Novavax, Inc. (NVAX) Q1 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Novavax First Quarter 2015 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Ms. Andrea Flynn, Senior Manager, Investor Relations. Ma'am, please go ahead.

Good afternoon. This is Andrea Flynn, Senior Manager of Investor Relations at Novavax. I would like to thank everyone for joining today's call to discuss our first quarter 2015 financial results. Today's earnings release is currently available on our website at novavax.com, and an audio archive of this conference call will be available on our website later this evening. Joining me on today's call is Novavax's President and CEO, Stan Erck; along with Dr. Greg Glenn, our Senior Vice President of Research and Development; and Buck Phillips, our CFO. Before we begin our prepared remarks, I need to remind you that we will be making forward-looking statements during this teleconference that could include financial, clinical or commercial projections. Statements relating to future financial or business performance, conditions or strategies and other financial and business-related matters, including expectations regarding revenue, operating expenses, cash usage and clinical developments and anticipated milestones are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Novavax cautions that these forward-looking statements are subject to numerous assumptions, risks and uncertainties, which change over time. I will now turn the call over to Stan.

Thanks, Andrea, and good afternoon, everyone. We began 2015 by demonstrating significant progress, most notably completing enrollment in 4 of our ongoing clinical trials, including our Phase II elderly and maternal immunization RSV clinical trials as well as our Phase II quadrivalent seasonal influenza trial and our Ebola GP vaccine clinical trial. This continued execution of our clinical development plans has us well positioned to announce several value-creating clinical data readouts all in the third quarter. In anticipation of the next steps in the clinical development for each of these programs, we recently strengthened our balance sheet through a public offering, which provides us with the capital necessary to aggressively execute our development plans and advance these programs to the market. We anticipate announcing topline data from all of our key programs in and around the third quarter of 2015, making this year incredibly exciting for us. As we usually do, I'll now ask Greg Glenn to review our recent clinical and scientific accomplishments. After that, I'll provide detail regarding key anticipated events in 2015. We'll finish the prepared remarks with the financial overview by Buck, and then, we'll open the line for questions. With that agenda, let me hand the call over to Greg.

Thank you, Stan, and afternoon. As Stan mentioned, 2015 has been a busy and exciting year, with several important clinical data readouts coming over the next several months. This includes data from our 2 lead programs for RSV, maternal immunization for prevention of RSV in infants, and an RSV vaccine for the elderly as well as our quadrivalent seasonal influenza vaccine and our Ebola vaccine. I'll start with a review of our recent accomplishments and focus first on our comprehensive RSV program. The first major achievement I'd like to highlight is the completion of enrollment in our Phase II clinical trial of our RSV F vaccine in elderly adults. This trial is a randomized, observer-blinded, placebo-controlled study of 1,600 elderly adults over 60 years of age that is being conducted at 10 U.S.-based sites. The trial is designed to evaluate the incidence for all respiratory illnesses due to the RSV, including medically-attended respiratory illnesses due to RSV and hospitalizations for respiratory illnesses due to RSV in community-living adults, and the safety and immunogenicity of a 135-microgram dose of RSV F vaccine compared to placebo. The trial will estimate the efficacy of the RSV vaccine in reducing the incidence of respiratory illness due to RSV. Taken together, this landmark trial will determine the attack rate of RSV in this population and provide an estimate for the vaccine efficacy, important information necessary to power our Phase III study. We expect to provide topline data in the third quarter of this year. Another major achievement is a completion of enrollment in our Phase II trial of our RSV vaccine in pregnant women as the next step in our maternal immunization program. This trial is a randomized, blinded, placebo-controlled trial study, enrolling 50 healthy women in their third trimester. The trial evaluates the safety of the vaccine in mothers and their infants. It will assess the immunogenicity as measured by serum concentrations of anti-F IgG antibody, palivizumab competing antibody and neutralize the antibody titers in infant cord blood as well as mothers. Study will also measure the transfer of RSV specific antibodies to mother to infant and assess the RSV F antibody half-life in infants up to 6 months. We expect to provide topline data in the third quarter of this year on this trial. Recent preclinical studies in the guinea pig model of the maternal antibody transfer confirm our previous data that high concentrations of palivizumab competing antibodies are transferred efficiently to and concentrated in fetus. Keeping in mind that human polyclonal antibodies have a half-life of 30 to 45 days. We expect this antibody titer may deliver clinical benefit from 5 to 6 months after birth. This is a key time period as protection -- this could result in protection of 80% of infants who are hospitalized due to RSV. This period of hospitalization occurs primarily in the first 6 months of life. Over the past 12 months, we have focused on executing all aspects of the company's operations to support the clinical evaluation of our vaccines in these key programs. And I am proud to point out that we have, in fact, delivered as promised last year. In particular, the enrollment of third trimester women for safety immunogenicity evaluation or vaccine is a historic accomplishment. As a reminder, the U.S. FDA has granted our RSV vaccine Fast Track Designation for protection of infants via maternal immunization. We believe this reflects the agency's recognition of the importance of this unmet medical need, their support for maternal immunization as the approach to protect infants with this important respiratory pathogen and the potential of our RSV vaccine. Importantly, this designation may allow for improved time to licensure, enhancing the opportunity for us to communicate with the FDA. We are eager to provide the update on this data in the next few months. In November 2014, we initiated the Phase I clinical trial of our RSV F vaccine in children. As I indicated on our last call, we elected to delay any further recruitment in this program and expect to reenter the clinical evaluation until after the end of RSV season in 2015. With respect to RSV program, I want to note that our data sets continued to grow and garner significant interest from the medical community, especially in light of the continued recognition of RSV as an important cause of disease in infants, children and the elderly globally. With respect to the elderly, RSV is increasingly being recognized the pathogen of great importance. A recent review from Dr. Ann Falsey and her colleagues in the Journal of Infectious Disease, highlights that the burden of RSV infection in older adults is similar to seasonal influenza, with comparable rates of infection and severity of illness. Further, Professor Karl Dickerson [ph] previously calculated that the winter time respiratory morbidity to RSV actually exceeded the seasonal influenza. Dr. Falsey goes on to mention that the impact of RSV infection continues to increase the result of an aging population and the use of immunosuppressive therapy for cancer and immunosuppressive disorders indicating effective therapeutic agents and vaccines to RSV would be highly beneficial for older adults as well as children. Now moving on to our influenza program. Our Phase II clinical trial of a recombinant quadrivalent seasonal influenza vaccine was initiated and completely enrolled in the fourth quarter of 2014 and it's progressing as planned. As a reminder, this trial is being conducted under the company's contract with our partner BARDA. This Phase II trial is a randomized, observer-blinded, dose ranging trial, designed to evaluate the safety and immunogenicity of our quadrivalent seasonal vaccine in 400 healthy adults. We believe this vaccine has potential to provide a differentiated new response, through the presentation of both hemagglutinin and the intact neuraminidase antigen differentiated agreement response has potential to deliver more robust protection against infection. We expect to announce the topline data from this trial in the third quarter of this year. Now moving on to our Ebola vaccine program. I'll just remind you that in less than 5 months, we accomplished the following key milestones. We've developed a novel, nanoparticle-based Ebola GP vaccine, based on the sequence of the Makona strain of Ebola, which is currently circulating in West Africa. We validated our Ebola vaccine, which compiling animal data, including 2 lethal Ebola challenge studies in nonhuman primates, both of which demonstrated 100% protection. We also completed enrollment of a Phase I clinical trial on our Ebola vaccine adjuvant with Matrix-M in healthy adults. As a reminder, our Ebola vaccine clinical trial is a randomized, observer-blinded, dose-ranging Phase I trial, to evaluate the safety and immunogenicity of the vaccine with and without Matrix-M adjuvant in 230 healthy adults between age -- or ages between 15 and -- sorry, 18 and 50 years of age. In addition to this trial's primary goal of evaluating the safety in this population, we are also evaluating the immunogenicity as measured by concentrations of serum IgG antibodies to the Ebola Makona strain glycoprotein. The upcoming FDA vaccines and related biological product advisory committee meeting will discuss the status of the 3 vector-based Ebola vaccines and the pathway to licensure. Since we are announcing our nonhuman primate -- since announcing our nonhuman primate in human studies in January, we have continued to participate in the WHO consultations on the response for the Ebola outbreak. So with that overview, I will now turn the call back to Stan.

Thanks, Greg. Based on Greg's remarks, hopefully, you will appreciate the important progress we have made and that 2015 has a potential to be a significant inflection point in Novavax's history. So at the risk of repeating some of what Greg mentioned, let me recap both where we are and update you on guidance of our expected progress in 2015. First, after initiating and completing our H7N9 pandemic flu Phase II trial last year with very positive results, beginning in the last months of 2014 and into February of this year, we initiated 3 new Phase II clinical trials, and 2 new Phase I clinical trials. We will use the data from the Phase II trials, specifically, the quadrivalent flu trial, the elderly RSV trial and the maternal RSV trial to help us design our pathway forward into Phase III trials. In particular, we're hoping to start our Phase III pivotal trial in the elderly late this year and then a global Phase III efficacy trial for maternal immunization, targeting the protection of infants at the beginning of 2016. With Ebola, the pathway forward there will depend on both the strength of the Phase I human clinical data and the opportunities for financial backing. So we expect the data from the following clinical trial in the third quarter this year: data from a 1,600 subject RSV trial in the elderly; data from our RSV F vaccine to protect infants via material immunization; data from our quadrivalent flu vaccine in 400 subjects; and data from our Phase I Ebola trial in 230 subjects. While we have a lot to accomplish in the remainder of the year, I believe we have the team, the infrastructure and the cash necessary to successfully accomplish our goals. As I mentioned last quarter, we continue to broaden our exposure in the RSV, flu and emerging virus communities and I believe now command a great deal of respect for the breakthroughs we've made in all these fields of vaccination. We see this recognition from academic, governmental and nongovernmental key opinion leaders and from our industrial colleagues. This important exposure will be vital as we look forward to Phase III and licensure. So with that, I'll turn the call over to Buck to review our first quarter 2015 financial results.

Thank you, Stan. Today, we announced the results for the first quarter of 2015. Summary financial statements can be found in today's press release. For the first quarter of 2015, we recorded a net loss of $24.4 million or $0.10 per share. This compares to a net loss of $13.8 million or $0.07 per share for the prior year period. The increase in net loss in the first quarter is primarily the result of increased R&D expenses related to our successful RSV vaccine program and the initiation of 3 RSV clinical trials in the third and fourth quarter of 2014. I will discuss that expense variance in greater detail in the R&D section of my comments. Revenues for the quarter were $9.9 million compared to $7.9 million for the same period in 2014. The 32% increase in first quarter 2015 revenue relative to the same period in 2014 is primarily due to HHS BARDA's reimbursement of the costs of our prior Phase II seasonal influenza trial described in our filings as the 205 trial. This resulted in an additional $3.1 million in revenue in the quarter. For the first quarter of 2015, cost of government contracts revenue decreased 19% to $2.5 million compared to $3 million in the same period in 2014. This decrease is primarily associated with the lower level of activity in the 2015 quarter associated with our Phase II seasonal influenza clinical trial, relative to the Phase I/II clinical trial of our H7N9 vaccine candidate in the same period in 2014. As a reminder, both of those programs are funded under our contract with BARDA. R&D expenses increased 78% to $25.9 million in the quarter compared to $14.5 million in the same period in 2014. The increase in R&D expenses was driven by activities related to our 3 ongoing RSV vaccine clinical trials, the initiation of the Phase I clinical trial of our Ebola vaccine candidate and higher employee-related expenses tied to the continued growth of the company. As stated earlier in my comments, the increase in RSV clinical trial expenses was the main driver to the increase in net loss for the first quarter of 2015. As discussed last quarter, the bolus of clinical trial expenses occurs in the weeks leading up to the initiation of enrollment and during the enrollment period. Therefore, we expect the expenses related to these clinical trials to continue to decrease in the ensuing quarters. G&A expenses increased 38% to $5.8 million in the quarter compared to $4.3 million in the same period in 2014. This increase is primarily due to an increase in employee-related expenses tied to the continued growth of the business at Novavax. Increase in employee related expenses, both for G&A and as I had mentioned earlier for R&D, are primarily driven by growth in headcount, with a small contribution from noncash stock compensation expense. As of March 31, 2015, the company had $327.7 million in cash, cash equivalents and investments on the balance sheet. As Stan indicated, during the quarter, we completed an underwritten public offering of approximately 27.8 million shares at $7.25 share, representing -- or resulting in total gross proceeds of approximately $201 million. The recent financing provides Novavax with the capital it needs to aggressively invest in the next stages of development of its RSV vaccine franchise. Those investments will be made in the form of Phase III clinical trials and the expansion of the company's functional and operational capabilities to support those trials. I'd like to briefly expand on my comments about headcount growth here at the company. A key reason for this growth is Novavax's successful clinical trial activities as well as the ongoing clinical trials, for which, we expect to announce topline data in the third quarter. In order to continue to follow through on that success and deliver on the promise of a multibillion dollar RSV vaccine franchise, we need to further invest in the company. As an example of that investment, R&D personnel has grown from 190 heads in March of 2014 to 287 heads in March of 2015, representing 91% of the company's new headcount growth over the period. A specific example of that growth in R&D has been our investment in compliance functions like quality control, quality assurance, regulatory affairs and pharmaco vigilance. All of these functions are required today in order to successfully file for and gain regulatory approval of our novel vaccines. We've also started investing in the commercial side of our business. Novavax has started to lay the groundwork for a successful commercial launch through our organizations or our interactions with entities like the Advisory Committee on Immunization Practices, members of the healthcare payer community and key opinion leaders in the areas of elderly, maternal, infant and pediatric care. We believe these investments will help us as we prepare to commercialize our products. This concludes my review of the financial statements. And I will now turn the call back over to Stan.

Thanks, Buck. Let's open it up to Q&A, and look forward to reporting to you in particular next quarter with some data. So Q&A?

[Operator Instructions] Our first question is from the line of Cory Kasimov from JPMorgan. Whitney G. Ijem - JP Morgan Chase & Co, Research Division: This is Whitney on for Cory. First, I just wanted to check, and apologies if I missed it. But can you give us an update on the RSV flu combo and when we could expect to see that data?

Yes, this is Stan. We have not put it on the calendar. We're anticipating that we'll have a Phase I trial, hopefully, by the end of this year start one. Could slip into next year, but we're trying to do it this year. Whitney G. Ijem - JP Morgan Chase & Co, Research Division: Got it. And then, in the RSV program alone, once we get the data in the third quarter, I guess, how quickly could you flip those over into Phase III trials?

We're -- so I preface this with the statement that the stars have to be in a line, but we're trying to align those stars. Our expectation -- our plan is to take the data from the -- both the elderly and the maternal trial, put them into shape to get an end-of-Phase II, meeting with the FDA as soon thereafter as we can. In time to, number one, to vaccinate the elderly in front of the RSV season and that would require vaccinating the elderly in the November-ish time frame. And in the maternal, this is going to be a global program, and we are working to decide whether which hemisphere we'll do the first maternal immunization program in. But our expectation is, we take the data from the trial, do an end-of-Phase II meeting with the FDA. And again, start the trial around the beginning of the year. I would project sometime during the first quarter of next year.

And our next question comes from the line of Heather Behanna from Wedbush.

Just a couple of questions. One on -- Buck, thanks for all the color on expenses. I'm just wondering, would we expect to then see an uptick in the fourth quarter as you prepare for pivotal studies in the elderly and maternal in 2016?

Heather, thanks for the question. I think, just as in 2014, when we saw expenses tick up in the fourth quarter with the initiation of the RSV trials and the influenza trial, I think it's reasonable to expect an uptick in our R&D line, contingent on the initiation of those Phase III trials, the trials that Stan had just talked about and those would start in the fourth quarter, probably a little bit in the third quarter, but the bolus will be seen in the fourth quarter.

Okay. And then from a clinical perspective, for the elderly, sort of what is your go, no go, as far as moving elderly forward and getting to the FDA, is it -- what is -- is it the clinical attack rate or infection rate in the elderly? Is there a certain threshold or benchmark that you're looking for when you think about those data reading out in the third quarter?

Heather, this is Greg Glenn here. So yes, I think we want to see an attack rate in RSV that looks like the literature. So somewhere between 3% to 7% would be an acceptable attack rate in our view. And then what we're then looking for is to see the vaccine perform similar to flu. So again, there's a range there. We really weren't trying to create too many numerical expectations there, but I think we should see a vaccine effect that looks something like what you would expect to see for flu since it's also an upper respiratory -- lower respiratory tract illness from a virus. So I don't think we can provide very specific guidance about what we would consider success in anticipation except that I think it should look something like a flu vaccine in that population. It is -- I should say, this is going to be one of the best data sets in RSV to date. This is a very rigorously done large trial on the RSV epidemiology and I think that will be, I think, a very important data set for us and for the field. And we anticipate that this data set should look good. We know there's been a normal -- as normal -- normally happens, there's been a good RSV season. So we're expecting the status that will be really important and well-received.

Great. And then just one more quick question and I'll jump back in the queue. Just when we think about the panel next week for Ebola and that's dealing with the vector vaccine. So I was just curious if there's any read through to your program? Or if guys are just kind of looking at the animal rule and full speed ahead once you secure funding and see -- assuming that the data looks fine in your Phase I study?

Yes, I think it'll be informative. I believe right now that our view is the animal rule and a fairly simple development program will be the pathway for us to approval. We have very, very good data. And that makes it relatively simple to develop immune correlates. Nothing's perfectly simple, but relative to the vector-based vaccines, we have an extremely good antibody response. It's high affinity. It looks like the -- like PCA, we have these palivizumab competing antibodies. We have these activities that compete with the monoclonal antibodies that have been defined for Ebola. All those features really speak to the antibodies being very effective. And so for us, the animal rule is actually quite attractive because we believe we could readily show immune correlates with the vectors relying on T cells that could be quite complicated. So I could imagine there'll be a great deal of discussion of correlates with respect to T cells and it's a complicated topic because they're hard to quantitate. There's going to be a lot of method discussion and the dynamic range of that measure is not so great. So it'll be quite interesting to hear what is discussed, but I think our discussion, when we get to that point, will be really focused on antibodies, which is a much more, historically -- not simple, but I'd say historically utilized immune correlate for protection.

And our next question comes from the line of Joel Beatty from Citi.

Thanks for taking the questions. So with all the trial results expected in Q3, are you able to provide a sense of which trial results might come first?

Tell you the truth, I'm not -- this is Stan. I'm not prepared to tell you which one comes first right now. They're all aggregating and we've got as you can imagine to report data in the third quarter, we've accrued all the subjects. We've got blood samples. Blood samples are now in-house or at our CRO for analysis, and which data set gets processed first is a bit up in the air right now. So it's -- that's all I can say. We've at least narrowed it down to the third quarter.

And our next question comes from the line of Kevin DeGeeter from Ladenburg. Kevin DeGeeter - Ladenburg Thalmann & Co. Inc., Research Division: Greg, can you just refresh my memory as to the ratio of antibodies in the guinea pig model you saw in terms of mother to offspring?

Yes. So that's -- just a little bit of reminder, that's a great model for modeling [indiscernible] transfer of humans. So in that setting, we immunized the sows, the mothers, and looked at the antibody transfer -- the antibody levels in the mothers and the sows and then the pups. So there -- and then we measured all 3 immune measures, anti-F IgG, the microneuts as well as the PCA. And I think, what we were -- so what we saw there was 150% to 200% of the antibody levels that were detected in the sows were detected in the pups. And I think one striking feature in there is that in the adjuvant groups where the antibodies, the PCA in particular were very, very high, one might have thought that there may be some kind of saturation of the FC receptor, which transfers the antibodies, but there clearly isn't. The antibody titers, even though the sows are very high, the pups still had concentration. These are very high antibodies. So I think it's encouraging because when you look at our clinical data from the M202, which we presented, PCA antibodies are at a geometric mean of 400. That's very high. So one would hope that, that same phenomenon will be active in the clinical setting. So we'll see, but it was very encouraging to see that we had concentration even when we had high levels of antibodies in the immunized mothers. Kevin DeGeeter - Ladenburg Thalmann & Co. Inc., Research Division: And then maybe just 1 or 2 quick questions from me. With regard to Ebola, now that it kind of appears that none of the programs out there are going to necessarily have most robust human efficacy cohorts and we're moving the discussion, even at FDA, of animal rule. How do you anticipate sort of differentiation in this field? And sort of what's sort of the endgame here? Because there's a number of products that have pretty significant commitment to clinical trials, but it's not really clear how workable those studies may turn out to be.

So I can address the biology and the workability of -- clinical feasibility of testing our vaccine. It is -- we have a very, very good vaccine. It's a nanoparticle. We use very low dose. The adjuvant has effects both on the enhancement of immunity, the level, the dose varying and the quality of immune response. So we have -- in my view, we have the best vaccine that is available. It's a regimen that could be deployed in an epidemic. It's a regimen that could be deployed for healthcare workers. I think Ebola's not going to go away, but it is a -- there is, I think, a very large question as to whether one could evaluate efficacy in a field trial? We think the regulatory agency has said, that it's possible to take this through to licensure using animal efficacy. Therefore, the animal rule. And for us, as I mentioned earlier, because we induce such strong antibody responses, that route is -- seems to me to be quite feasible. So to do additional safety and immunogenicity and animal challenge studies, would be -- seem to be a very feasible route for approval of our vaccine. So that's how we're thinking about it. We're going to be very excited to see the data. As you probably know, we have data in 3 nonhuman primate studies, 2 macaque, 1 baboon. Really, the data looked very, very similar. And again, it looked like the low dose with Matrix-M gave us a very, very good response, the functional antibody response and protective. So I think that, biologically, it's very much lined up for a clear pathway to approval. I think it's still uncertain what the commercial opportunity is here. GAVI just -- actually, Seth Berkley was just interviewed in Nature last week. And he reiterated that they were committed to buying 12 million doses of vaccine at GAVI. So there are things out there in terms of where this might go. I believe, because Ebola has more or less progressed to something that looks more endemic that the need for a vaccine won't go away either, but we shall see. And of course, we'll make more decisions about our path forward after we see our data, which will not be very far from now. We are regularly going to the WHO. They know of our program. They're very interested. So the consultation on the pathway forward for use in globally is also a part of our discussion. Kevin DeGeeter - Ladenburg Thalmann & Co. Inc., Research Division: Maybe just one last quick one for me and then kind of take another stab at kind of this timeline question. Stan, you mentioned, hopefully, if stars aligned beginning to enroll the elderly RSV Phase III beginning potentially in November. That would seem to suggest that, that Phase II data would have to be available definitely not late in the quarter sometime, middle or earlier. Is that a reasonable way to think about that time line?

Kevin, I mean... Kevin DeGeeter - Ladenburg Thalmann & Co. Inc., Research Division: I had to give it a try.

So you tried.

[Operator Instructions] Our next question is from the line of David Lebowitz from Janney Capital.

Would you be able to differentiate the approval process between the seasonal and pandemic vaccines?

Yes, I mean, the seasonal vaccine for -- I think, for our vaccine, we expect to do a clinical trial, that evaluates it, a randomized clinical trial, the efficacy of the vaccine. For a pandemic trial, this will be based on immunogenicity. So having established the data set with seasonal vaccine that it works, then we would expect that you would measure immune responses to the pandemic vaccine and that would would be the basis for -- clinical basis for licensure.

And to extend from that, what about the co-formulation at a subsequent point?

That's a really good question. I think if you look back at the history of the pediatric vaccines, obviously, today you can get a vaccine that has many components in it. Each of those individual components, historically, had its own data set showing it worked. And the ideal situation was to show that the immune response that you generate was relevant. I expect us to be able to do that both with the flu and RSV. So one route to approval for a combination vaccine would be to have developed an immune correlate, show that when you combined them, you develop the same kind of immunity, i.e. there is not interference, and that could be a rational basis for approval. But that's all pretty far off. We haven't discussed this with Seaver. But that I would say is a historical precedent for combination vaccine, is to rely on the immune correlates from the individual components as your measure of immunity that would be used for licensure.

Thank you. And at this time, I'd like to turn the call back to Stan Erck for any closing remarks.

Okay. Thanks, everybody. You'll be hearing from us shortly. Look forward to talking to you on the formal call 90 days from now.