Novavax, Inc. (NVAX) Q4 2022 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. And welcome to the Novavax Fourth Quarter and Full Year 2022 Financial Results and Operational Highlights Conference Call. At this time all participants are in a listen-only mode. [Operator Instructions] After the speaker’s presentation, there will be a question-and-answer session [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to turn the conference over to your speakers today Erika Schultz. You may begin Maam.

Good afternoon, and thank you all for joining us today to discuss our fourth quarter and full year 2022 operational highlights and financial results. A press release announcing our results is currently available on our website at novavax.com, and an audio archive of this conference call will be available on our website later today. Please turn to Slid two. Before we begin with prepared remarks, I need to remind you that this presentation includes forward-looking statements, including information relating to the future of Novavax, its key strategic priorities, operating plans, objective and prospects. Its future financial or business performance, conditions or strategies, key commercial goals, future product demand trends, the ongoing development of our vaccine candidates, including strain selection, anticipating timing of trials and results, the scope, timing and outcome of future regulatory filings and actions, the efficacy, safety and intended utilization of our vaccine candidates, including against COVID-19 variants, the global market opportunities for our vaccine candidates, our manufacturing capacity, and the future availability of our vaccine candidates and key upcoming milestones. Each forward looking statement contained in this presentation is subject to risks and uncertainties that could cause actual results to differ materially from those projected in such statements. Additional information regarding those factors appears under the heading cautionary note regarding forward looking statements in the slide deck we issued this afternoon, and under the heading risk factors, and our most recent form 10-K and subsequent form 10-Q filed with the Securities and Exchange Commission and available@www.sec.gov and on our website at www.novavax.com. As well as subsequent filings with the SEC. The forward looking statements in this presentation speak only as of the original date of this presentation. And we undertake no obligation to update or revise any of these statements. Please turn to slide three. Joining me today for the first time is John Jacob, our new President and CEO. John will provide an update on his first few weeks at Novavax as well as provide an overview of our near term priorities as we plan for the long term path to success. Additionally, John Trevino, Chief Commercial Officer and Chief Business Officer will provide an update on our commercial activities, and Dr. Filip Dubovsky, President of Research and Development will discuss our various strategy and clinical development. Finally, Jim Kelly, Chief Financial Officer and treasurer will provide an overview of our financial results. Rick Crowley chief operations officer will also be available for the Q&A section at the end of today's call. I would now like to hand over the call to John Jacob. Please turn to slide four.

Thank you, Erika. And thank you everyone for joining us today. I'm pleased to be together with all of you for my first earnings call with Novavax. And I'm excited to have the honour of helping to shape this new chapter in the company's history, in partnership with our Board, our leadership team, and all of our employees. After spending 25 years in the pharmaceutical industry, and having led the growth of several different organizations to become mature commercial entities, there are a few key factors that drew me drew me to Novavax, including their validated and innovative technology platform, which has produced a differentiated and effective COVID 19 vaccine, a pipeline of additional assets and their adjuvant matrix M that together offer the potential to create significant value for the organization. There are fully integrated set of capabilities, ranging from discovery and manufacturing, to commercial execution on a global scale. And finally Novavax’s people and company values, which have cultivated a mission driven culture dedicated to improving global public health. Today, I would like to share a few insights from my first five weeks at the company and outline our near term priorities before handing it over to additional members of our leadership team to discuss our results from the previous quarter. So let's talk about my observations during the first five weeks. Since joining Novavax in late January, I've spent my time listening, learning about the business and gaining perspective from key stakeholders across our organization. Though I will certainly continue to listen and learn for months to come as they visit our global facilities and meet all of our amazing employees, customers and partners. I've had the chance in these initial weeks to gather some early insights, and to gain an initial picture of our current business, our capabilities, and our challenges. These early interactions have made it clear to me that we need to focus our entire organization on a few key priorities, which I believe will give us the best chance for success and 2023. Importantly, they have also reinforced to me the remarkable technology, capability set and talent that we have as a company and the opportunity we have to build long term value by leveraging the foundation that has been laid to date. So let's take a moment and talk about our near term priorities. While the significant investments made to build the company over the past three years were necessary for Novavax to deliver our first commercial product during a complex global pandemic. We are now seeing a more traditional commercial market emerging as the pandemic settles into an endemic face. This new emerging commercial market will require the company to adjust our level of investment and our plans to better align our efforts with this opportunity. In fact, the leadership team and I have already taken decisive actions together during my first few weeks, with this in mind. These actions are intended to focus our efforts on the things that we believe are most important to our near term success, while at the same time reducing our spend, and our resource commitments in areas that may no longer be aligned with those goals. I'd like to take a few minutes to share with you these priorities and some of the actions we've already taken since my arrival. Priority one, deliver a competitive product for the upcoming 2023 fall vaccination season. We are a global company, and our intention is to deliver an updated COVID vaccine that aligns with public health recommendations. Additionally, we intend to make this product available in smaller dose files, which we know is important for our customers. Together these factors are intended to help ensure we are well positioned to compete as markets move from an advanced purchase agreement to a commercial orientation overtime. Importantly, globally, we do not yet have full clarity on strain selection for the upcoming 23 fall vaccination season, which will be an important factor for us as we update our vaccine. In the US, for example, we are working in partnership with the FDA to inform them about what we will need in order to deliver our product, including the timing of strain selection, and the nuances of our own manufacturing process as a protein based vaccine. Let's move on to priority two. Reduce our rate of spend, manage our cash flow and evolve our scale and structure. Since my arrival, we have taken immediate steps to reduce our rate of spend better align our investments with our near term priorities, and focus our efforts and energy with the intent of delivering a successful launch this fall. I have already taken an important initial step to evolve our structure by modifying the organization of our executive leadership team, which we discussed in our earnings press release. These changes will allow us to better align our internal resources, operate more efficiently and helped to position us for long term success. Highlights of these changes include the appointment of Elaine O'Hara as our new Chief Strategy Officer who will focus on business and corporate development, portfolio strategy and Alliance management. Elaine brings to the organization over 15 years of senior Strategic and Commercial leadership experience in vaccines and infectious disease, including Chief Commercial Officer in North America for Sanofi vaccines and senior roles at both Otsuka and Pfizer. In addition, Dr. Filip Dubovsky will assume the role of President Research and Development, following the retirement of Dr. Greg Glenn. Right we'll move into a consulting role as a strategic R&D adviser to the company. Silvia Taylor, who’s a Chief Corporate Affairs and Advocacy Officer with expanded responsibility including government affairs, policy and advocacy. Troy Morgan, our Chief Compliance Officer will remain in his role and now report directly to me as CEO in order to elevate our company's focus on compliance. And finally, investor relations will move under our CFO Jim Kelly, among other changes. In the coming months, we will be assessing our global structure in more detail with these priorities and long term value creation in mind, and look forward to sharing any additional potential changes with you during future calls. You will hear more today about how we are reducing and streamlining our investments from Jim Kelly, later in the call. And finally, priority three, leverage our technology platform, our capabilities, and our portfolio of assets to drive additional value beyond new alone. Beyond our COVID 19 vaccine and the near term opportunity for the fall ‘23 vaccination campaign, we have a differentiated technology platform, a global footprint with a fully integrated capability set and a portfolio of promising assets, including a COVID-19 influenza combination vaccine in Phase 2, with data expected mid-year, that presents significant opportunity for value creation. It is our intention to unlock the potential of these assets and capabilities, both in the near term and over time, via different strategies, including but not limited to business and corporate development. This could include the potential for out licensing, partnering, co-promotion and or other related activities. To further align our resources against this objective, I have added the new role of chief strategy officer to my executive team as mentioned earlier. As part of a role, Elaine will be undertaking a strategic review of our pipeline, including an assessment of how we will prioritize our pipeline investments. We have already decided to pause clinical development on RSV, which Phillip will discuss in more detail. As noted in my opening comments, I have been trying to learn as much as I can during my first few weeks at Novavax. And although I still have a lot to learn as I continue to get to know our business, what I can say for sure already, is that I have truly been impressed with the energy and talent of this team. Impressed with our technology and the remarkable set of assets and capabilities we have built as an organization on a global scale, and importantly, the significant opportunity for future growth and value that this represents. At the same time, I'm aware that over the past few years along this journey, we have experienced both highs and lows. And although the company has achieved many successes along the way, we have also experienced some disappointments. I would like to take a moment today to pledge to you our commitment to be transparent about our opportunities as well as our challenges to provide balance and perspective about the near term and future priorities we are focusing on and with humility to admit the challenges we face. I would like to say thank you to all of our investors, our partners, and the consumers of our vaccine for your faith and us. And in this opportunity. And for your patience as we now lead Novavax down a path towards a new and exciting future. The road ahead will be filled with potential opportunity, as well as some significant challenges. And it won't be easy. But we commit to give you all our energy and our effort with a goal of success. And we made fall through along the way. But if we do, we'll work hard to correct our path and be continuously thankful for your belief and our potential. So let me close my opening comments by saying in the coming months, we are committed to maintaining a strong focus on the priorities I shared with you today with the goal of strengthening our position as a company in the near term, and putting us in a good position for future growth and success. With that, I would like to hand it over to the team to discuss our results in more detail, beginning with John Trizzino, to provide an update on our commercial activities on Slide five. John?

Thanks, John. Please turn to slide six to discuss commercial updates. As John has discussed, we're beginning to see the COVID-19 market evolve and stabilize as we transition from the pandemic to endemic phase of COVID-19. We expect COVID vaccines will remain an important part of annual seasonal immunization schedules to address waning immunity and protect against emerging variants. It is generally accepted by public health policy advisors that there is an ongoing need for an annual seasonal vaccination and we expect this will create long term markets for COVID vaccines globally. We anticipate that these markets will take a slightly different shape, country by country, similar to establish markets for other vaccines like influenza. In the U.S., the government's decision to end the public health emergency in May, signalled the intent to move away from government purchasing and toward a commercial market for the second half of this year. In regions such as the EU and Asia Pacific, the market is beginning to transition from pandemic APA's to a more traditional commercial market. We expect governments will continue to play a significant role in these tender and private markets, by procuring a portfolio of vaccines and allocating those vaccines in country. Taken together, we believe these market dynamics create a significant long term opportunity, with a potential global market size of greater than $15 billion annually over time, and we anticipate that the U.S. and EU two of our priority markets make up approximately $10 billion per year of this total projected opportunity. Now, let me outline our path to commercial success. And please turn to Slide seven. To capture our share of this potential opportunity, we are leveraging the strong foundation we built in 2022 to advance key commercial goals that will support our path to long term success. These activities for the 2023 for vaccination season include one, working to enable reliable access to our vaccine, two, leveraging our commercial footprint and priority markets in the Americas and Europe to drive demand, three, utilizing our global manufacturing and supply network, and four, delivering a differentiated product profile. So, now let me dive a little bit deeper into each. Number one, enable reliable access to our vaccine. We believe the relationships we've built with customers and key markets, through the launch of Nuvaxovid will help facilitate a smooth transition to the commercial market. In the U.S., we recently updated our agreement with the U.S. government to deliver 1.5 million additional doses of our COVID vaccine, which maintains access throughout the country in advance of our intent to deliver an updated various specific vaccine for the fall season. Outside the U.S, we currently have $2.1 billion in committed APA's remaining. We expect to deliver doses against this commitment through 2023 and 2024. And we remain in ongoing discussions with our customers on supply. In the EU, we’ve finalized our revised delivery schedule for the remaining 20 million committed doses under our APA. Number two, leverage our commercial footprint and priority markets. Our focus is on positioning Nuvaxovid as a critical protein based option, as well as working to generate additional pull through in all our target markets. In the priority regions where we have established commercial operations Americas Europe, UK and Asia Pacific. Our efforts are focused on building brand awareness, improving access and differentiating our product to build demand and support pull through efforts. In the US. Our team's near term focus is on communicating with and educating consumers and healthcare professionals to drive demand. While in the EU and APAC, our efforts are focused on advancing policy recommendations for National Immunization programs and private purchasers. Number three, utilizing our global manufacturing network, as John discussed earlier, one of our key priorities is to align our structure and scale with the commercial market opportunity. This includes continuing to assess our manufacturing needs and modifying our global manufacturing footprint consistent with our contractual obligations to supply and for anticipated demand, especially in the U.S. for our COVID vaccine. We are working to establish our strengths and capabilities as we seek to manufacture variant specific vaccines in monovalent or bivalent formulations. These efforts are intended to provide us with increased flexibility to supply our priority markets, in line with seasonal demand. As part of these efforts, we have established our own internal drug substance manufacturing capabilities, which we see as a potential competitive advantage in the future. Our facility in the Czech Republic, Novavax CZ recently received authorization from EMA to supply antigen drug substance to the European Union. And just this month, we completed our filing to the FDA to add this facility to our supply network. Lastly, our differentiated product profile. We believe our top organizational priority to help us capture market share is delivering a competitive product for the upcoming 2023 full vaccination season in either a bivalent or monovalent formulation. In addition to the U.S., the EU has also stated their goal to harmonize their product and strain recommendations for the 2023 full vaccination season. And with this in mind, we believe that EMA and potentially other regulatory bodies may also consider a variant strain approach for the fall season. For all our customers, we plan to remain an ongoing dialogue and prepare to supply the product that is requested. To further differentiate our product among health care providers, we are seeking to develop a smaller dose vial presentation. Nuvaxovid's competitive product profile is based on our validated technology platform and our clinical data demonstrate our vaccines high efficacy, strong durability of immune responses, protection against infection and well-characterized safety and reactogenicity profile. These key characteristics, coupled with our favourable transportation and storage attributes, all contribute to our vaccines differentiated profile. I'll now hand it over to Filip to discuss our strategy for developing our various strain vaccine and ongoing clinical development.

Thanks, John. Please turn to Slide 8. Today, we remain focused on developing our COVID-19 vaccine, including against variance, while also evaluating our influenza and combination vaccines. Beyond these three clinical assets, we are rationalizing our preclinical pipeline to align our resources with programs that we believe will drive significant value for our business. This includes pausing the planned clinical development for our adult RSC program until a strategic pipeline assessment is complete, and we are confident our other priorities are fully resourced. Let's turn to Slide 9 and look at a high-level overview of our ongoing COVID-19 studies. In line with the priorities that John Jacobs introduced, these studies are focused on two key areas. The first is to gather data to improve and expand our label as well as to strengthen our policy recommendations. The second is to prepare for the upcoming vaccine strain change. 3301 [ph] is our original Phase 3 study in U.S. and Mexico. We've continued the study and have administered first and second homologous boosts to both adults and adolescents. The adult on boost data has been submitted to the FDA and is being submitted to other global regulators. CV 505 is being conducted in South Africa and is evaluating different dosing schedules for both immunocompromised and immunocompetent participants. This data will support a more flexible vaccination schedule and guide us on vaccine dosing in special populations. 3312 is an extension of our lot to lot consistency study that I reported on in the previous quarter and of the January of our pack. In this extension, we are rebooting some participants to evaluate the breadth of immune response after a second boost with our vaccine. And Study 503 is our global pivotal paediatric study evaluating the safety and effectiveness of the vaccine in children as young as 6 months of age. We continue to enroll in the older cohort and began enrolling in children 2 to 5 years of age in January. All of these studies were designed to provide data that can be used to expand our label and support policy recommendations. Finally, study 311 is our strength change study that we've previously discussed. The study achieved its prespecified endpoint supporting a potential strength change to BA.1. However, as discussed at the VRBPAC, the prototype strain vaccine, BA.1 vaccine and bivalent vaccine overall performed comparably supporting the continued use of our prototype and ongoing boosting campaigns. Part two of the study will evaluate our prototype strain vaccine, a BA.5 variant vaccine in a bivalent continuing prototype plus BA.5. This study is being expanded to include a cohort of adolescents who will receive the same BA.5 containing formulations. It is unclear if the BA.5 will be a component of the '23, '24 updated vaccine composition. However, in discussion with regulators, this study is designed to support our regulatory file irrespective of which strain or strains are chosen for the final composition. Are we miss, if I didn't mention that with the exception of study 505, these are all being planned and conducted in partnership with the U.S. government. Before I move to our influenza COVID combination vaccine, I want to update you on our approach on doing preliminary work on emerging variants, so we can be nimble once the string composition has been announced. Let's move to Slide 10. We monitor public health platforms for the versions of new variants. When concerning variants emerge, they are placed into our variant development platform. Work begins with closing renew sequence and evaluating by spike proteins in vitro, the immune responses are evaluated in animal models and monoclonal antibodies are developed for our structure function analysis. Concurrently, we developed myxovirus seed that's required for commercial manufacturer and we also manufacture monovalent vaccine bulk, which can be used for clinical evaluation or if that variant is part of the selected future composition, it can be blended as a monovalent or bivalent vaccine and be available for initial commercial release. Although we cannot be assured any of the variance we are working on will be selected for the future composition, this approach may shorten the time between strain selection and deployment of vaccine. Okay. Please move to Slide 11. For our COVID influenza combination and stand-alone influenza vaccines, we initiated our Phase 2 study in Australia and New Zealand in December. The study design is shown conceptually on this slide. We previously reported results from our initial Phase 1, Phase 2 trial that confirmed the feasibility of the combination vaccine. The current trial enrolled approximately 1,500 participants and is evaluating different antigen and adjuvant dose ranges for our combination product as well as our stand-alone influenza vaccine. The immune responses will be compared to two licensed influenza vaccines. This study will determine the specific formulations that could be advanced into late-stage development for both influenza and the combination vaccine. We expect initial results from our Phase 2 trial midyear. We will evaluate the results and make a data-driven decision on our go-forward plan for these candidates. If the data are positive and demonstrate this program, we have significant potential value, and we will expect to pursue options to continue advancing the program into a Phase 3 trial. With that, I'll hand over to Jim Kelly to discuss our financial results.

Thank you, Filip. Please turn to Slide 12. This afternoon, we announced our financial results for the fourth quarter and full year 2022. Details of our results can be found in our press release issued today and in our 10-K filing. I'll begin by providing an overview of our total revenue performance and cash position then I will discuss our quarterly and full year results in additional detail. Finally, I will discuss our recent initiatives to reduce and control our spend with the intent of improving Novavax' cash runway and best position the company to deliver near- and long-term value. Please turn to Slide 13. For the fourth quarter of 2022, we recorded total revenue of $357 million, a 61% growth over the fourth quarter of 2021. For the full year 2022, we recorded total revenue of $2 billion, a 73% growth over prior year. The growth in each period resulted from our Nuvaxovid product sales, which offset a decline in grants, royalties and other revenue and reflect the transition of Novavax to a commercial stage company. Additionally, we ended 2022 with $1.3 billion in cash compared to $1.5 billion as of the end of 2021. In December 2022, we raised $250 million in gross proceeds through concurrent equity and convertible securities offerings. In January 2023 we funded the maturity of our $325 million convertible notes. Please turn to Slide 14. Taking a look at our full year financial performance, our cost of sales for the fourth quarter and full year 2022 were $182 million and $903 million, respectively. This includes $99 million and $604 million, respectively, for expenses related to excess, obsolete and expired inventory and losses on future supply commitments. These write-offs are associated with the rationalization of our supply network in light of lower demand as we transition to an endemic COVID-19 market. Research and development expenses for the fourth quarter and full year 2022 were $258 million and $1.2 billion, respectively compared to $963 million and $2.5 billion for the comparable periods in 2021. The decrease in both periods was primarily due to a decrease in development activities related to coronavirus vaccines and an increase to capitalized manufacturing costs that previously were expensed to R&D. Selling, general and administrative expenses for the fourth quarter and full year 2022 were $162 million and $489 million, respectively compared to $84 million and $298 million for the comparable periods in 2021. The increase in both periods relates to the commencement of our commercial sales operations in support of our Nuvaxovid product launch. We recorded a net loss of $182 million for the fourth quarter and $658 million for the full year 2022. This compares to a net loss of $846 million and $1.7 billion for the comparable periods in 2021. Please turn to Slide 15. In our 10-K, you will see that we have added a going concern disclosure. While our current business plan and cash flow forecast estimate that we have sufficient capital available to fund our operations for the next 12 months, we recognize that this plan is subject to significant uncertainty related primarily to future revenue, funding from the U.S. government and are pending arbitration with Gavi. I'd like to first discuss these uncertainties and then share with you immediate actions we have taken to mitigate these concerns and improve our financial position. Regarding our full year 2023 revenue, our performance will depend on our ability to deliver an updated version of our COVID-19 vaccine for the 2023 fall vaccination season. Key activities in support of this plan include our timely completion of the 311 study to demonstrate our strain change capabilities, and delivering an updated COVID-19 vaccine consistent with public health recommendations for screen composition. Regarding our U.S. government funding, in February 2023, the U.S. government indicated our existing agreement would not be extended past December 2023, which may place a portion of the remaining $460 million of funding at risk. We are proactively discussing mitigation options with the U.S. government in an effort to realize the full amount outstanding. And finally, regarding Gavi. We recognize that the outcome of our pending arbitration is inherently uncertain. We are taking immediate actions as we seek to address these concerns, with the intent of improving Novavax' cash runway and best position the company to deliver near- and long-term value. Earlier this month, we initiated an organization-wide effort to assess our capabilities and more closely align our investments and activities with the top business priorities that John outlined at the start of today's call. Through this initiative, we have implemented multiple measures to reduce and control our operating spend. These include alignment on our key priorities for investment for 2023, cost containment measures to reduce spend and an immediate hold on non-critical hiring. Given the uncertainty of the 2023 fall vaccination strain selection process and implications on our full year 2023 revenues, we've decided not to provide full year 2023 financial guidance at this time. We will assess whether it is prudent to do so in the future based on the clarity provided by government agencies globally that will, in turn, inform our revenue and operating plans. However, today, we are providing preliminary insights into our near-term financial performance expectations. In the first quarter of 2023, our intent is to lower our combined SG&A and R&D expense to $370 million or less. If achieved, this would reflect a $50 million reduction to our run rate when compared to the $420 million recorded in the fourth quarter of 2022 and is based on the anticipated impact of our enhanced spend controls, prioritization and gating of activities. Regarding pipeline investment, among other things, we are gating funding for our flu CIC Phase 3 program, pending an assessment of our Phase 2 clinical results in mid-2023. This will include an evaluation of dilutive and non-dilutive options to fund this important program. On revenue, we are seeing an emerging seasonality for the demand for COVID-19 vaccines globally. Because of this, we do not anticipate any new vaccine sales for the first quarter of 2023. We do anticipate vaccine sales beginning in the second quarter and the majority of our Nuvaxovid sales to occur in the second half of 2023. Outside the United States, we currently have $2.1 billion in committed APAs remaining. We expect to deliver doses against these commitments throughout 2023 and 2024. Regarding our U.S. government funding, we entered 2023 with $416 million of funding outstanding and expect to recognize the majority of this amount in 2023 and are proactively discussing mitigation efforts with the U.S. government in an effort to realize the full outstanding amount. With that said, I'd like to turn it back over to John for some closing remarks.

Thank you, Jim. And please turn to Slide 16. Looking ahead, I'm excited about our opportunity this year and also believe that we have a significant opportunity to create value over the long term in Novavax. We recognize that we'll face some significant challenges on our journey from here and at the near-term road ahead will be tough. As we work hard with the intent of updating our differentiated vaccine in line with emerging requirements around the globe for the fall season, reshape our ways of working, reduce our spend and refocus our time, energy and resources on our emerging priorities for the year. The support of our shareholders, partners and customers has been instrumental in guiding us to where we are today. And this support will continue to be critical to our long-term success. Because of this, our commitment is to put forward our best effort in all that we do and to conduct our business with the highest standards of integrity. Over the coming months, I will continue to work with the executive leadership team and our Board of Directors with the intent of delivering strong results this year and to develop our long-term vision for growth, positioning our business to eventually become one of the leading global vaccine companies. We look forward to sharing updates and additional details on our execution of this plan and our emerging long-term vision on our first quarter 2023 earnings call. I'll now turn it over to the operator for Q&A. Operator?

[Operator Instructions] Today's first question comes from Roger Song with Jefferies. Please go ahead.

Great. Thank you for taking our question. Few ones from us. The first is about the liquidity. Maybe the team can give us a little bit more granularity in terms of the top line versus the OpEx spend. On the top line, we are hearing you have USD 20 million -- I don't know the EU kind of APA -- revised APA. And also, you have the 2.1 APA -- 2.1 billion APA remains to deliver in 2023 and '24. And how should we think about the 2023 revenue kind of in general? And also in terms of the OpEx, how flexible your OpEx will be based on the top line revenue, understanding you're cutting the costs overall? And I have a follow-up after that.

Hi, Roger, John Jacobs here. Thank you for joining, and thanks to everyone for joining our call today. Just a couple of comments, and I'll hand it over to Jim Kelly to add some additional context, our CFO. But as you mentioned, we have just over a $2 billion book of business globally outside of the U.S. that the company will be optimizing between 2023 and 2024. Discussions around that are ongoing right now. In addition, the U.S. represents an exciting and relatively new opportunity for Novavax as the company didn't fully penetrate the U.S. market in the past. We're working closely with USG who just put an order in for additional vaccines right now as well as the FDA to align on what we're going to bring forward for this fall season and are excited about the additional opportunity that the U.S. marketplace offers us regarding potential revenue. And Jim Roger also had some commentary about OpEx and maybe you want to add some more context to that answer for now.

Certainly. And thanks for your question, Roger. One of the things that we shared was our expectations around trajectory of spend into the first quarter. That's certainly something we provided. And one of the things you're seeing is that we do have leverage in our business. We're seeing the ability to reduce sequentially that number of SG&A plus R&D by $50 million, which is just over 12%. What you also heard is that we have an operating plan that we think provides sufficient capital for us to be successful this year although acknowledge it's not without risk. And for that reason, that's why we're not providing financial guidance. You are correct that there are certain variable aspects to our cost structure that do coincide with sales that would be avoided. But the reality is we look forward to delivering an updated vaccine in the fall in bringing that product to people around the world.

And Roger, just to make sure we were crystal clear that 20 million doses in Europe as part of that $2.1 billion book of business outside the U.S. And you had a follow-up question, Roger?

Thanks, Yes, I understand. In terms of the variant specific vaccines since the globally that the regulator and public health agency is looking for. Just curious about your current -- the CMC capacity or the speed of the production? What is the time frame you're looking for to be able to need the stream change specific U.S. seems looking for three months, but would you be able to meet that or you really need the 6 months to be able to make the stream change? Thank you.

Great question, Roger. And obviously, everyone knows that it takes a little bit longer to develop a protein-based vaccine than an mRNA vaccine. But there are things we can do to speed up our time line, and we are taking decisive action with that intent in mind. First and foremost, that's partnering with the FDA very closely in conversations between our team and FDA senior leadership and FDA technical leadership to make sure that they understand what our requirements are and that we understand what their requirements are in a crystal clear fashion, so we can move forward together with the goal of offering our protein-based vaccine as an option for U.S. consumers. In addition to that, we, as an organization, have a fully integrated capability set that allows us to bring forward multiple variants at the same time and bring those variants to scale in our CMC process. So we can hedge our bets, if you will, ahead of the curve in anticipation of variants that may be selected. And what I'll do is turn it over to Mr. Rick Crowley, who runs our manufacturing organization for additional color and context. Rick?

Roger, it's a good question. The -- as said, we are actively producing variance of interest, and we're identifying those through the public health authorities and our discovery team is developing the variance that we are then moving on into the large-scale manufacturing. And so we anticipate having a pool of inventory ready at the time of the decision being made. And that allows us even though it still takes about 6 months to go from inception to commercial, we are getting a jump start on that by creating this inventory and putting this material in stock ready to be delivered in the fall.

And our next question today comes from Alec Stranahan with Bank of America. Please go ahead.

Just a few from us. As a follow-up to the question that was just asked on the vaccine turnaround, do you have any additional info on the spring versus summer strain selection? I know this was sort of a topic of debate at the most recent VERPAC meeting. And just from a technological perspective, how accurate would it be to have multiple, I guess, irons in the fire? What would sort of be the hit rate historically when you look back at prior flu seasons? And one more question on innovation outside of COVID. I know you mentioned that RSV might be prioritized. Is this due to how crowded the space has gone? Or are there some other technological hurdles? I mean any color around sort of the first stops or best applications for your technology would be helpful.

Filip, do you want to take the question on strain selection?

Sure. Let's start there. So I mean what we're hearing from all the regulators more or less globally is that they're moving toward annual vaccination schedule. And when we heard the VERPAC that they're really trying to select strains around summer time or a bit earlier to be deployed in the '23, '24 northern hemisphere season, which is really a fall, winter for us. So those are the time frames that Rick was talking about meeting by selecting the strain. Now you had an add-on question, what's the hit rate? And I think you mentioned flu. Now flu is different from COVID. And we talked about that at VERPAC is recognized that COVID is changing a lot faster than influenza. Now that being said, there are some of these that as we look at the landscape -- the global landscape appear to continue to be important variants in cause disease, and some of them appear to be quite stable. In the slides that I showed you, I outlined the ones that we're pushing forward actively now. But we have other ones that are further in the pipeline that we can move toward GMP manufacturing, if that's the way it looks. And I got to tell you, the public health authorities globally are aware of where it takes to take a vaccine to a market in the time frame they're talking about, and they're trying to be as helpful as they can.

Thank you, Filip. And regarding RSP, we're in the process -- and good question. We're in the process of rationalizing our portfolio, our supply chain, our global footprint, et cetera, to better align that with the emerging opportunity. We see coming at a global level as these markets transition from APA to a commercial opportunity for the long run. And as John Trizzino said, we see the market evolving eventually to over $15 billion global opportunity with about 2/3 of that opportunity in the U.S. and Europe. But in the short run, our goal is to deliver results in 2023 to focus our energy, our efforts, our resources and our investment on what matters most. And our top priority at Novavax is introducing a differentiated and competitive vaccine alternative for this fall season at a global level and in the U.S. market in alignment with what regulatory authorities are looking for. By channelling our resources on that priority as well as streamlining our business, we hope to have a very successful year in 2023. Filip, any additional color there?

Yes. So we're aware of the competition in the RSV space. But there's no specific reason we can be competitive in that space as well. The construct we have now has been modified and improved as has the manufacturing process. Right now, we're just like John said, we're in the position of trying to decide which ones to push forward and make sure that the resources are available to cover the priorities before we go deeper into the pipeline.

Thank you, Filip. And one other comment to add to that. One of the reasons I came to Novavax, and I'm so excited about being here is our portfolio of assets that we have and our differentiated technology. And as I said earlier in the call, Pillar 3, our top priorities, all 3 are equal in priority to us. And Pillar 3 was extracting value and leveraging that technology and that portfolio through business and corporate development opportunities, beginning in this year and in the future. And RSV could very well be part of that. So we look forward to sharing more updates with you in the future as that develops.

Our next question comes from Georgi Yordanov with Cowen Company. Please go ahead.

Thanks so much for taking our questions. And Don congratulations on the new role. So maybe starting with you in general, you've talked about the opportunity to offer a differentiated product to the market. So maybe can you talk about what would be the key aspects of differentiation that you would like to market and communicate to consumers that being both the general population, but also prescribers? And then as part of that, also to talk to also like what is your ability to actually communicate and market these differentiating aspects given that we don't really have clear head-to-head studies? And then I have a couple of follow-ups.

John Trizzino, would you like to take that question?

Yes, certainly. Thank you. I think the differentiation takes many different kinds of shapes and sizes. And so first of all, clearly, protein vaccine and the only other protein vaccine licensed in the U.S. is a key important differentiating characteristic of our vaccine, right? I think if you understand the comfort in dealing with the protein-based vaccine, the refrigerator stability of the vaccine, and I think the label right now, I think it puts us on a level playing field or will put us on a level playing field with mRNA vaccines are critical attributes today that make us competitive for the 2023 season. I think if you also consider the number of kind of market research studies that we've done up to this point, really clearly indicate that there's a need in the marketplace, not only with health care professionals, but also consumers who are looking for an option away from mRNA and looking to protein-based vaccines in order to provide that. I think as we go forward, there are a number of other studies that are underway, some of which Filip outlined that will look at some additional differentiating characteristics going into the future. So -- not only do we want to be competitive today, but we want to be clearly differentiated on a number of points going into the future.

Great. And then just a couple of follow-ups. The first one is specifically around what you mentioned in terms of the strategy of manufacturing multiple strain vaccine risk. Can you maybe talk about what would be the impact of that on your gross margins? And I guess, how suitable is this strategy in the longer term?

Filip, Rick, why don't you comment on how suitable that strategy is over the long term. And then we'll turn it over to Jim Kelly to comment on the cost.

Hi, this is Rick. As Filip has stated earlier, COVID is a very different animal than flu. And so the evolution of the strain changes is more rapid. I think the only way any vaccine manufacturer can keep up with that is to manufacture variance of interest at risk and have a stockpile. So I think we're no different than any of the mRNAs in that respect.

And that's certainly a sustainable strategy, Rick, with our global supply chain that we've built over the last several years here at Novavax.

That's correct.

Jim, did you want to comment on the impact to the P&L there?

Yes, sure. So that's a great question. When you think about the amount we'd be manufacturing at risk to enable this strain change strategy, it's not the full season is worth just an initial start that keeps us on track for the fall. And so in that way, I don't view it as being a meaningful impact on our long-term cost structure.

Great. And then the final question is just on the COVID flu combination study. Clearly, your mRNA competitors recognize that as a major upside to the ventral COVID market. So maybe can you clarify specifically the regulatory path that you see ahead of that? The cities that you're running are specifically in adult -- sorry, in elderly patients and so do you expect that, that combination product would only be used in elderly patients? Like what is the path to actually getting that product on the market?

Yes. And first, let me just make a comment here that we're excited in anticipation of those results midyear this year. The team has been working very hard on that. We're looking forward to getting those results. And those results will help inform our strategy moving forward on how we bring the product to the next stage of development. But why don't I turn it over to Filip to address that in more detail. Filip?

Yes. I mean, you're right. The studies are being done in older adults, and that's actually where we see the maximum value for this product. That's the place where differentiated products are being used globally, and that's where we want to play, compete and win. The studies are designed to choose the optimal dose for both the COVID combo product as well as the flu product. I remember from our previous work that we've demonstrated that we're able to induce a very long-lived T-cell response with our adjuvant. And we're even trying to see if we can get a bit more juice out of going to higher doses of matrix in these studies. That, along with what we're going to see from the bid response is going to give us some assurance whether we have a product that can really compete in that high cost space.

Yes. Let me just add additional comment there, if I may. Let's be clear here. And as we've seen from some of the data that's already come out from Moderna that they're coming up with a very effective influenza vaccine is no small task. And recall that we already have some experience with our flu candidate in a very successful Phase 3 clinical trial. So you're taking an already demonstrated successful flu vaccine candidate and combining it with our already demonstrated successful COVID candidate on a common technology platform or recombinant protein nanoparticle plus the adjuvant. So I think you got a combination here that has the potential to be very strong. We have a little bit to learn a lot to learn here about how they interact with one another. But we do know that we've got two strong components that we're taking forward.

Let me just pile on because why not. So the other point is, remember, we've already done the combination study with our previous Phase 1, Phase 2. And there, we were successfully able to innovate our way around the logic interference that was seen just by adjusting dosage levels. We dropped the hemoglutinin and we jacked up the spike, and we were able to recapitulate the immune responses we want it. So this is really to fine-tune those and to start building initial safety databases as we move forward with the product, if the data says we need to do that.

So we see this as a key potential value driver for the organization by midyear. We look forward to sharing results with you when we get them.

And our next question today comes from Eric Joseph of JPMorgan. Please go ahead.

Hi, good evening. And thanks for taking the questions. Just wanted to get a sense of where you might see operating efficiencies on the R&D side? You noted the health of the RSE program but are you -- I'm wondering if you're appropriately sized on the manufacturing side of things? It sounds like there's support for Novavax CZ going forward? I guess, how should we be thinking about where products acts being sourced over the long term and, in particular, the relationship with the Serum Institute? And then a couple of follow-ups. Secondly, I would like to get a sense of whether there is a sunset period for the $2.1 billion remaining in APAs, whether they're is potential for them to stay in place beyond the 2024 horizon? And then finally, I also just wanted to get clear on John T.'s role within the executive leadership team with Elaine coming in as Chief Strategy Officer?

Let me address -- you have a lot of smiles in the room here. Thank you for your question. I'll address John T. first as he sits right across from me. John Trizzino is an outstanding Chief Commercial Officer and will remain so here in at Novavax by my side as the new CEO and with the executive team moving forward. Elaine's focus will be as a Chief Strategy Officer on Business and Corporate Development, which is a new role for the executive leadership team. And it speaks to Pillar number 3 that I spoke to about in my opening comments that we see an opportunity to begin to unlock more of the value from our extensive pipeline, our differentiated technology, and you alluded to already, our global footprint. We have a fully integrated infrastructure here from discovery through to manufacturing through to full commercialization across several continents. And that in and of itself is a very important feature that Novavax has to offer potential partners. So Elaine will be leading those efforts for the organization to expand our efforts around business and corporate development. John will remain in his very important role as our Chief Commercial Officer and help lead the launch of our Nuvaxovid vaccine this fall. That's our intention. When it comes to the supply chain, we're in the process of rationalizing our global supply chain as well as our portfolio and our global footprint as a company to make sure that it's aligned with the emerging opportunity we see now in the short run for COVID and also potential future opportunities as there are long lead times involved here, as you know as we expand our portfolio and continue to move those assets forward. And why don't I hand it over to John Trizzino for some additional content.

I think -- Yes, thanks. I think that regarding the $2.1 billion of remaining APA, it's important to understand that we're retaining the value of that through '23 and '24, as we mentioned during the script. Right now, we see a pathway towards satisfying those APAs during the course of '23 and '24 and don't see a sunsetting of any of the value of those contracts.

And one last point, and I'll ask Crowley, if he wants to comment as well on the CZ plant in Europe. That's an important asset for Novavax. And the company has built out that asset over the last few years as we got ready to take on the global pandemic, and we see it as a competitive advantage for us to have that level of quality and that manufacturing capacity in-house. Rick, did you want to comment any more on CZ?

Yes. I was just going to say that we've utilized the CZ facility and staff there to become our global center of excellence for both manufacturing and quality. The -- additionally, it is our license holder for our EU license. So it's an important role in the facility. Now you'd also asked about Serum. And by having Serum and CZ operating and approved, we're able to be very flexible in terms of how we manufacture our future variants because we're not dependent on just one facility. And so we can split our variant risks across both facilities and be able to supply the market appropriately at that point. And one final note is that we have gone through a serious analysis of our footprint and what it really needs to be to meet the demand as we currently see it. And that is -- has been executed and that resulted in CZ being as important as it is to us at this point.

And our next question comes from Mayank Mamtani with B. Riley Securities. Please go ahead.

Good afternoon. Thanks for taking our questions. Welcome aboard to John and Elaine. I appreciate the helpful level of detail on many fronts, including having your 10-K also that just came out. So maybe just a quick big picture strategy question. Is there a particular scale, R&D, SG&A CapEx that you're working towards? And if there's like a medium to long-term time line you may have put out for that? And what could be the adjacent pipeline opportunities you could pursue? I know you talked about rationalization and discontinuation of RSV, but could you look to in-license something that you may see interesting out there? And then I have a couple of follow-ups.

Jim Kelly, would you like to take the first question?

Well, certainly. And thanks for the question. The assessment that you're hearing us discuss today really began over the past year with respect to our manufacturing network. We have scale that network down, especially the external participants, enabled us a great deal of flexibility to get to where we are today. And I think Rick highlighted the significance of course, our check plan with respect to not just DS production, but so much happening at that site. And then we'll also emphasize the importance of our Swedish site for matrix. So of course, we'll move forward. And as a company, we'll continue to be thoughtful about how we scale to the opportunity. We're really looking forward to this fall season. I think that's going to give us a great opportunity to see how our vaccine competes globally, and we'll continue to update you from there.

And regarding your question on adjacencies and the pipeline, what I can say is that we intend to pursue a range of potential options from partnerships to co-promotion to out-licensing and even other opportunities that could be much larger in scale. Business development is complex and takes a lot of thought and care strategically for us to frame around these opportunities and bring them forward. So I won't speculate on timing or scale at the moment, but we'll say that we're opening the door for a much more opportunity to leverage the technology, the capabilities that we've got as a potential partner at a global level, our manufacturing scope and scale and the assets that we have in our pipeline to mine more value from those things over time and grow the potential of Novavax to become a leading vaccine company on the global stage.

Got it. And just a quick follow-up on the regulatory and commercialization discussion on the strain change vaccine. How important is securing the full BLA to your partners, private or public? Just maybe clarify what steps remain there? And a related question that often comes up, why not pursue NanoFlu monotherapy, where you did have both influenza A and B strain specific potency? Could you just sort of clarify that?

John Trizzino, would you like to take the question?

The BLA first and then hand it back over to, Filip. I think it's worth clarifying that the U.S., in particular, the U.S. government's action to suspend the public health emergency will not affect our ability to sell under emergency use authorization during the 2023 season. Of course, we'll be filing our BLA in the second half of the year. And of course, we'll have -- see expectations of BLA approval probably by late this year or early next year. But there's no -- in conversations with FDA, there's no concern at this point relative to operating under an emergency use authorization.

And let me try to unwind the influenza stand-alone. So first of all, the study we're doing now does, in fact, include stand-alone influenza. And a couple of things to remember about the study that you referenced previously. One of them is that to compete in the elderly market with a differentiated product. We really need clinical data that would be difficult to do without it. And the other thing is we've learned up a lot about manufacturing COVID vaccine over the past couple of years and those learnings were brought into the flu stand-alone product. And that means we have a much more efficient process going forward. So in a sense, we were a black shoe of the Phase 2 study, which we're doing now and it opens the doors to pursue either the standalone, part of [indiscernible] flu or the combination.

Got it. And final question. In your 10-K, there is some level of detail on your Gavi arbitration. It looks like a response might be due next week, as early as next week. Could you maybe just touch on that -- what your argument sort of seems like? And just broadly, any comments on the deferred revenue of I think, $700 million? Or how should we think about that going forward?

Thank you for your question. Yes, in late January, we did receive a request for arbitration from Gavi and while Novavax stands by its prior statements regarding that matter, we don't comment any further on legal matters and arbitration is inherently uncertain. So it is possible that we could be required to refund all or a portion of those advanced payments. Look, we share Gavi's goal of improving global health via providing vaccines to consumers in low-income countries. And we intend to work to economical resolution for both parties, and we'll keep you posted as the situation unfolds appropriately.

And if I could, when you brought up the point of where exactly would this fall on our balance sheet. What you'll notice in our 10-K is that $700 million has shifted from deferred revenue to other current liabilities. And it just captures the inherent uncertainty associated with that arbitration.

Thank you. And ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to John for closing remarks.

I want to thank everyone for joining us today. Really appreciate your time and your energy and we look forward to providing additional updates as the year pursues. Thank you.

Thank you. The conference call has now concluded. You may disconnect your lines at this time, and have a wonderful day.