Valneva SE (VALN) 2017 Q4 法說會逐字稿

Good day, and welcome to the Valneva Full Year 2017 Publication on March 22, 2018, Analyst Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Thomas Lingelbach. Please go ahead, sir.

Thank you so much. Welcome, and a very good day to our analyst call on full year 2017 financials and general operational business updates. Today, I'm joined by my fellow management board colleagues David, Franck and Wolfgang.

It is a great pleasure to report a very strong year for Valneva today. We have fully delivered on our financial targets, and you will see later, as part of the financial reports, that we have been able to grow our sales by 15%, the EBITDA significantly increased compared to 2016, while we have continued to progress our key value drivers with the potential R&D investments.

We are executing well on our key growth drivers, especially on the commercial side, driven by increased product adoptions in main markets, an additional IXIARO supply contract with U.S. government and our decision to take direct control over our commercial operations in the U.S. private markets.

I will later describe in detail the major progress that we have been able to make on our R&D pipeline, but just to name a few things we feel extremely proud of. We got a Fast Track designation from the FDA for our Lyme candidate. We signed a collaboration agreement and progressed our Zika vaccine and in 2017, we prepared both Zika as well as Chikungunya vaccine candidates for initiation of Phase I, which in the meantime took place and, again, will be part of the operational update on R&D.

We further strengthened the management, and we are very glad that we could add high-caliber talent to the management team with the appointment of David Lawrence as CFO and the appointment of Wolfgang Bender as our Chief Medical Officer.

We had very, very positive R&D news flow right at the beginning of the year 2018, with the Phase I clinical study initiation for Zika, with the Phase I study initiation for Chikungunya and with positive Phase I interim results for our Lyme vaccine candidate.

With this, I would like to hand over to our CFO to give you the financial report.

Thank you, Thomas, and good day, everyone. Firstly, I'd just like to say I'm very pleased to present the company's full year results for the first time since I joined. On Slide 7 -- I'll just make sure the slides are in order here. On Slide 7, you will be getting used to seeing this slide now. So we basically show our 2 main value drivers on the left-hand side in the pie chart, and we show commercial performance and on the right-hand side, the highlights of R&D pipeline, notably the Lyme disease program, which is the most advanced of the ones that Thomas just spoke to. And key highlights here, product sale revenues grew by more than 15% and total revenues, including grants and R&D tax credits, grew by 12%. I'll go into more in detail in a second. So product sales amounted to EUR 92.6 million, of which we directly manage 73.5% of those sales. Gross margin for the year was 58%, and we'll come back to talk about how that trend is going. And I'm very pleased that we generated cash of almost EUR 13 million from operations, and we'll come back to how that impacts our balance sheet.

So if we move on to the next slide. So this is our P&L for the year. And I'm going to go into revenues more deeply on the next slide. So total revenues, including grants, R&D tax credits and other items, were almost EUR 110 million for the year and that represents a growth of over, as I said before, just over 12%. And in comparison cost of goods and services grew by just under 7%, which means, on aggregate level, gross margin improved year-on-year. And I will also come back to talk a little bit about that more on the next slide.

R&D expenses at EUR 23.4 million were slightly lower than 2016, largely driven by timing, nothing that we originally expected and then we budgeted to potentially commence Chik and Zika Phase Is in late 2017. So some of the point here is about phasing. As Thomas mentioned, Valneva is strongly committed to investing in our R&D programs, and we'll come back to that later in the 2018 guidance section.

Distribution and marketing expenses rose by just under 8% to EUR 17.9 million. I am noting that product sales growth grew by 15%. That shows a very healthy return on our sales and marketing investments and activities.

G&A was EUR 15.5 million, with nothing in particular to highlight there. Just going down into amortization and impairment. So the 2017 full year number was EUR 10.7 million, which includes EUR 3.7 million for C. difficile, which we reported during the year. And one notable point here is if we stripped out C. difficile impairment from 2017 and the Pseudomonas impairment from 2016, you see an underlying number of EUR 6 million to EUR 7 million in amortization and impairment.

And operating loss was EUR 4 million, and again if you just take out the C. diff impairment, we are almost at breakeven level for 2017, which is a significant achievement.

Finance and tax. The finance and tax results, the costs there were EUR 7.5 million. And that was mainly from currency effects that we suffered in the first half of 2017 that we reported with the H1 results. And I'm very pleased, as is Thomas and as the whole management board, to therefore report almost EUR 11 million in EBITDA for 2017 compared to just under EUR 3 million for 2016.

So next slide please. So here I'm going to go into the revenues in a bit more detail. So in my discussions with several analysts in the last 6 to 7 months since I joined, I think we've understood enhanced visibility on revenues is something that would be appreciated. So this slide is basically in with increasing that visibility. And I'll also take the opportunity to comment on margins on the way through this slide and how we plan to report going forward.

So firstly, as you know by now, we tend to focus mainly on product sales revenues. And what we're seeing for both IXIARO and DUKORAL is ongoing double-digit growth. And that's driven by robust sales and marketing strategies that drive up volumes in key markets, such as the U.S. for IXIARO and such as Canada for DUKORAL. So IXIARO grew 13% year-on-year, and DUKORAL grew 16% year-on-year. And that means that our overall product sales growth was 15%, which is very healthy double-digit growth.

For 2018, we anticipate further double-digit growth in product sales and, therefore, to achieve over EUR 100 million in product sales for the first time, and that's a significant achievement for the company. And I don't want to discuss other revenues in detail, except to say the overall guidance is EUR 110 million to EUR 120 million, and that we do plan to report grants and R&D tax credits in the other income line in future. Nonetheless, we will use this format to help give you continuity and visibility of the numbers during the year.

And couple of comments on margins. So if you look at the makeup of this slide, you'll see that we have EUR 92.6 million for product revenues in 2017. The gross margin on that was 57% (sic) [58%] . And what we're going to continue to focus is on gross margin on product sales. And these other items, which have come up in Q&A on previous calls as well tend to fluctuate, some of them do fall right through to the bottom line, but others don’t. And what we're going to focus very heavily on is product sales revenues and gross margin at the product level. And to give you insight into there, as reported, the JE -- IXIARO JE gross margin for the year of 2017 was 64%, which is up from 60% from the previous year, and DUKORAL was almost 47%, which is up from 45% in the previous year. So we are seeing an ongoing margin improvement, and we do expect to see further improvements going forward.

Next slide, please. So a couple of things to highlight here. Really, this is more on balance sheet items and debt and cash. And the bottom right of those charts is another achievement we're very proud of. So we've almost doubled operating cash flow generated in the year from EUR 6.5 million in 2016 to almost EUR 13 million in 2017. And that's really based and driven from the operational performance going from the top line all the way through the margin, down through the business. And couple of points on cash and debt, just to put those in perspective. And most of you know that we are paying down a loan from Pharmakon and that we also started to draw down a facility from EIB. And we paid down about EUR 7 million in debt overall on a net level, and that amount was basically EUR 10 million drawn from new drawings from EIB, offset and a bit more by Pharmakon repayments plus some other repayments within the business. But we remain -- our balance sheet remains in a healthy position. And we would plan to stay at north of EUR 35 million going forward. And so the year-end number of EUR 38 million is a number we are pretty comfortable with. I think I will stop there for a moment, and we'll talk a little bit more when we come back to guidance, but I'd like to pass you back to Thomas to talk about the investments that we're making in our very valuable and critical R&D programs. Thanks.

Thank you so much, David. Yes, let me give you an update on the -- on our major R&D progressions. You know that since we created Valneva, we have continued to focus our future -- current and future R&D portfolio towards vector-transmitted diseases, which are diseases in this case transmitted by either ticks or mosquitoes. As such, after completion of the C. diff program, which was still outside of this new investment theme, we progressed 3 major programs: Lyme, Chikungunya and Zika. All of them made tremendous progress over the past 12 months, and I'm going to report one by one. And we'll start, of course, with our most important program, a vaccine against Lyme disease. You know that Lyme is transmitted by ticks. It is the most common vector-borne illness in the Northern hemisphere and delayed or inadequate treatment can lead to really long-term sequelae. We progressed this program into a first human trial, a Phase I. And this Phase I had its interim readout, which is a readout after 3 months, focused on its primary endpoint, safety, of course, and immunogenicity. It is important to note that our program is the only active clinical-stage vaccine program against Lyme disease worldwide, and it is a multivalent protein subunit-based vaccine that targets the outer surface protein A, so called OspA of Borrelia, which by the way is a well-proven mode of action. And due to the fact that we developed a multivalent vaccine, it is intended to cover all the prevalent Borrelia species on both sides of the Atlantic. The Lyme disease, as such, is a disease that is not only the most common vector-borne in the Northern hemisphere but is also an illness that is steadily increasing as the disease footprint widens, and hence, its medical need is also significantly increasing and a very significant positive health economical benefit for vaccination against Lyme can be expected.

Let's talk a little bit about the Phase I results. We conducted the trial in 179 subjects in the U.S. and Europe, approximately 80% in Europe, 20% in the United States. Further details can, of course, be found on clinicaltrials.gov. The study primary endpoint was met. We had reported a very favorable safety profile. No safety concerns that were associated with VLA15 in any of the treatment groups, and I'm going to report safety a bit more in detail. And we saw encouraging immunogenicity with our vaccine candidates. It was immunogenic in all doses and all formulations, created, of course, with respect to the immune response. We saw this immune response by good OspA-specific IgG antibodies against all the different OspA serotypes. There was a clear dose response seen between the lowest and the 2 higher doses, adjuvanted versus nonadjuvanted groups. The highest adjuvanted dose group, which is in this case a 90-microgram group adjuvanted with aluminum hydroxide, showed a 0 conversion rate, measured by fourfold rise against baseline from 71.4% to 96.4% for the different serotypes.

Talking a little bit more in detail about the results. On Page 15, we have summarized the key safety conclusions for this interim readout, which, again, is a readout on day 84 and in month 3 of the trial. So I mentioned already, no associated safety concerns. This means, we did not see serious adverse events considered related to the immunization with VLA15, and we saw no cases of Arthritis or Rheumatoid Arthritis. There were very few severe related adverse events. Total of 8 subjects with severe related AEs from different treatment groups. So almost equally distributed. All were, so called, solicited AEs. This means volunteer reported, by default considered related to vaccination. The study investigators, and this trial has, of course, been overseen by an independent Drug Safety Monitoring Board, considered AEs as related in 4 subjects: 2 subjects with severe local pain or tenderness, both not medically attended, one treated with a single Paracetamol dose; one subject with nausea, not medically attended, no treatment; one subject with headache, not medically attended, treated with a single Paracetamol dose. And severe Arthralgia and Myalgia seen in one subject. However, the DSMB considered it unrelated to vaccination and the investigator considered it unrelated to vaccination, since the study subject did previously an ultramarathon with 100 kilometers.

When we talk a little bit about the immunogenicity, you see on Page 16, the immunogenicity profile. This is an average of the seroconversion rates by treatment groups. So it does not specify details on serotype by serotype. Why do we not report it at this point in time? Because it's an interim analysis, and we are only at month 3, and the final analysis will come up at month 12. And, of course, the ratio in between the different serotypes may change as we go through the follow-up period, which is why our intent from the beginning has always been to report serotype-specific antibodies at the final analysis of the trial. When you look at the picture, you see essentially the error bars. They show the spread of the immune response in between serotype 1 and serotype 6 of the full range. And you see that's basically a very good picture across all the serotypes on adjuvantation. So this means alum-adjuvantation increased the immune response in all those groups. The 2 higher dose groups, 48- and 90-microgram, have almost shown the identical immunogenicity profile. And, of course, the question is now why are we picking, for the time being, the highest dose to be considered for further development. And this has to do with the kinetics of the immune response. We measured at different time points up to day 84, and we saw that especially on the day 56 data that there the 90-microgram dose behaved better in terms of immunogenicity, and hence, indicates a better kinetics of immune response at higher dose levels. And for OspA, it is very critical that you have the highest possible immune reaction. So this means you basically vaccinate with the highest possible safe dose.

Here with this results on Lyme, we feel not only very proud but also very encouraged to progress this product candidate throughout its development chain, and we have initiated respective Phase II preparations and anticipate Phase II to commence in the second half of 2018, of course, all subject to respective consultation and approval processes with regulators.

The other program that we have advanced quite significantly is our vaccine candidate against Chikungunya. Chikungunya is a mosquito-borne viral disease caused by the Chikungunya virus, which is a Togaviridae virus transmitted by Aedes mosquitoes. It is a classical outbreak disease. We have seen multiple outbreaks in Asia, Africa, Europe and the Americas. And, for example, as of 2017, more than 1 million reported cases have been seen in the Americas alone. And today, there is no preventative vaccine or any effective treatment available. Different to Lyme, in the field of Chikungunya, we are not alone. There are multiple companies working on vaccine candidates against Chikungunya since there is a significant medical need and market potential expected for vaccines to cover Chikungunya. However, we are trying to differentiate ourselves with a very interesting differentiated product candidate. We aim with a monovalent, live-attenuated prophylactic vaccine for a single shot protection. And this could indeed be a major differentiating factor against other programs currently in clinical development. We aim for long-lasting protection of individuals above 1 year of age. The Phase I that we very recently commenced in the United States is a Phase I in about 120 healthy CHIKV-naïve subjects, aged 18 to 45 years of age, the classical blinded, randomized, dose-escalation study. But this study is very particular because we have been able to develop and get approved by the regulators a study design that will give us towards the end of Phase I a first hint on the vaccine efficacy. And this is something that you typically do not see in the world of vaccine development because you know well that most -- in most of the cases and most of the clinical setups in vaccines, you do see efficacy only as part of a pivotal Phase III trial. So how do we do that? We vaccinate with a single shot and then after a certain period of time, 6 or 12 months depending on the study arm, we vaccinate again with the highest dose. Since we are talking about a live vaccine, this is a sort of an indirect human viral challenge demonstrating that subjects will ultimately be protected from viremia and, thereby, we see that the vaccine protects. It is, of course, not a definitive answer, it's an indicative answer but can be considered a very strong indicative answer. We have seen this picture in our entire preclinical setting already in nonhuman primates, where we did not see any viremia after a challenge at 300 days. We will see a readout of our Chikungunya vaccine trial by the end of this year, very early next year.

Zika. We have been able to really bring a Zika vaccine candidate within a very short period of time into clinical development. I don't need to speak about Zika as a disease anymore because, I think, it has been widely through the press, and we have talked about it in the past. Our vaccine candidate is a highly purified, inactivated, whole-virus vaccine candidate. It is a vaccine candidate that we developed using our proven and licensed inactivated vaccine platform for IXIARO/JESPECT. As such, we have been able to be extremely fast, and it was also sort of a proof that our platform that we have established in our manufacturing environment can be used for more than just JE vaccines.

The preclinical testing demonstrated an excellent purity, in-vivo neutralization and overall biological, chemical and physical profile comparable to our licensed IXIARO vaccine. This led to a co-development deal with Emergent BioSolutions that includes an opt-in post Phase I that we are currently conducting in the United States in exchange of milestone payments and potential future royalty on sales. When it comes to the target product profile or, more importantly, the target population, we are considering it as priority for people traveling to or living in endemic area but also, maybe even more important, as a potential preparedness vaccine for stockpiling. The study readout timing will be almost exactly the same as for our Chikungunya.

In total, as David mentioned, we spent quite a significant amount of money in R&D last year, about 20% of the top line. However, we are progressing now our clinical candidates further throughout the value inflection point, which is great because this is where we see the company's upside, and this is also why, when we later talk about guidance, you will see a significant increase for R&D expenditure anticipated for 2018.

With this update on R&D, I would like to hand back to David.

Thanks again, Thomas. So if we move on to Slide 21, and let's come back to guidance. So as I mentioned earlier, for product sales, we're going to reiterate our expectations of double-digit growth, and that guidance applies for the foreseeable future. That takes us over the EUR 100 million level, which is an achievement we are really looking forward to. And just to mention, total revenue, including grants, R&D tax credits and so on and so forth are EUR 110 million to EUR 120 million, but through the year, we're largely going to focus on the product sales that we are driving through our own efforts. The R&D, I think Thomas has made it clear that there's enormous value in our pipeline and as the programs move from left to right, clearly, we need to invest more. And I'm noting that we do plan to invest more, the only comment that's been previously made is around potentially EUR 30 million. So we are guiding that we're going to spend and invest up to between EUR 30 million and EUR 35 million in 2018.

Even with this significant level of investment in R&D though, we still plan to deliver positive EBITDA of EUR 5 million to EUR 10 million. Okay? And just to go on to the last slide before we stop for Q&A, I think I would like to draw your attention to the news flow that we expect during the year. And we think this is a potential pivotal year for the company breaking the EUR 100 million product sales barrier. So we will talk more about product sales growth and the evolution as the year goes on, including margins. We will initiate Lyme Phase II and clear it out. It will be another significant achievement. We're saying H2, and we will be in dialogue with the FDA as soon as we can with regard to Phase I data and enhance. And clearly, we're executing the -- both the Chikungunya and the Zika studies. We do expect other news flow, but we expect these particular points to be further catalysts for the company's value during the year. And at that stop -- at that point, I would like to stop and invite Q&A. Thank you.

(Operator Instructions) We can now take our first question from Jean-Jacques Le Fur from Natixis.

Jean-Jacques Le Fur from Natixis. Two questions regarding the R&D, especially. The first one is, do we have to anticipate the R&D expenses to increase in the next, let's say, 3, 4 years, starting from the EUR 30 million, EUR 35 million for this year. So could we see the -- this R&D expenses going further than the -- over, sorry, than the EUR 30 million, EUR 35 million? And my second question is regarding the split of your R&D expenses. If I well understand for Lyme that you spent about EUR 5 million this year due to the huge potential for this vaccine. I'm a little bit more disturbed or skeptical for Zika and Chikungunya, especially as we have seen Sanofi stopping its program for Zika. The WHO stating that Zika is no longer an emergency. So I don't see the real potential for these 2 vaccines compared to Lyme. And that's why -- and you will spend the same amount for each of them or each of these vaccines. Wish you may have some highlight on that.

Let me start with the second part of your question first. Because it puts things better to strategic perspective. So first of all, I think you -- as you mentioned already, you share with us the view that there is a huge medical need, and there is a significant market potential for Lyme vaccine. So that's clear. And, of course, we will do everything to bring this vaccine forward as quickly as we can, and David is going to talk more about the investment profile that, of course, will be -- will go in parallel to the progression profile of this vaccine. When it comes to Chikungunya, the point on Chikungunya is that the market for Chikungunya, not only in an outbreak situation but also as a general prophylactic vaccine in risk areas, considered risk areas, is considered substantial. And this is the reason why so many different companies are working on vaccines against Chikungunya. The interesting thing about Chikungunya is that outside of the pure disease view, technologically the mode of action for Chikungunya vaccine is pretty clear. It's neutralizing viral antibodies, and there are, of course, different technologies how to tackle that. So the -- let's say the investment ratio to bring a vaccine against Chikungunya to market is, of course, very different to something like Lyme. And this is why we believe that there is a good justification for us to invest in Chikungunya provided, and now I come with the caveat, that at the end of Phase II -- Phase I, sorry, our differentiation factor compared to the other competitors in the field is being confirmed. So this means, for the time being, our Chikungunya financial commitment is till the end of Phase I. Then, we will see where we stand in light of all the other competitors. And then, we will invest in Phase II. When we look at Zika, I mean, we agree with your assessment. No one knows whether Zika will ever be a disease for which a sort of a routine vaccination will be needed. We don't know what kind of outbreak situation we may or may not face with Zika. And this is exactly the reason why we have risk mitigated this program through a deal with Emergent post Phase I. And let me remind you that we, as Valneva, are not investing in any clinical development activities post this Phase I. The agreement with Emergent is that we do a joint development with a cost share until the end of Phase I, and then Emergent have an opt-in, and this opt-in will come along with potential milestones and royalties. And the milestone payment alone would significantly offset all the R&D investments that we have put into Zika to date. And maybe this is the right point, David, for you to talk about the R&D costs going forward.

Thanks, Thomas. And Jean-Jacques, I hope that sort of helps tee-up the response I'm going to give you. So going forward, we don't really foresee going above EUR 35 million. However, I wouldn't be absolutely dogmatic to say that we'd never go above EUR 35 million, and I certainly don't want to be categorical. So for the reasons Thomas mentioned, for example, we have a Zika investment profile just now. And the key time point for us looking further right will be when we get towards Phase III for Lyme. So the EUR 35 million is a number that we feel pretty comfortable. It's the top end of what we'll invest on the -- in the next 2 to 3 years, and we wouldn't anticipate, unless for very good reasons going above that, until the Lyme Phase III.

We can now take our next question from Sam Slutsky from LifeSci Capital.

I guess, for first question, curious about how the transition has been going since taking control of U.S. sales and marketing for IXIARO?

I think it's a good question for our -- for Franck.

Yes, thank you. So in a nutshell, I would say so far so good. So we have taken control, in fact of this market at the end of last year, in December. The team is in place. First marketing and advertisements have been launched. We see a positive trend. We have multiplied the number of distributors. We see and we expect to reach a much, much broader, I would say, audience with that. So too soon to say, obviously. We will see the result at the end of the year, but we are very positive so far with this decision.

Great. And then -- appreciate that. And for second one, could you just talk about the seroconversion rates for the Lyme vaccine with the Phase II kind of recommended dose? And how does that compare to what was previously seen with LYMErix?

So there are -- so first of all, there are no publicly reported informations on seroconversion rate for LYMErix. So the Lyme -- the seroconversion rates that they have seen in this interim analysis, and let me remind everyone one more time that this is an interim analysis, that's taking day 84 results is within the typical range that you see for different kind of vaccines, even licensed vaccines. So is there potential to further enhance and improve the level of seroconversion by optimizing dose/schedule? Of course, there is. And this will be subject to the Phase II work that will be undertaken. I mean, you know that especially this is a vaccine candidate that is very complex, 6 serotypes compared to a single serotype for LYMErix. New technology, namely recombinant subunit with 3 heterodimers, combining C-terminal path of the respective OspAs. So hence, our primary, primary worry, if you like, was to see a good safety profile, which is the #1 objective for a Phase I trial. And as such, we were very, very happy with the very clean safety profile compared to other lipidated protein-based, licensed and very big, by the way, vaccines. And yes, and so we will now further fine tune protocol for Phase II and as I said further optimize as we go through the Phase II.

Okay, great. Appreciate that. And I guess, lastly, in terms of the Phase II trial design, you'll disclose that after meeting of regulators?

Yes. So we are anticipating towards the latter part of H1 respective regulatory reviews and conferences, and we'll then, of course, disclose it.

(Operator Instructions) We can now take our next question from Samir Devani from Rx Securities.

I've got a couple. The first is just, I'm slightly curious in terms of the accelerated dosing strategy for IXIARO. And maybe you could just comment a little bit about whether that's having any impact on uptake? And then my second question is to David on the debt. I'll come back on that.

Yes, you're talking -- Samir, you're talking about the 0, 7 schedule for IXIARO, don’t you?

Yes. So my understanding was that there was sometimes lack of uptake because of the dosing schedule and obviously with the accelerated regimen there.

Yes. So basically, you know that IXIARO was initially licensed with a 2-dose primary immunization schedule, day 0, day 28. We have then, post marketing, tested an accelerated schedule, day 0, day 7, which, of course, especially for a traveler's vaccine has a significant value. Typically, travelers just come too late for vaccination, and then you don't see the necessary level of compliance with 2 doses. And essentially, we got the -- we initially got the approval of the 0, 7 schedule as a, so called, secondary schedule or alternative vaccination schedule, how it's also named subject to regulatory jurisdiction in Europe. We then got it subsequently into 2 other major markets, namely, U.S. and Canada. And it is, of course, an add-on to the growth factors for IXIARO.

Okay. And then on the debt, I just -- maybe I just want to get my understanding of your comment. I think you mentioned about keeping the cash level around roughly where it is right now. But just thinking about the debt, I think the Pharmakon loan is due for repayment at the end of this year. So I just want to confirm whether that was going to be paid off in full? And then on the EIB, is the plan to draw down the, I think it's EUR 15 million or so, remaining on that this year?

You're pretty insightful, Samir. So the Pharmakon loan final payment is actually January 2019, okay? That's the schedule. And yes, the plan is to pay that loan off. Regarding the EIB facility, the EIB facility that we've agreed is for up to EUR 25 million. And what I'm on record is saying is that I believe that this company deserves a better cost of capital than we have and some of that will be taken care of over time, as we pay down the Pharmakon loan. And we hope to be able to look at alternative and cheaper forms of debt as the year goes on. The sort of level of debt of EUR 25 million or so, again, I think, is something we feel comfortable with based on the business profile that we have right now. So over time, I think, you will see the Pharmakon loan paid down as planned and as scheduled, and we'll take on board some alternative debt, hopefully, at a reduced cost of capital.

Just for clarification. Is that -- Pharmakon, I think, is roughly about $40 million, $41 million. Is that correct to the moment?

Yes, as of the end of last year, yes. So -- and -- it's slightly out of step, Samir. So be slightly careful in your models. We make the repayments quarterly, and the quarter happens to be Jan, April and so on, not monthly, 6, 9, 12.

We can now take our next question from James Mainwaring from Stifel.

I first just want a tad bit more clarity on the Lyme vaccine. I see you -- it says GSK have an option to sort of join in on that. I was sort of wondering if you could give more clarity about sort of what they're looking for? And why they haven't sort of opted in sort of co-developing that with you currently? And then I suppose -- I mean, do you have a say in whether they join in? And if they don't, can you go alone on it? David was pointing R&D might have to go up for the Phase III. So just we're wondering about whether you'd need to find a different partner if they didn't join in? Or whether you can develop that yourself? And then the second one is about sort of guidance and the growth for IXIARO and DUKORAL. If we sort of assume currently sort of base guidance, I was just sort of wondering about some geographic expansion and whether through new markets that targeted to, to enter this year?

Okay. So let's start with the Lyme question. You may recall that the Lyme vaccine candidate is a program that falls under the previous strategic alliance agreement entered into by Intercell at that time with Novartis Vaccine at that time. This transitioned now to Valneva and GSK, but the terms and conditions that were initially reported are still valid for this program. So this means, we develop the program until the end of Phase II. And then GSK has an option to take it over at a predefined milestone and royalty payment, which has been disclosed at that time and can be found, respectively, or we can decide to continue in a co-development setting, which is roughly a 50-50 cost share and later 50-50 profit share. And this is at our sole discretion. What we will try so is to bring this, let's say, decision point forward, and we have ongoing dialogues. And I think this is as much as I can say to that point. And I think, David, a little bit on product guidance.

Yes, so on the sales guidance, specifically. I think the -- a couple of folks have asked the question already. Actually the primary sales driver for our product sales growth next year is in the U.S. And that's something we're going to focus on. The U.S. is a well-priced market for us and, as Franck said earlier, we've put in place our own infrastructure towards the end of last year, started implementing that. And in an opportunistic and carefully analyzed manner, we do look at geographic sales expansion, but the primary growth driver that we're going to focus on this year is the U.S.

(Operator Instructions) We can now take our next question from Christian Orquera from First Berlin.

I have a couple, if I may. My first question is on the gross margin. Actually, the gross margin was in the range of the 60% after the 9 months of 2017. And it went slightly down on the full year basis to 58%. Maybe you can give more light on that. Was it product mix? Or what was the key driver for this going down in Q4? And second question is on the taxes, which actually after H1 results, there was a trend towards a tax charge for this year and which -- and then the full year results came positive actually, about EUR 1 million. And you created also a position in the balance sheet for deferred tax assets. So maybe you can give a bit more light on what happened on your assessment on tax expenses for your business?

Okay. Thanks, Christian. Okay, and yes, your eye for detail on the margin is spot on, actually. So our margin can fluctuate from quarter to quarter. And that largely depends on output, and it can be impacted by stock write-offs or inventory write-offs. And in 2 quarters last year, we had impairments on manufacturing lots. One of those was Q4. And so you're exactly right. Q4's cost of goods was higher than we might have hoped for. In biologics manufacturing, we do see lots written off from time to time. Clearly, it's not something we enjoy having to do, and we try to keep it to a minimum. So that's the answer for your gross margin point in Q4. It's well spotted. Regarding the finance and the finance results and tax, just going to that in a little bit more detail. So the full year number there was EUR 7.5 million. And that's made up basically of the currency hit, which was largely in the first half of the year. That was about EUR 3.5 million. Interest charges of about EUR 5 million and that's largely Pharmakon but not only Pharmakon. And then you're quite right, we've done a plus EUR 1 million on tax. And that -- if you were to look at the R&D tax credits and grants line, which I showed on slide 9, you'll basically see that we reported about EUR 4.5 million for the full year of 2017. Most of that was, in fact, on the tax credits. And clearly, what we're going to do is try and take advantage where we can of the support of government policies that exist for us, notably in France and Austria. So that's where that emanates from, and we will continue to try and do that, Christian. It's hard to predict exactly how much, but we will take advantage of those when we can get them.

Does that mean that maybe we may see a similar effect in 2018?

No, I wouldn't build that into your model, Christian.

(Operator Instructions) We can now take our next question from Thomas Guillot from Kepler Cheuvreux.

Three, if I may. First one on IXIARO. Could you give us a bit of guidance of the incremental sales that considering the U.S. private market will bring you in 2018? I mean, what's the additional sales it could bring to you? And second question on Lyme vaccine regarding the seroconversion rate. I think on top of mind, LYMErix had 76% seroconversion rate for its serotypes -- for its only serotype. Is that comparable to what you released in your concurrent results? And my next question is on selling and marketing cost. You had, I think, in the fourth quarter 20% percentage of sales, S&M cost increased from the 15% over the past 9 months -- the first 9 months. Is it sustainable at this range?

Okay. So I start with the Lyme question, while the -- my colleagues can think about answering your financial figures. The -- so basically, LYMErix showed 76% field efficacy. So this means, this was the efficacy number shown in placebo-controlled 10,000 patients, head-to-head field efficacy trial at that time. As I mentioned before, the first view immune response does give you a hint that you may see similar levels, but it is not correlatable in between immune response and later field efficacy. We have, unfortunately, to wait for a few more years to get to that point. In terms of markets though, the -- comparing LYMErix and the Lyme disease situation in the 90s with the Lyme disease situation today, as you know, it's not comparable. At that time, we had a couple of ten thousand reported cases in the United States, literally very little in Europe. The situation is now that you have the number of confirmed cases in Europe and U.S. together is more than 0.5 million every year, and the medical community is consistent about the fact that this number is still heavily underreported because of lack of proper diagnostic systems and tools. So I think there is a huge opportunity. And this is why we developed a multivalent vaccine for both sides of the Atlantic. So David, do you want to -- in between you and Franck, whoever want to response.

Let me try to give the simple answer. If there's more detail, then Franck maybe can contribute as well. So Q4 for sales and marketing, the big driver there tends to be the timing of and direct-to-consumer activity in Canada. So in Canada, we are allowed to, for example, use TV advertising to support DUKORAL, and you probably know that we have the ETEC label in Canada. So given that Canadians tend to migrate to warmer climates in Q4 and Q1 during the harsh Canadian winter, we tend to invest heavily in promoting our DUKORAL product. So that's really the additional expense in Q4 would be exactly what you might hope and expect, and we did have a good sales performance in Q4 as a result. And hopefully, when we get right into Q1, we'll see some follow-on results from Q1 in Canada for DUKORAL. So that's the specific point on Q4. And regarding the IXIARO sales growth, so what I'd like to do is to reiterate that the primary growth driver for IXIARO sales growth in 2018 is going to be U.S. private. So we haven't guided -- we don't guide market by market, and we don’t intend to split out the U.S. Military to U.S. private. And what we perhaps said and what we continue to say is the U.S. Military is good solid business for us. It provides a good bread-and-butter business, but the growth driver for IXIARO in the U.S. is going to come from the private market. And the U.S. private market, as you all probably know, is relatively well priced. So when you look at the sales growth driver, that's where it comes from.

And maybe one additional aspect for the Q4 is that, as you know, we have been building the U.S. sales force and significant cost was occurring in Q4 and so that's something now which will be stable, basically. So the royalties to effect, the one that David mentioned and the building up of our U.S. sales force.

So we can imagine that this level of S&M will continue in 2018, right?

Well, the patent -- if you think -- so there are 2 pieces there. One is the patent. So we do our DTC in Canada Q4 and Q1. And then the level of ongoing expenditure and -- in the U.S., yes, will remain more unpredictable having started that investment in Q4. So you probably need to split it into 2 different ways, so the percentage expenditure on DUKORAL in Q4 and Q1 is relatively high and then it evens out over the year, whereas the other expenditure is more even across the year.

(Operator Instructions) We have no further questions in the queue at this time. I'd like to turn the call back over to you for any additional or closing remarks.

Yes, thank you so much for your excellent questions. Thank you so much for this, for your broad participation. We are looking forward to continuing working with you and giving you updates along the lines that we have discussed early today. And we are looking forward to, as David said, to a very exciting year marked by substantial value drivers and events. Thank you so much, and still have a good day. Bye-bye.

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