Valneva SE (VALN) 2012 Q2 法說會逐字稿

Good day and welcome to the Intercell Q2 analyst call. At this time I would like to turn the conference over to Mr. Thomas Lingelbach, CEO of Intercell AG. Please go ahead, sir.

Good afternoon, ladies and gentlemen, good morning to those of you joining from the US. My colleague Reinhard Kandera, CFO and myself would like to welcome you to the Intercell Q2 and half one 2012 results and company update call.

First of all, I would like to start with a general overview about where the company stands today on delivering against its strategic plan. It's fair to say that now after more than four sequential quarters, the company continues to deliver according to promise and to guidance. We see strong financial performance underpinned by continued positive JEV sales performance with additional revenues from collaborations and licensing and a solid execution on the financial plan with a profitable second quarter.

We are progressing our R&D pipeline with the key programs towards the next value inflection point. We are in preparation of licensing the JE vaccine in India. We have submitted the applications for the pediatric label extensions and the other programs are proceeding nicely towards next stage gate entries and value inflection points.

On the strategic development side, we have completed successfully our financing to secure the funding needs into financial self-sustainability, and as such continue to strive for value creation for our share and stakeholders.

With that short introduction I would like to hand over to Reinhard to give you our financial update.

Thank you, Thomas. Good afternoon, ladies and gentlemen. I am happy to guide you through our second-quarter financial numbers in the next couple of minutes.

If you turn to page six of our presentation, you see our most important overview numbers which demonstrate that we were able to make progress on our most important financial indicators. We were able to show strong revenue growth mainly resulting from the good performance of our Japanese encephalitis product sales. We were able to show cost control evidenced by further-reduced R&D spending, which is focused on our most important late stage value drivers.

As a result of revenue growth, as a result of disciplined spending we could even show a positive result a net profit of EUR1m in the second quarter of the year. We've also made progress in creating a stronger cash position through a EUR35.2m financing transaction that was executed in May and June 2012.

On the next page, let me guide you through some details of our second quarter and first half-year numbers. As you have seen, our revenues in the second quarter, we have EUR15.2m and EUR21.2m for the first half-year 2012. Our R&D expenses were about EUR1m in the quarter reflecting strict cost control, but also reflecting some timing effects on (inaudible).

If you look at the first half you see EUR9.6m spending on R&D. I mentioned the profits that we could show in the second quarter of EUR1m for the first half you now see an overall net loss of EUR7.1m.

It's also important that our improved profitability and reduced loss is also reflected in a strongly reduced operating cash outflow of only EUR0.5m in the second quarter and EUR9.4m in the first half of this year, which is significant improvement if you compare it to the same period in the last year.

And finally our cash position consisting of cash and consisting of marketable securities has improved to EUR66.5m by June 30, 2012.

I want to go into some of the details that are important for investors and analysts on the next page, which is page eight of our presentation. As I've mentioned, revenues in the second quarter were strong, growing by almost 20%. We've seen our strongest-ever quarterly sales of IXIARO/JESPECT our Japanese encephalitis vaccine, and we are on track to meet our full-year product sales expectations.

The result is also supported by strong collaboration and licensing revenues coming from existing partnerships and this helped us to show even a positive result in the second quarter.

We have mentioned in our quarterly report that we have agreed on a payment with GSK which has contributed to the collaboration and licensing revenues, but these revenues also include revenues from collaborations with Novartis and Merck.

In terms of cost of goods sold, we posted EUR7.6m in the second quarter, again demonstrating a positive gross margin. However, the gross margins still will continue to fluctuate over the next couple of quarters as we continue to increase capacity utilization and stabilize the manufacturing operation of the product.

R&D expenses reflect our focus on key value drivers. They were particularly low in the second quarter. We would see the first quarter spending of between EUR5m and EUR6m as more representative of our quarterly spending throughout the rest of the year. SG&A expenses were roughly flat, despite growing sales and despite related increase in sales and marketing spending.

The result was helped by positive other operating income of about EUR2m. This results from R&D tax credit, but also from positive currency effects reflecting in particular the strong US dollar versus euro exchange rates.

We are on track to progress the company's financial results towards self-sustainability. We were able to show for the first time after many quarters again a positive result. But we are working towards our goal to become self-sustainable by 2014-2015 and it will certainly not be the last profitable quarter in a row of our quarterly results in the next two years.

In terms of cash we have secured our funding needs to achieve this self-sustainability by bringing in EUR35.2m in cash from a debt and equity financing in the second quarter as already reported, so we think that overall we are showing good financial progress from all our key numbers and we move forward on the solid cash basis which is very important for a biotech company.

For the full-year 2012 outlook, we reiterate our IXIARO/JESPECT sales growth of EUR8m to EUR10m, compared to 2011 full year sales. However, we want to give you a heads up regarding the expected net loss. We now expect the net loss at the higher end of our previous guidance of EUR15m to EUR20m based on the fact that we will have the additional finance expenses resulting from the loan financing and based on the fact that it's August and we have not been able to bring in an additional new partnership. We remain on track to deliver a result within the range, but we want to cause you and we currently expect a result at the high end of that range.

With that I want to hand back to Thomas to give you an update on our operations.

Thanks a lot, Reinhard. Well, Reinhard mentioned already the financials around our first commercial product. It continues its strong sales performance and hence it continues to deliver on its cornerstone role for the company's strategic plan.

I think our marketing and distribution partners as well as our own sales team have done a very good job in driving increased adoption in the key travel markets as well as the US Military. Obviously the second-quarter results are always supported by the seasonality of the product that you can see throughout the last three years since the product got introduced into the market.

We continue what we call the lifecycle management for this product. On the one hand side, it is very important to see now a regulatory-wise distinct identical product being introduced in India. Our partner Biological E have completed all the preparation work. They have produced large stock and are ready for the commercial launch campaign in the very near future.

We have submitted all license applications necessary for the US and Europe to get the label extended for pediatric use as well. And we have successfully closed out the Article 20 procedure that we had to deal with following the very first product recall in May 2011.

In terms of the product long-term strategic potential, we remain confident that this product has the potential, market potential based on its very unique competitive position in the market and the key growth drivers remain further penetration in the key markets based on an expansion of selling resources with our global partners as well as with our own Intercell staff, the further growth in the military market through adoption of the respective recommendation and based on continuous close coordination with the military bases and as already mentioned, penetration into the endemic market with India being the first country and then the preparation to enter additional key markets outside of India within the endemic environment.

So based on this solid foundation around our JE product, we are able to continue to work on a diversified R&D portfolio addressing different areas of unmet medical need. We spoke already about Japanese encephalitis and I would like to give you a very brief summary on where we stand with our individual programs and this summary is shown on page 14.

Pseudomonas our most advanced development program, currently undergoing a pivotal Phase II/III efficacy trial. Remember this is a vaccine trial targeting the hospital-acquired pneumonia and tested in ventilated ICU patients. A very critical medical need there and we are enrolling towards the first interim analysis to be conducted up to 400 subjects. Those 400 subjects will include 200 who receive the vaccine and 200 who receive placebo. Based on this interim analysis, which will be quite technically a futility analysis, the further progression of this program will be decided.

This trial is co-financed by Novartis and handled and managed by the team here at Intercell. We expect this futility analysis in the second half of 2013 and subject to how the enrollment will be progressing in this very difficult target population, we will certainly be able to be a bit more precise on the timing of this futility analysis during the latter part of this year or very early next year.

Pandemic influenza, we do have one program in the collaboration with GSK. I come back to the GSK collaboration at a later point during this call, where we test the patch as an external adjuvant. This will be done by combining an off-the-shelf H5N1 vaccine from GSK with a vaccine enhancement patch continuing LT and by putting the patch on top of the injection site and co-administering those two applications, we would like to see whether a universally applied adjuvant can enhance the wound response.

We are right now in the data evaluation process and hence we will be able to report the data from the Phase I trials in the second half of this year. The data evaluation is being conducted obviously together with GSK and hence we don't want to be more precise at this point in time because we don't know how long this process is going to last.

We have Clostridium difficile program undergoing Phase I. Clostridium difficile, a chronic diarrhea disease most prevalent in elderly. Different companies are working on different approaches to tackle (inaudible). We have an approach that we are currently investigating in a Phase I trial. This Phase I trial has been designed in two different parts, Phase IA and Phase IB. Some people would call it Phase I/II, but in the Phase IB that is currently ongoing we are already investigating the product candidate in the target population, which means elderly and we will receive data from this trial in 2013, most likely in the first half of 2013.

We have a whole series of programs and clinical development programs where our proprietary adjuvant, IC31, a toll-like agonist basically improving the quality of immune response or the T-cell immunity is being investigated. In total, we are part of four different clinical trials in the field of tuberculosis. And here we work in consortia together with SSI, together with Sanofi and under the roof of different grand funding organizations including the Aeras Foundation.

We also had IC31 in indications with our partner Novartis and in all those trials we will see data late this year/early next year. The results will come in one after the other over the next period of 12-18 months.

We have already presented to you at the last quarterly call that following our re-privatization also in research we privatized one pre-clinical lead candidate and we focused more than 80% of our early stage efforts and resources on progressing this very first lead candidate, a candidate against Lyme Borreliosis and we are heading towards a pre-clinical proof of concept by the end of this year. And thereafter we will take a decision on clinical entry early 2013.

We have a few technology platforms and all of them are subject to ongoing partnering discussions and Reinhard mentioned already during his financial outlook that we have not been able to generate a new partnering deal on one of those platforms. But we still have it as part of the company's objectives for the second half of this year. We have active discussions on additional indications or potential areas of collaboration for our adjuvant IC31.

We have a pretty exciting fully human antibody platform and here we achieved first validation with M2 antibody with a pre-clinical proof of concept. We have other infectious disease targets that we are nicely progressing and we are in many potential licensing and service business evaluations right now.

The patch itself, also the previous Phase III trial in the field of traveler's diarrhea failed. I mentioned many times that the patch technology as such was validated in terms of its delivery performance. I mentioned already that there is one clinical investigation still ongoing as an adjuvant patch with GSK.

We have been able to test other indications in our research labs, those included allergy indications, those included certain potential vaccine applications such as boosters for existing antigens and also here based on the data set we have been able to generate until now, we are quite positive about potential licensing or service business opportunity.

With regard to the patch technology Reinhard mentioned already that GSK in his financial update, we received a payment from GSK in connection with a dispute resolution. We have terminated the vaccine patch collaboration and licensing agreement with GSK. So Intercell has now its rights back for the patch technology and obviously we have done this in very good faith. This gives us the opportunity to start really from the research lab with new partners rather than the initial partnership with GSK that was more focused on the late stage development candidate.

In terms of news flow and further news flow expected for 2012, '13 and '14, I mentioned all the respective milestones in 2012 and '13. And you can find a summary of those on page 20.

In terms of summary and strategic outlook, I think I would like to summarize the situation in that we will continue to strive towards our strategic objectives that we communicated as part of our strategic renewal process mid last year and on which we have so nicely delivered until today.

The key elements are clearly that we will maximize the value from our existing product by focusing on product and disease awareness by continuing the marketing effort in house but also with the partners and by improving the product profitability driven by better manufacturing performance but also increased plant utilization of a single-product-dedicated manufacturing facility.

We will continue to build on our strength around R&D, especially our validated and proven R&D capabilities, progressing our pipeline program but also looking for strengthening the pipeline opportunistically to really build on what we have shown to be good at many times, mainly to bring something from the bench to commercial, which is something that not many biotech companies have shown until today.

We will obviously be opportunistic when it comes to strategic growth. Here we will continue to maximize opportunities for new partnerships and we will continue to explore complementing business opportunities. With this strategy, we believe that we can generate value for our share and stakeholders

Thank you so much for your attention and we are opening up now for the Q&A session.

Thank you. (Operator Instructions). We'll now take our first question from Peter Welford from Jefferies. Please go ahead.

Hi. Thanks for taking my questions. I've got a couple. Let me start off with on the pipeline side, both the Glaxo deal with the patch and IXIARO. With regards to Glaxo, just so I understand correctly, after they have funded the Phase I pandemic flu patch trial, does that pandemic flu patch then -- all rights revert to Intercell, is that included? Or will there still be some ongoing relationship for the pandemic flu indication?

And then, secondly, on IXIARO in Japan, could you possibly give us an update on the progress of IXIARO in Japan and how that's going along?

And then just a quick finance question, if I can. Interest expense obviously ticked up and there's been obviously the term loan that's just been arranged recently, can you possibly give us some sort of idea as what we should use as a quarterly run rate for the financial expenses in third quarter onwards so we can better model that, going forward. Thank you.

Thanks a lot for your questions, Peter. I will start with the first two and then hand over to Reinhard. First of all, yes, we are operating under a specific clinical trial agreement with GSK for the ongoing pandemic influenza trial. Thereafter, everything is open and both parties can decide what to do and we have the right to use this technology wherever and in what form ever.

On IXIARO, and IXIARO Japan specifically, so far we have evaluated the Japanese opportunity but, with our marketing distribution partner Novartis, we have also evaluated other potential entry routes. So far, we have not come to the conclusion that Japan, based on the existing product licensure setup, is a valuable and justifiable strategic option because the regulatory hurdle seems to be too high to justify the financial investment. However, we continue to explore opportunities and will be opportunistic if there appeared to be an easier entry route into Japan.

So I'm coming to your third question, financial expense, with regards to the new loan from BB Biotech. As you know, it's a EUR20m loan that has a fixed interest component plus a part -- 5% part of our Japanese Encephalitis product sales that we pay for the loan. You see that in the second quarter, compared to the first quarter, finance expenses have increased by about EUR600,000. Since the loan closed almost exactly at mid of the second quarter these additional finance expenses represent half a quarter so if you doubled that to about EUR1.2m for a full quarter and applies to consecutive quarters for your models, this should be a good approximation.

All of the expense related to the loan, so the fixed interest plus the revenue share, is recognized under finance expense since it is a consideration for the granting of the loan. And this finance expense is normalized in our accounting over different accounting periods, meaning a strong quarter in sales does not mean that these costs go up, and a weak quarter in JEV sales does not mean that it goes down. But we have normalized the expected expense over the different accounting periods throughout the term of the loan.

I hope this has clarified the accounting treatment for you, Peter, and for the other analysts and investors.

That's great. Thank you.

We'll now take our next question from Gunnar Romer from Deutsche Bank. Please go ahead.

Good afternoon, everyone. It's Gunnar Romer from Deutsche Bank. First question would be with regard to the payment from GSK. I was wondering whether you could give us some more insight with regard to the magnitudes I'm seeing. In Q1, you had income from collaboration and licensing of EUR1.3m and it was now close to EUR5m in the second quarter; is the difference mainly coming from the payment or what other elements are in there?

Then, secondly, on the GSK deal and the termination on the other vaccines, I was wondering whether also implies a negative cross-read for the panflu patch, given that you're currently in data analysis. Is there -- how do you think -- or how do you look at the commitment from GSK for further commercialization of the panflu patch, going forward? And could you give us some more insight into your plans regarding the further -- the future for the patch technology more generally? Thank you.

Gunnar, this is Thomas speaking. I will start with the more strategic view on patches and GSK collaboration and then Reinhard will translate this into financials.

We -- remember that we presented, as part of our revised strategy, that obviously we have not been able to continue any clinical investigations or late stage development activities around the patches. The GSK in -- the initial GSK collaboration had three key elements. One was future marketing and distribution of the travelers' diarrhea; second was collaboration on panflu under the umbrella of HHS supporting or not supporting continued efforts in the field of pandemic influenza; and the third one was what we call the vaccine patch collaboration and licensing agreement, which was essentially a research kind of activity in the field of patches.

Obviously, the -- with the front runner, meaning development program, going away, we were left with the two other parts and there was no further strategic interest from GSK in starting patch programs from the very early stage of the bench. They were interested in late stage but not so much in the early stage activities.

Panflu still represents an exception to it because we see this as an opportunistic trial where one can go a complete different route, which is a technology-enabling route; this is not a product route. This trial wants to confirm that you can use a patch to deliver an adjuvant in a more universal way and, subject to how this trial is going to come out, one can have either a very substantial tool for business development, new partnerships, or even in support of an existing partnership like the one with GSK. The GSK collaboration thereof got obviously terminated in good faith and we said we'll leave the panflu in the same setting we had it always, which means, subject to the result, we decide on next steps.

The patch, in general, is in our research lab here and in Vienna, and we are testing it for different multiple indications. And we will only continue to invest in the patches next year if there is some potential partnering that can carry the cost. And this is something that we have been explaining in multiple times at different occasion and this is essentially how we see the strategy around patch technology, as such.

Coming to your third question on a concrete number of the GSK payment that was agreed, I have to apologize that I cannot give you such a number since confidentiality has been agreed with GSK. But you mentioned the comparison between the first and second quarter and I can confirm that this agreed payment is a material factor for the increase and that it helps us to achieve profitability in the second quarter.

Okay. Thank you. Maybe if I can have a follow-up that's regarding Pseudomonas. I'm seeing in your report that you now expect interim data in the second half of 2013; previously you had guided to mid-2013. I know -- I'm aware it's an ongoing project but I was just wondering whether you can give us an idea of the enrollment progress and where you are in terms of enrollment and when you would start analyzing data for the interim read-out.

Okay. We are obviously conducting a trial, as you know, in a very difficult type of population. We have many centers across Europe that do participate in this trial and it is always very difficult to predict the enrollment pace. We initially assumed certain enrollment pace subject to clearances with the respective ethical committees and competent authorities but also subject to legal clearance with the respective study centers. Some of it took a bit longer than originally expected, which is why we are on the recruitment side a bit below the recruitment pace. We might well be able to catch up but we said, initially, mid of the year-end we had, according to our initial plan, a June/July time frame. And we wanted to be a bit more cautious and this is why we said let's be a little bit on the safe side with regard to the interim data.

This works, according to what we discussed already in one of our previous interactions, as a very clear futility analysis, which means that once the 400 subjects will be enrolled, the follow-up period will be over. Well, once the 400 subjects will be enrolled then the enrollment will stop, follow-up period will need to be completed and then the read out will be done by closed DSMB. And, from there, a recommendation will be made based on the predefined go/no-go criteria for this trial.

Thank you. And would you be able to put a number behind what is currently enrolled?

No.

Okay. And then one final question on IXIARO, if I may, and your plans for the endemic market. You said you were very close to the launch in India, together with your partner. I was just wondering whether you could provide us an idea of how we should think about the -- not only the potential but also the potential ramp-up of sales in this market.

Yes. This is obviously a very good question, Gunnar, and you have noticed that we have not given any guidance with regard to this potential in India, so far. We have not included it in our guidance with regard to this year's revenues. Why? Because it is a market that is not existing today.

Also, we are talking about an endemic country. Our product -- or the BE product will target primarily the private sector. It will target the private sector because the public sector is primarily driven by tender businesses where still very low cost, and potentially even low quality, product is being brought into the country, whereas we try to put the product into -- position the product in a very distinct target population. And we have tried to model this but have not been very successful so far because it's not very clear how this market can be accessed. Therefore, we want to wait for the first six months post market introduction because, also, we have learnt the lessons from the initial hypothesis and pre-guidances on IXIARO sales prelaunch. And we will certainly not repeat the same mistake twice.

Thank you very much.

And I'll take a next question from Guillaume van Renterghem from UBS. Please go ahead.

Yes, two questions, if you don't mind. The first one is with regards to your guidance as to when you should break even. Previously, you were clearly flagging 2014 and, at the beginning of your comments, you said that it was more likely to be 2014/'15 so I'm just wondering what has changed between these two guidance.

And on Pseudomonas aeruginosa when the interim data analysis will read out in H2 2013, do you expect to receive a milestone payment or not at all? Thank you.

I can start with the second one first, the Pseudomonas. On the Pseudomonas we will not -- we do not expect a milestone payment because this program is a program that is co-financed 50-50 with Novartis and hence the only decision point will be to continue or not to continue this program upon successful interim analysis. And then the second part of this trial will also be cost-shared 50-50 and only thereafter we will decide if this program goes into the Novartis strategic alliance and, subsequently, respective milestones.

Thank you.

In terms of our guidance, we are not changing our guidance to profitability. I think we introduced this guidance mid of last year when we announced our renewal strategy and we guided for sales sustainability in three years to four years. I leave the rest for your interpretation but it is the same what we are still saying.

(Operator Instructions). We'll now take our next question from Mark Pospisilik from Kempen & Co. Please go ahead.

Hello. Good afternoon, everyone. Just two questions from my side. One more on the launch of the Japanese Encephalitis in India; if I could perhaps pursue that just a little bit to get a truly qualitative feedback perhaps. Is there anything you can say on the rollout? Will it be focused on a few states to begin with or will it be nationwide? Can you say anything about the types of healthcare providers or such that you'll be targeting, perhaps? Is it urban hospitals, rural clinics, GPs' offices or anything along those lines that you could say there?

And then on the gross margin, if you could provide a little color there. Despite the revenue growth and the sales growth, it looks like gross profit is down just a little bit. If you could provide any detail there and let us know what's going on there. Thanks.

Okay, Mark, with regard to the rollout in India, currently we are targeting the large clinics across all the states. We are currently reviewing this as part of the power outage that basically influenced the Indian infrastructure in many states. Nevertheless, the initial plan is to target the large institutes and clinics for tropical medicine and respective centers plus the large corporations in the country who do offer vaccination to their employees. So this is what we call the first wave and, from there, we will decide on the next steps.

Regarding our gross margin, I would like to caution you on interpretation between one quarter and the other. I think we are still in a phase where we see significant volume growth. We are talking of biologic manufacturing which, by definition, is volatile. We have even currency effects since most of our manufacturing costs incur in British pounds so, by comparing gross margins from quarter to quarter, please be careful with drawing conclusions.

You will see volatility in the gross margin over the next couple of quarters. Remember that we just came into positive territory last year, in 2011. We view it as a success to show a consistently positive gross margin and to cover our manufacturing costs at this level of sales that we are currently showing. We are targeting a 50% gross margin in two years to three years and we are well on track to achieve that but expect volatility resulting from the factors that I have mentioned.

That's great. Thank you.

As there are no further questions at this time, I would like to turn the call back over to your host for any additional or closing remarks.

Thank you. Okay, this is now the end of our -- today's call. I would like to thank you for your participation, for your good questions and for your continued confidence in Intercell. Thank you very much. Have a good day.

That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.