Summary of NOVAVAX INC - Yahoo! Finance

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Statements herein relating to future financial or business performance, conditions or strategies and other financial and business matters, including expectations regarding revenues, operating expenses, cash burn, 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. Factors that may cause actual results to differ materially from the results discussed in the forward-looking statements or historical experience include risks and uncertainties, including the Company's ability to progress any product candidates in preclinical or clinical trials; the scope, rate and progress of its preclinical studies and clinical trials and other research and development activities; clinical trial results; current results may not be predictive of future results; even if the data from preclinical studies or clinical trials is positive, the product may not prove to be safe and efficacious; Novavax's pilot plant facility is subject to extensive validation and FDA inspections, which may result in delays and increased costs; the success of the Company's foreign joint venture and licensing agreements; the Company's ability to enter into future collaborations with industry partners and the government and the terms, timing and success of any such collaboration; the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights; our ability to obtain rights to technology; competition for clinical resources and patient enrollment from drug candidates in development by other companies with greater resources and visibility; our ability to obtain adequate financing in the future through product licensing, co-promotional arrangements, public or private equity or debt financing or otherwise; general business conditions; competition; business abilities and judgment of personnel; and the availability of qualified personnel.
Overview
Novavax, Inc., a Delaware corporation ("Novavax" or the "Company"), was incorporated in 1987, and is a clinical-stage biopharmaceutical company focused on creating differentiated, value-added vaccines that improve upon current preventive options for a range of infectious diseases. These vaccines leverage the Company's virus-like-particle ("VLP") platform technology coupled with a unique, disposable production technology. The Company produces these VLP based, potent, recombinant vaccines utilizing new and efficient manufacturing approaches.
VLPs are genetically engineered three-dimensional nanostructures, which incorporate immunologically important lipids and recombinant proteins. Our VLPs resemble the virus but lack the genetic material to replicate the virus. Our proprietary production technology uses insect cells rather then chicken eggs or mammalian cells. The Company's current product targets include vaccines against the H5N1 and other subtypes of avian influenza with pandemic potential, H1N1, human seasonal influenza, Varicella Zoster ("VZV"), which causes shingles, and a Respiratory Syncytial Virus ("RSV").
We have made significant progress in our vaccine that targets the H5N1 avian influenza with pandemic potential. In December 2007, we announced favorable interim results for a Phase I clinical trial which began in July 2007 for our pandemic influenza vaccine that demonstrated

- 26 -

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS immunogenicity and safety. In August 2008, we received favorable results from a Phase I/IIa trial which was conducted to gather additional patient immunogenicity and safety data, as well as to determine a final dose, which demonstrated strong neutralizing antibody titers across all three doses tested. A final Clinical Study Report has been completed. The vaccine was well tolerated at all dosages as compared with placebo. No serious adverse events were reported. More reports of injection site pain were received from vaccine as compared with placebo recipients; however, the majority of reactions were categorized as mild or moderate. All dose levels elicited HAI and neutralizing antibody responses as compared with placebo. The highest seroconversion (>4-fold rise in titer from baseline to postvaccination) rates for the HAI (64%; 95% CI:45,80) and neutralizing antibody (97%; 95% CI:84,100) responses were observed with the 90 ľg dose.
We only intend to initiate further human clinical trials for our pandemic influenza vaccine, which would be required for regulatory approval, with a collaborative partner. We entered into a letter of intent with ROVI Pharmaceuticals which, among other things, will support Phase III Clinical development, however, a definitive agreement is yet to be finalized.
We are working to develop and test a VLP vaccine against the novel influenza H1N1 virus which was first detected in April 2009 and is now causing a worldwide pandemic. We began production of the H1N1 VLPs in our manufacturing facility on June 5, 2009 and have completed production of the first batch of vaccine within 12 weeks from the receipt of the viral H1N1 RNA. This faster cycle time from strain identification to first vaccine batch is another demonstration of our ability to create strain specific vaccines to potential pandemic influenza viruses. Over the past few years, we have gone through the process of creating recombinant VLP vaccines for multiple strains of influenza, both of seasonal as well as avian strains. This experience and knowledge has prepared us to execute this real life challenge.
Unrelated to the discovery of the 2009 pandemic H1N1 virus, in April 2009, we reported preclinical study results from work conducted by scientists from both the Centers for Disease Control and Prevention, and the Company under a Collaborative Research and Development showing that an investigational VLP vaccine against the 1918 H1N1 influenza strain (that caused the Spanish flu virus and a highly pathogenic 2004 H5N1 avian influenza strain.
We also progressed development of our VLP trivalent vaccine that targets seasonal influenza virus. In December 2008, we announced favorable safety and immunogenicity results from our Phase IIa seasonal study in healthy adults which we commenced in September 2008 to evaluate the safety and immunogenicity of different doses of our seasonal influenza vaccine. We observed a slightly different safety profile (non-serious adverse events) from our Phase IIa trial of our pandemic VLP vaccine, and thus reviewed and analyzed the dose response curve as well as the safety data from the healthy adult seasonal trial. A final Clinical Study Report has been completed. No vaccine-related serious adverse events were reported. Non-serious adverse events were reported more commonly in vaccine as compared with placebo recipients although the differences in rates between the two groups were not statistically significant. The majority of adverse events were categorized as mild or moderate. The seasonal influenza VLP vaccine was also immunogenic. Among subjects who received either the 15 or 30 ľg/HA/strain/dose, the vaccine induced HAI responses ł1:40 against one or more vaccine strains in more than 80% of the subjects. HAI responses were highest to the H3N2 strain, followed by the H1N1 and B strains. High HAI titers, similar to those seen with the vaccine strains, were also observed against drifted H3N2 and H1N1 strains, demonstrating the potential for the vaccine to be cross-protective.
In May, 2009, we enrolled subjects in the second Phase II study of our trivalent seasonal influenza VLP vaccine candidate. This clinical trial is designed to evaluate the safety and immunogenicity of a broader range of vaccine doses and to provide data to help select doses for future studies in older adults and a Phase III efficacy study. We plan to report top-line immunogenicity and safety results from this study by the fourth quarter of this year. We intend to

- 27 -

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS commence a seasonal influenza dose ranging study in the elderly (>65 years of age) in the second half of 2009. We continue to seek a collaborative partner for our seasonal influenza vaccine upon completion of these additional Phase II clinical studies.
We have also developed vaccine candidates for both RSV and VZV, both of which are currently being evaluated in preclinical studies.
On July 22, 2009 we announced final selection of an RSV vaccine candidate that will be advanced into additional preclinical studies to support an Investigational New Drug ("IND") application. We had been evaluating a number of RSV vaccine candidates, all of which had successfully induced antibody responses in mice. Our scientists have now engineered a new vaccine candidate which has been shown to protect mice against RSV disease and can be produced at sufficient yields to allow commercial manufacture. This new candidate is directed against a protein on the surface of the virus, the "F" or "fusion" protein, which is the protein that the virus uses to infect and fuse with cells in the respiratory tract and cause disease. The new RSV-F vaccine candidate consists of novel three dimensional particles containing the F protein. The structure of the F protein in these particles is identical to the configuration in which it exists on the surface of the native virus. The particle nature of the vaccine holds the promise for inducing a broad set of immune responses including antibody and cell mediated immune responses to prevent infection of the respiratory tract and attack respiratory cells that may already be infected with RSV. The first preclinical study of this new vaccine candidate in mice, the results of which we announced in February 2009, showed that it induced production of antibodies that neutralized live RSV. In addition, the vaccine protected mice against replication of RSV in the lungs. A VZV vaccine candidate has also induced antibody and T-cell responses. We plan on moving forward with further preclinical development of both vaccines in 2009.
Our vaccine products currently under development or in clinical trials will require significant additional research and development efforts, including extensive pre-clinical and clinical testing and regulatory approval, prior to commercial use. There can be no assurance that our research and development efforts will be successful or that any potential products will prove to be safe and effective in clinical trials. Even if developed, these vaccine products may not receive regulatory approval or be successfully introduced and marketed at prices that would permit us to operate profitably. The commercial launch of any vaccine product is subject to certain risks including but not limited to, manufacturing scale-up and market acceptance. No assurance can be given that we can generate sufficient product revenue to become profitable or generate positive cash flow from operations at all or on a sustained basis. Subsequent Events
At the Market Issuance
Pursuant to the At Market Issuance Sales Agreement (the "Sales Agreement"), with Wm Smith & Co. ("Wm Smith"), we may sell an aggregate of up to $25.0 million in gross proceeds of our common stock from time to time through Wm Smith. During the three and six months ended June 30, 2009, we sold 5,379,077 shares and 5,449,577 shares and received net proceeds of $13.8 million and $14.0 million, respectively. Subsequent to June 30, 2009, we sold approximately an additional 2.0 million shares for net proceeds of approximately $8.0 million.

- 28 -

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Convertible Notes
As of June 30, 2009, we had $5.0 million of senior convertible notes outstanding (the "Notes"). The Notes carried a 4.75% coupon; were convertible into shares of Novavax common stock at $4.00 per share; and matured on July 15, 2009. On July 15, 2009, we repaid the remaining $5.0 million balance of its convertible notes. Under the terms of the Notes, we elected to pay the remaining balance of the principal plus accrued and unpaid interest for approximately $2.6 million in cash and issued 1,016,939 shares of common stock representing the remaining $2.6 million of the principal plus accrued and unpaid interest due by dividing that principal amount by $2.5163. ROVI Pharmaceuticals
On June 30, 2009 we announced the signing of a letter of intent to license its proprietary, VLP vaccine technology to ROVI Pharmaceuticals of Spain ("ROVI") for influenza vaccines. ROVI will use the VLP technology to create a comprehensive influenza vaccine solution for the Spanish government under a new 60 million-euro program sponsored and led by the Spanish Ministry of Health and other government groups to develop pandemic and seasonal flu vaccines while also establishing its only in-border facility.
Under separate agreements that are in the process of being finalized, ROVI will receive exclusive licenses to our VLP vaccine and manufacturing technology to commercialize flu vaccines in Spain and Portugal, and non-exclusive licenses in Europe, Latin America and Africa. Furthermore, under a stock purchase agreement, ROVI made a $3.0 million equity investment in Novavax at $2.74 per share, a 10% premium to the June 29, 2009 closing bid price on the NASDAQ Global Market. Under a definitive agreement, to be finalized, a non-profit Foundation, jointly sponsored by ROVI and the Spanish authorities, will be formed. It is anticipated that the non-profit foundation will initially be funded with a 25 million euro credit line from the Spanish government, to support Phase III clinical development and other studies necessary to achieve marketing authorization of the VLP influenza vaccines in the European Union in 2012. Additional clinical development funds will be contributed by ROVI if required, but are not anticipated at this time. In addition, the State of Andalucía will support ROVI in building a new VLP vaccine plant in the city of Granada at a cost of approximately 20 million euro with bring it on-line in 2012 at a cost of approximately 20 million euro. The plant, with certain licensed manufacturing rights from us, is expected to have enough manufacturing capacity to supply Spain and other parts of Europe, Latin America, and Africa. As part of the final agreements, it is anticipated ROVI will be authorized to manufacture and sell an unlimited annual number of doses in Spain, Portugal, Latin America, and Africa, but will be limited to 5.0 million annual doses in other parts of Europe. Significant Transactions in 2009 and 2008 Cadila Pharmaceuticals Ltd.
On March 31, 2009, Company and Cadila Pharmaceuticals Ltd., a private company incorporated under the laws of India ("Cadila") entered into a Joint Venture Agreement (the "JVA") pursuant to which the Company and Cadila formed CPL Biologicals Limited, a joint venture (the "JV"), of which 80% will be owned by Cadila and 20% is owned by the Company. The JV will develop and commercialize our seasonal influenza VLP-based vaccine candidate and Cadila's therapeutic vaccine candidates against cancer as well as its adjuvants, biogeneric products and other diagnostic products for the territory of India. We will also contribute to the

- 29 -

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS JV technology for the development of several other VLP vaccine candidates against diseases of public health concern in the territory, such as hepatitis E and chikungunya fever. Cadila will contribute approximately $8 million over three years to support the JV's operations. The JV will be responsible for clinical testing and registration of products that will be marketed and sold in India.
The board of directors of the JV consists of five members, three of whom (including the Chairman of the board) are nominated by Cadila and two of whom are nominated by Novavax. If the board is not in unanimous agreement on an issue, the Chief Executive Officers ("CEOs") of the Company and Cadila will work to resolve the issue. If the CEOs cannot resolve the issue in five business days, a vote by the majority of the board will decide. However, the approval of the Company and Cadila, as shareholders of the JV, and the board of directors of the JV is required for (1) the sale of all or most of the assets of the JV,
(2) a change in control of the JV, (3) the liquidation, dissolution, or winding up of the JV, (4) any occurrence of indebtedness that results in the JV having a debt-to-equity ratio of 3-to-1 or greater, or (5) most amendments of the JVA or the JV's Articles of Association. The JV has the right to negotiate a definitive agreement for rights to certain future Novavax products (other than RSV) and certain future Cadila products in India prior to Novavax or Cadila licensing such rights to a third party. Novavax has the right to negotiate the licensing of vaccines developed by the joint venture using Novavax's technology for commercialization in every country except for India and vaccines developed by the joint venture using Cadila's technology for commercialization in certain other countries, including the United States. In connection with the JVA, on March 31, 2009, we also entered into license agreement, an option to enter into a license agreement, a technical services agreement and a supply agreement with the JV. Also on March 31, 2009, we entered into a binding, non-cancellable Stock Purchase Agreement (the "SPA") with Satellite Overseas (Holdings) Limited ("SOHL"), a subsidiary of Cadila, pursuant to which SOHL has agreed to purchase 12.5 million shares of our common stock, par value $0.01 at the market price of $0.88 per share. We delivered the shares of common stock on April 1, 2009. We raised gross proceeds of $11 million in the offering. The net proceeds to us from the sale of the common stock, after deducting estimated offering expenses payable by us, is approximately $10.7 million. The SPA provides that, as long as SOHL owns more than 5% of the Company's then-outstanding common stock, SOHL may purchase a pro-rata portion of any Company common stock sale issuance. Under the SPA, certain issuances are exempt from SOHL's pre-emptive right, including shares issued (1) as stock dividends, stock splits, or otherwise payable pro rata to all holders of common stock;
(2) to our employees, officers, directors or consultants pursuant to an employee benefit program; (3) upon the conversion or exercise of any options, warrants or other rights to purchase common stock; and (4) as consideration for a merger, consolidation, purchase of assets, or in connection with a joint venture or strategic partnership. However, any issuances pursuant to (4) above, must be approved by a majority of the full board and, if the transaction exceeds 5% of our then issued and outstanding shares of common stock, the per share purchase price cannot be less than $0.88. Under the SPA, for so long as SOHL owns 5% of our

- 30 -

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS common stock, SOHL may designate one member of our board of directors. SOHL designated Rajiv I. Modi, Ph.D., who was elected to the board of directors effective April 1, 2009.
Finally, on March 31, 2009, Novavax and Cadila entered into a Master Services Agreement (the "Master Services Agreement") pursuant to which we may request services from Cadila in the areas of biologics research, preclinical development, clinical development, process development, manufacturing scale up, and general manufacturing related services in India. If, at the third anniversary of the Master Services Agreement, the amount of services provided by Cadila is less than $7.5 million, we will pay Cadila a portion of the shortfall, as defined in the Master Services Agreement. We will have to pay Cadila the portion of the shortfall amount that is less than or equal to $2.0 million and 50% of the portion of the shortfall amount that exceeds $2.0 million. When calculating the shortfall, the amount of services provided by Cadila includes amounts that have been paid under all project plans, the amounts that will be paid under ongoing executed project plans and amounts for services that had been offered to Cadila, that Cadila was capable of performing, but exercised its right not to accept such project. The term of the Master Services Agreement is five years, but may be terminated by either party if there is a material breach that is not cured within 30 days of notice or, at any time after three years, provided that 90 days prior notice is given to the other party. As of June 30, 2009, we have not incurred any expenses related to the Master Services Agreement.
At the Market Issuance
On January 12, 2009 we entered into the Sales Agreement with Wm Smith under which we may sell an aggregate of up to $25.0 million in gross proceeds of the our common stock from time to time through Wm Smith, as the agent for the offer and sale of the common stock. The board of directors has authorized the sale of up to 12.5 million shares of common stock under the Sales Agreement. Wm Smith may sell the common stock "at the market" as defined in Rule 415 of the Securities Act, including without limitation sales made directly on NASDAQ Global Market, on any other existing trading market for the common stock or to or through a market maker. Wm Smith may also sell the common stock in privately negotiated transactions, subject to our prior approval. We pay Wm Smith a commission equal to 3% of the gross proceeds of the sales price of all common stock sold through it as sales agent under the Sales Agreement. During the three and six months ended June 30, 2009, we sold 5,379,077 shares and 5,449,577 shares and received net proceeds of $13.8 million and $14.0 million, respectively.
Amendments to Convertible Notes
On April 29, 2009, we entered into amendment agreements (the "2009 Amendments") with holders of the outstanding 4.75% senior convertible notes (the "Notes") representing $17.0 million of the $22.0 million outstanding principal amount of the Notes to amend the terms of the Notes to allow for early payment under specific terms described below.
The 2009 Amendments (i) provided for payment of $17.0 million aggregate principal amount of the Notes on April 29, 2009, (ii) provided for 70% of this principal amount plus accrued and unpaid interest to be paid in cash and
(iii) provided for the remaining portion of this principal amount to be paid in that number of shares of common stock that equals 30% of this principal amount divided by $2.50. On April 29, 2009, we paid $12.1 million in principal and accrued interest and issued 2,040,000 shares in accordance with the terms of the 2009 Amendments.

- 31 -

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS On July 15, 2009, we repaid the remaining $5.0 million balance of the Notes. (See Subsequent Events - Convertible Notes). Sublease Agreement with PuriCore, Inc.
We have entered into a sublease agreement with Sterilox Technologies, Inc. (now known as PuriCore, Inc.) to sublease 20,469 square feet of the Company's Malvern, Pennsylvania former corporate headquarters at a premium price per square foot. The sublease, with a commencement date of July 1, 2006, expires on September 30, 2009. In October 2006, we entered into an amendment to the Sublease Agreement with PuriCore, Inc. to sublease an additional 7,500 square feet of the Malvern corporate headquarters at a premium price per square foot. In April 2009, we negotiated an amendment to our sublease with PuriCore to expand the term of the sublease until September 30, 2011, to expand the sublease premises to include all of the approximately 32,900 rentable square feet and to grant PuriCore the option to renew the sublease for an additional three-year term.
Facility Exit Costs
In July 2008, we decided to consolidate our research and development and manufacturing activities into our facility at Belward Campus Drive in Rockville, Maryland by closing our Taft Court facility in Rockville, Maryland. Our new GMP pilot manufacturing facility located at our Belward Campus Drive location is being used to support clinical trials and may also be used for future commercialization quantities of our VLP vaccines. The move commenced in September 2008 and was completed on October 17, 2008. Our accrued expenses on the consolidated balance sheet as of June 30, 2009 and December 31, 2008 include $178,000 and $296,000, respectively, related to the remaining lease payments. Graceway Agreements
In February 2008, we entered into an asset purchase agreement with Graceway Pharmaceuticals, LLC ("Graceway"), pursuant to which Novavax sold Graceway its assets related to Estrasorb in the United States, Canada and Mexico. The assets sold include certain patents related to the MNP technology, trademarks, know-how, manufacturing equipment, customer and supplier relations, goodwill and other assets. We retained the rights to commercialize Estrasorb outside of the United States, Canada and Mexico.
In February 2008, Novavax and Graceway also entered into a supply agreement, pursuant to which Novavax manufactured additional units of Estrasorb. Final delivery was made in July 2008. Graceway paid a preset transfer price per unit of Estrasorb for the supply of this product. After we delivered the required quantity of Estrasorb we were required to clean the manufacturing equipment and prepare the equipment for transport. Graceway removed the equipment from the manufacturing facility and we exited the facility in August 2008.
In February 2008, Novavax and Graceway also entered into a license agreement, pursuant to which Graceway granted Novavax an exclusive, non-transferable (except for certain allowed assignments and sublicenses), royalty-free, limited license to the patents and know-how that

- 32 -

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Novavax sold to Graceway pursuant to the asset purchase agreement. The license allows Novavax to make, use and sell licensed products and services in certain, limited fields.
The net cash impact from these transactions were in excess of $2.5 million. The license and supply agreements with Allergan, Inc., successor-in-interest to Esprit Pharma, Inc., were terminated in February 2008 and October 2007, respectively.
License Agreement with Wyeth Holdings Corporation On July 5, 2007, we entered into a License Agreement with Wyeth Holdings Corporation, a subsidiary of Wyeth ("Wyeth"). The license is a non-exclusive, worldwide license to a family of patent applications covering VLP technology for use in human vaccines in certain fields of use. The agreement provides for an . . .