrew Baum from Morgan Stanley; a couple of questions.

First, and I apologize if I missed this; I was late to the call. The anticipated ramp up in R&D spend in the second half of the year, is that related to your currently in development products? Or is it related to the Cytos acquisition?

And then second, regarding JE-Vax -- sorry, regarding IXIARO, just listening to Thomas, to me at least the frustration sounded palpable that you're experiencing. Perhaps you could break it down a little bit more into the activities you're doing for your existing indications to try and rebuild the market, which has clearly contracted since Sanofi exited.

So, perhaps you could give us some details over the number of salesmen you have contractual arrangements with Novartis, additional marketing spend, together with some indication of whether you think that's going to be enough? Or whether the contraction in the market is such it's really going to be a two-year experience before you start to see this market recreating its penetration level and approach some of the other vaccines you list on the slide.

Okay Andrew, let me answer your first question. Increase R&D spending in the second half of the year means increased compared to 2009. That's something you already see in the first half of 2010. And this is mainly a result of driving Travelers' Diarrhea into Phase III.

Obviously, we have also a couple of other earlier programs ongoing, as Thomas mentioned, in Pneumococcus. We have the Pseudomonas. We have the Pan Flu, where we have R&D spend in the first half of this year, which was funded by grant. It's reflected in grant income.

But given the progress of the pipeline, if you would look one year back, it's only logical that our R&D spending has increased compared to 2009.

Okay Andrew I would like to continue, and as usual a very good question on IXIARO, and how IXIARO is going to progress? And how are we going to build the right vaccination and penetration rate?

There, number one is right now the revenues are being generated to a level of 90% through five key countries. And in those five key countries we can see very good penetration and vaccination rates. And step number one is usually to apply the successful lessons learned.

We are working with Novartis essentially on -- under a marketing and distribution agreement. Novartis are in charge of the active marketing and distribution part. We are supporting it as good as we can, especially by supporting it with medical management and working closely with our partner, Novartis, on getting the respective national recommendations, which are (inaudible) for vaccine penetration. And we are helping our partner Novartis in getting the right target customer approach.

Through the penetration and through this applied marketing and distribution toolkit, from country to country we believe that the respective vaccination rates can be taken up. We have always guided the market that it takes for such a vaccine north of five years to build the respective markets and get the right penetration rate.

It's very hard to predict and to guide really. Is it five years? Is it seven years? Is it 10 years, because there is less precedence or not enough precedence in this field. If we looked into the products on the list there, like hepatitis or like typhus, the situation has been slightly different.

However, possibly the most recent introduction of vaccines also they have not been super exactly in the travel segment. But TBE is a good example where it took roughly 10 years to penetrate the market to a large extent. So other vaccines like Hepatitis A/B where it took five years. And maybe if this is the range we believe then we are at the right end. And this hopefully answers your question.

So just to clarify, could you just talk about the salesmen side of it? How many reps are out there detailing the product? And if I understand correctly, that's all under the remit of Novartis.

Yes it is, as far as the private markets are concerned. You know that we are dealing with the military ourselves. This is our direct key account business. All other markets are directly linked to Novartis.

Novartis has obviously not dedicated sales reps to this product. The commercial structure of Novartis is such that the entire Novartis vaccines and diagnostics commercial organization is dealing with this product in an all-in-one basket kind of strategic setting. And in countries where Novartis vaccines and diagnostics do not have an own sales force, they have partnered with parties in the respective territories.

Thank you.

Tara Shivarattan.

Hi there, it's Tara from Jefferies. I was just -- if I continue on with IXIARO; two questions. I was wondering if we could consider the 2Q IXIARO sales as a reasonable run-rate for the third and fourth quarters. Or if we should use the first-half sales as a better guide?

And then secondly, if you look at slide 15 it seems to suggest that IXIARO sales in the US have stalled. And is this really just military sales that, as you say, have slowed, because of the destocking effectively of the JE-Vax or do you still have to ship the stock to the military? Thanks.

Let's first start with the -- I hope I got it acoustically right -- it's Gerd speaking, on the rate for the Q3 and the Q4. Obviously we have in the travel segment the ambition that this will be also good quarters to come. In -- overall, as we said before, growing the business further on, along the line Thomas just discussed with Andrew.

Concerning JE-Vax and military, we unfortunately still face a situation that military in the United States is partially using JE-Vax, and we have been working against this at very different levels, going really very broad, also in the US lobbying effort.

Unfortunately, we still not have a clear and decisive final point made at the military; that they are not allowed any more to take the JE-Vax. We, frankly, find this very, very special because this is an old mouth drain derived product, where we want to really use a new cell culture derived product, get into more innovative ground.

And I think this should be reflected by the military, who was a partner for us to get this modern new cell culture based vaccine into the market. And now they are still using the older one, which is certainly not fully understandable, but it is where we are in the moment. And I think we are doing a very good job in the moment to change that for the future.

Okay, thanks.

Brigitte De Lima.

Hello, I've just got a quick - a few financial questions please. The first was just on the IXIARO inventory write-downs. I think in Q1 you said there wouldn't be any further write-downs. Can you just let us know if there's anything anticipated in the second half on that?

And then on the R&D tax credits, I appreciate they're quite small, but should we anticipate additional R&D credits in the second half?

And then the third question on the FX gains that you recorded -- reported for the second quarter; do you have any feel at all for whether these gains are likely to reverse in the second half? Or should we just assume that to be a one-off and not much else to happen in the second half?

And the last question would be on the Cytos acquisition. I notice that you've only paid one tranche of EUR10 million and the second tranche is payable in January 2011. Is there any particular reason why there's a second tranche only payable next year? Thank you.

Okay Brigitte thank you. Let me answer your questions.

So, write-downs of inventory or product that is in the manufacturing process is occurring and will probably continue to occur. You never work on 100% success rate in manufacturing -- in a vaccine manufacturing environment.

What happens usually is once you go in a more standard commercial setting these success rates get reflected in the normal cost of goods. We think we are not there yet in having this experience on average success rate, so this is why whenever we have, let's say, a failed patch in the manufacturing process we will write it down separately.

So expect that the one way or the other we will have write-downs of product. But probably by the end of 2010 we will have enough experience to normalize this in our normal cost of goods.

R&D tax credit is something that is due to Austrian legal environment where you have an 8% tax credit that gets actually paid out in a loss-making situation to companies. We, therefore, record 8% of our Austrian R&D spending in debt provision, subject to acceptance by the tax authorities. And the fact that you saw higher R&D tax credits in this second quarter of 2010 is that, on top of what we record relating to our current 2010 spending, we got somewhat higher than expected credit accepted by the Austrian tax authorities.

FX gain is dependent on euro/dollar exchange rate. If the trend that we have seen in the first half of 2010 would revert, we would also partially revert these FX gains. So it all depends on the exchange rate, but we are taking measures to stabilize. Actually, the fact that we hedged a part of our -- or most part of our 2010 US dollar exposure in terms of payment partially led to these FX gains, because we carry substantial US dollar cash balances that produced these gains to secure the US dollar denominated spending in the second half.

Last question, Cytos acquisition; we have agreed on a EUR15 million acquisition price. As you know, we have split the payment as a result of negotiations. The second payment is not subject to any milestones. It's, as you said correctly, due in the beginning of 2011, and after that there is no whatsoever further obligations out of that transaction.

Thank you very much.

Gunnar Romer.

Yes, hi there, it's Gunnar Romer from Deutsche Bank. I have a few more questions on the JE vaccine. Firstly, if you speak of growth in the second half, do you mean sequentially starting as of Q2 or year on year? Or in other words, do you expect to set off the potentially weaker seasonality in the coming quarters by higher penetration?

And then also on the JE vaccine, which proportion of Q2 sales was due to this supply shift you mentioned in Q1?

And then one more question maybe on the Hepatitis C collaboration. What do you expect in terms of financial implications this year and going forward? So, maybe if you can elaborate on the potential deal structure, just roughly? Thank you.

Okay, thanks Gunnar, this is Thomas speaking. Let me talk about JE. When we talk about growth, obviously, we measure right now. Due to the seasonality of this product we measure year on year. So there is, as for all travel vaccines, there is a seasonality profile, and a certain vaccination profile over the year.

And hence, it would be unprofessional and unreasonable to compare quarter to quarter, so we compare year on year. And we expect a growth, as Gerd and Reinhard both indicated already, compared to 2009; specifically, the profile we had seen in the second half of 2009.

When we talk about the Q2 numbers, and the shift, let me remind you one more time that we had a situation of a) quite significant inventories build up, because of a lot of unknowns within our commercial partners towards the end of 2009. This was one reason why we did not make -- did not see sales in quarter one, and we had supply/product release issues that led to a shift into the quarter two.

However, this effect financially is in the order of magnitude maybe 20%/25% of the quarter two sales, not more. So the majority is still linked to real product sales in quarter two.

And I think on seasonality one more time, I think a travel vaccine typically, and this is not just by showing in the [feed] of JE, is peaking in quarter two/quarter three during the year and has a subsequent second peak towards the end of the year, when you have obviously then build ups of inventory for the next year. Quarter one are for all travel vaccines typically very low sales quarters; point number one.

For us there is obviously the additional fact to consider that the single largest customer, meaning the US military, can get it any time. So -- and this is for us a little bit the unknown, and that's why it's relatively hard for us to guide or soft-guide into certain dynamics around the JE sales, which I hope that you understand.

And with that I would like to hand over to Gerd, who's going to respond to your HCV question.

Gunnar, at the moment on HCV we are following different options.

On potential destructure it can go from a complete licensing the program to a partner to another option, which we are preferring, and this is the one which we are focusing on, where we would like to find a partner having a successful and good small molecule approach. And where the partners really join forces, keeping right on the individual approaches; we on the vaccine, the partner on the small molecule, and we would develop the product forward in a combined setting. So this is the plan, which we would prefer. As I said before we have kept different options open, but would like to do the last described option.

That's very helpful, thank you; maybe just one or two follow-ups, one on the JE again. Can you remind us of when the shelf life is over for the existing stock of the old vaccine for the US military?

And secondly, you mentioned that there are no news on the Staph. Aureus vaccine. However can you share with us -- or has Merck shared with you, what's the current standard of enrolment? So how many patients would you estimate are enrolled currently? Thank you.

Okay, Gunnar. I will start with the JE part and then hand over to Gerd, who's going to mention something on Merck.

I think the -- let's talk about JE and the JE situation. So if I got your question right you're talking about shelf life of JE-Vax. This is something we do not precisely know and this is not publicly disclosed information.

Obviously, we do assume that there is not an issue on the shelf life as such, but more predominantly that there is obviously a vaccine usage, which is reported even on a quarterly basis. And if we just extrapolate based on the stockpile that is existing, we are envisaging that the existing stock will be depleting in the first half of next year. So this is our current assumption on when it comes to JE-Vax.

And please be reminded it's not the case that they do not use -- or military does not use IXIARO at all, but there is still a substantial portion of JE-Vax used in parallel to our IXIARO, and the shift needs to happen.

Gerd, Staph. Aureus?

Yes, remember earlier this year there was around about half of the study population of 8,000 in the study. The recruitment is going extremely well, and continues very well. Also, we have the recent update on the numbers now. Given the recruitment rates we have seen before, we should be now north of 5,000. And we will certainly obtain within the next one or two months additional updates on the actual recruitment, but this is where we are in the moment.

In all, these numbers and the rate of infection as we have declared before, point into 2011 for first interim analysis.

Thank you very much gentlemen.

Vladimira Urbankova.

Yes, hello, Vladimira Urbankova, Erste Bank; three very brief questions. First of all, R&D costs, around EUR17 million we have seen roughly over past several quarters. In the second half of the year you expect in absolute terms this amount to continue to rise, or being around this level, which still implies a year on year increase?

Secondly, if you look at cost of goods sold, from which level of sales you anticipate roughly breakeven level for IXIARO?

And thirdly, this guidance for the bottom line, EUR20 million to EUR40 million net loss, are there any also assumptions on the expenditure side, or is this purely driven by the revenue side you anticipate for the second half of the year?

Thank you Vladimira. So R&D, yes, we expect spending in the next quarters roughly in line with what we have seen in the last quarters, maybe slightly higher, but certainly not a lot.

Your question around profitability between EUR20 million and EUR40 million, we certainly expect a milestone income in the second half of the year. The uncertainty here is really on the timing side. Obviously, there is also uncertainty on the Japanese Encephalitis side. So, we think -- I think we have been very accurate in the past in budgeting of our spending, of our costs. The uncertainty is always on the top line here. And here, it's also difficult for management to make assumptions here and this is where we give relatively broad guidelines.

The third question was on break-even operationally on Japanese Encephalitis. So, with an approximately 80% of fixed costs, if you look at our 2009 sales and first half of 2010 sales, if you extrapolate that, you would see that operationally, in terms of cost of goods sold, around EUR15 million we would expect an operational break-even. Obviously still depending on success rates in the manufacturing and inventory building, but roughly you can assume this number.

What you also have to include when you look at the product in total is that you still see some spending on the clinical side in post licensure obligations, but these costs are currently capitalized and amortized in cost of goods. We still expect to have some post licensure activities ongoing for the rest of the year and in 2011. So, when those are finished and when the sales have gone up, we really expect to make positive cash flows out of the [JE] vaccine.

Thank you.

Martin Wales.

It's Martin Wales from UBS. I know you feel you've given some information on this, but could you just clarify what the variability in timing off milestones actually is that will influence that EUR20 million to EUR40 million net, firstly?

And secondly, you're being very general in stating some time in 2011 for MRSA; do you have any feel for when, given the current infection rates and recruitment rates?

So, for the first part of your question, I think the milestones which we are talking about are mainly the milestones out of the GSK collaboration based on certain clinical and manufacturing progress -- building up manufacturing progress we are doing, where we in the moment feel very comfortable that we will make it, but we obviously have some timing issues towards the end of the year.

Number two; we also have in this partnering income, potential income from new partnerships we might be able to do when it comes to specific activities in the antibody field, where we are currently quiet active. I mentioned also the Hepatitis C before, where we still have different options of deal structures we are considering. So, these are the points we are currently having in mind when we talk about this range.

And your EUR40 million assumes none of that happens this year, or none of the --?

Essentially, EUR40 million would be certainly the one where few or nothing will happen at this point in time; you're correct here on this point.

And number two of your question was on Staph. Aureus. It's difficult to say. We assume, and this is what we said before, that given the rate of infections going forward and the recruitment rate we have been seeing over time now that this should be more likely in the first half of 2011.

Also, we have to say because this is an event, which is driven by the absolute number of infections so the interim analysis is done when we have reached a certain number of infections. And overall blinded clinical trial the infection might not be completely linear, so there are new infectors to come during the trial. So there might be also a forward or backward time shift, which we currently cannot say but, hopefully, we'll be able to judge on later this year.

Okay. Thank you very much.

Romain Zana.

Hi. This is [Nicolas Longley] on behalf of Romain Zana from Exane BNP Paribas. I've got three questions regarding IXIARO. The first one, do you expect IXIARO's sale of productivity to narrow over the next quarters? I mean, do you now expect the kind of gross sales level of 4 million to 6 million per quarter for H2 2010? Or do we have to take into account a significant shift of sales realized from Q1 to Q2?

Secondly, you mentioned in the past the slightly exacerbating efforts put in place by Novartis for IXIARO distribution, and notably due to H1N1 rush in H2 2009. Well, do you see any substantial improvement at the moment?

And lastly, do you have more color about the level of stockpiles that the US Army still have of the old version of Sanofi?

So starting with quarterly developments of Japanese Encephalitis sales, I think from answering previous questions you see us reluctant in throwing in numbers or confirming or not confirming that Q2 will be representative for the next couple of quarters. We simply do not have enough visibility to do that.

We are stating, and we have reason to state, that we see a positive dynamic in the sales that we expect to continue. And, therefore, we expect significant increase compared to the first half and compared to the second half of 2009. This is what we can state here.

Certainly, we have been discussing a lot of reasons why the sales ramp-up was slower than expected in 2009. Any distraction from H1N1 has certainly gone away at this stage. And we see, as Thomas has stated in his presentation, as Gerd has stated, increasing dedication of our distribution partners to the product and to ramping up the sales.

Let me add to what Reinhard said. Just two sentences, which I have alluded to before; yes, we are confident that our partner, Novartis, is putting the right efforts in place. We would love to see it faster. We would love to see it more successful in terms of sales figures. But nevertheless, this is potentially part of the nature of this business.

In terms of competition and Sanofi's product, we have been stating that we do not expect competition in our segment, which means European/pan-European license and US license product for travelers travelling across those territories into the endemic areas for the next years to come.

What is the foreseeable future for next years to come? Three to five years is the foreseeable future in years to come. And we expect the competitive product, which is currently up for licensure in Australia and Thailand only, not to enter those markets commercially in the timeframe I've just given.

Okay. Thank you very much.

Sjoerd van Gorp.

Good afternoon. This is Sjoerd van Gorp from Kempen & Co in Amsterdam. I had two questions. One, could you indicate what part of the EUR5.2 million revenue from JE-V is from the military sales?

And secondly, about Travelers' Diarrhea Patch, could you give an indication what you expect for the market penetration based on your current -- the numbers that you see from your Japanese Encephalitis vaccine?

So, we are not currently breaking out military sales from our total number of sales. So, what we can state is that the majority of our sales in the second quarter has certainly come from the travel market.

Okay, on the Travelers' Diarrhea program, how does it compare? Very good question; it's quite difficult to answer at this stage, because obviously again in the area of travelers' diarrhea, it's more commodity rather than life threatening for travelers into countries.

On the other hand, there are significantly higher number of potential vaccinees into those territories. And, hence, we expect overall vaccine rates that are in between what you can see there on JE and things like Hepatitis or Typhoid but based on a significantly higher number of travelers. And that's why we expect the total market size for a travelers' diarrhea vaccine in the range of up to 500 million at peak and penetration, which is what we have been communicating a couple of times in the past.

Great. Thank you very much.

Lucinda Seagrove.

Hi there. It's Lucinda calling from Goldman Sachs. I'm sorry, I'm repeating a question by Martin Wales on phasing of milestone payments. Could you clarify what your expectations are for milestones on the Travelers' Diarrhea side in H2?

And also, is the weakening purely because of the Staph. Aureus milestone potentially being fished out into 2011? I just wondered if you could give some further clarity on phasing.

Yes, so maybe starting from the top, as you know, we expect EUR60 million in milestone payments under our GSK cooperation over the development time of the vaccine. A part is obviously back-end loaded to approval; a pass is related to positive Phase III trials.

But we have also some more operational milestones relating to reparation of next clinical steps, relating to commercial manufacturing readiness. Some of these more operational milestones we expect to meet in the second half of 2010, so this is part of what we mean when we say we expect milestone events.

Obviously, as Gerd has mentioned, we have -- we see licensing opportunities of entering into some new collaborations potentially, plus we have a couple of collaborations ongoing that could lead to milestone event.

So, bringing it to the point, we expect some milestones in the second part. Otherwise, if you simply extrapolate the first half, we would also not reach the EUR40 million so we think we will meet -- get some collaboration licensing income from milestones and potentially new deals.

But there is also an uncertainty, not only on the Japanese Encephalitis side, but also on the timing of some of those milestones and collaboration events. And this is why we have to give a broader range for our expectations. But we hope that as we progress into the second half we can update you when we have some more visibility on the timing.

Sure. So, essentially, the guidance of between EUR20 million and EUR40 million hasn't -- isn't based on the movement of Staph. Aureus? So, it's a mixture in a sense.

No, we do not expect in this assumption to receive the Staph. Aureus milestone in 2010.

Sure. Okay, thank you.

Peter Duellmann.

Yes, it's Peter Duellmann, Macquarie in Frankfurt; just one question, again on the guidance. If I remember that correctly, the old one has been reaching the level of net loss of 2009 also in 2010. Now, with the upper end of your guidance you still expect to come very close to that level.

Assuming that you will not reach the Staphylococcus Aureus milestone, and you still expect also some other milestones maybe to be shifted into the year 2011, what has turned out to be more positive for the upper end of your range compared to the time when you gave the old guidance? Thank you.

Yes, the old guidance was that we expected to have a loss in the similar order of magnitude. Obviously, when giving such a guidance there is -- it obviously consists of various elements that have an upside and a downside.

The pure fact alone that the Merck milestone was shifted into 2011 would not have necessarily led to an update in the guidance if we had other milestone events anticipated with the higher level of security than we have currently. But the fact that we do not have this level caused us to give the market a warning that the loss could potentially be higher, and this is only natural to do this early on.

Okay, thank you.

Tara Shivarattan.

Hi there. Thanks for taking another question. So, I just had two additional questions; financial questions really. The first one is what deferred revenues from the GSK/Novartis deal should we be assuming for 2010, if you could help us with that?

And also, would you have any greater visibility on the potential positive tax figure that we should assume for the rest of this year? Thank you.

So, we are not able to disclose the exact number of milestones from GSK and Novartis that we expect. We can only say that it is a significant part of the EUR60 million still to come from GSK.

What we recognize currently, and what you have seen in the first and the second quarter, partly includes recognition of revenues from our collaboration with Novartis. We expect that to continue. And obviously, there is a level of uncertainly also on the Novartis partner project if anything else will come in still in 2010 in terms of milestone payments under this collaboration. Sorry, that we cannot be more specific on that.

Okay, thanks; and on the tax for the rest of 2010?

On the tax, there may be some slight positive tax effects for the rest of the year, but certainly not at the same level as we saw in 2009.

Okay, great. Thank you.

Gunnar Romer.

Yes, hi there. One more question on, again, the guidance. Does it include any potential milestones out of the Pseudomonas development program? Or would they relate to 2011 anyway, given the uncertainty about the structure of the potential deal you might sign with Novartis and the opt-in agreement? Thank you.

No milestone income expected from the Pseudomonas deal with Novartis. After the Phase II, Novartis will have to make their decision on the opt-in for this product. The opt-in itself will not trigger a milestone payment. The next milestone from this program will come from the start of a Phase III trial; not expected for this year.

Thank you.

We have no further questions at this time; I'll hand the conference back to you.

So, thank you very much for many very good questions and for joining the call. So, we are looking forward to the next event, having you back on board. Thank you very much for your time. Thank you very much for your questions. All the best. Have a good day or good afternoon. Bye, bye.

Ladies and gentlemen, thank you for your participation. This concludes today's conference. You may now all disconnect your lines. Thank you.