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NVAX > SEC Filings for NVAX > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for NOVAVAX INC

Form 10-Q for NOVAVAX INC


9-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Certain statements contained or incorporated by reference herein constitute forward-looking statements. In some cases, these statements can be identified by the use of forward-looking terminology such as "expect(s)," "intends," "plans," "seeks," "estimates," "could," "should," "feel(s)," "believe(s)," "will," "would," "may," "can," "anticipate(s)," "potential" and similar expressions or the negative of these terms. Such forward-looking statements are subject to risks and uncertainties that may cause the actual results, performance or achievements of the Company, or industry results, to be materially different from those expressed or implied by such forward-looking statements.

Forward-looking statements in this Quarterly Report on Form 10-Q include, without limitation, statements regarding:

potential benefits, regulatory approval and commercialization of our vaccine candidates;

our expectation that we will have adequate capital resources available to operate at planned levels for at least the next twenty-four months;

our expected 2012 capital expenditures;

our expectations for future revenue under the contract with the Department of Health and Human Services, Biomedical Advanced Research and Development Authority (HHS BARDA) and funding requirements and capital raising activity, including possible proceeds from our At Market Issuance Sales Agreement and funding under the Loan Agreement and Improvement Allowance;

our expectations on financial or business performance, conditions or strategies and other financial and business matters, including expectations regarding operating expenses, use of cash, and the fluctuations in expenses and capital requirements associated with pre-clinical studies, clinical trials and other research and development activities;

our expectations on clinical development and anticipated milestones, including under contracts with HHS BARDA, LG Life Sciences and PATH, our planned clinical trials and regulatory filings as necessary for our vaccine candidates;

our expectations that our product candidates will prove to be safe and effective;

our expectations that our multivalent seasonal influenza virus-like particle (VLP) vaccine could potentially address an unmet medical need in older adults or children;

our expectation that our monovalent pandemic (H5N1) influenza vaccine could potentially be developed without an adjuvant for population segments that are sensitive to adjuvant use;

our expectations that our RSV vaccine could potentially address unmet medical needs;

our expectation that we will utilize the amount of services that is required to be provided by Cadila Pharmaceuticals Limited (Cadila) under the master services agreement and our ability to reduce our financial obligation and/or extend the period during which we could utilize such services;

our expectations regarding payments to Wyeth Holdings Corporation, a subsidiary of Pfizer Inc. (Wyeth);

our expectations concerning payments under existing license agreements; and

other factors referenced herein.

The Company assumes no obligation to update any such forward-looking statements, except as specifically required by law. We caution readers not to place considerable reliance on the forward-looking statements contained in this Quarterly Report.

Overview

Novavax, Inc., a Delaware corporation ("Novavax," the "Company," "we," or "us"), was incorporated in 1987, and is a clinical-stage biopharmaceutical company focused on developing recombinant protein nanoparticle vaccines to address a broad range of infectious diseases. Our goal is to become a profitable vaccine company that is aggressively driving towards development, licensure and commercialization of an important portfolio of vaccines worldwide.

Our technology platform is based on proprietary recombinant vaccine technology that includes VLPs and recombinant protein micelle vaccines combined with a single-use bioprocessing production system. Our vaccine candidates are genetically engineered three-dimensional nanostructures that incorporate immunologically important recombinant proteins. Our product pipeline targets a variety of infectious diseases and our vaccine candidates are currently in or have completed clinical trials that target pandemic (H5N1) influenza, seasonal influenza and respiratory syncytial virus (RSV).

CPL Biologicals Private Limited (the JV), our joint venture formed in 2009 between us and Cadila, of which 20% is owned by us and 80% is owned by Cadila. The JV will develop and manufacture our pandemic (H5N1) influenza and seasonal influenza vaccine candidates and Cadila's biogeneric products and other diagnostic products for the territory of India. In June 2010, the JV opened its newly constructed state-of-the-art manufacturing facility, 100% funded by Cadila, to be used to produce pandemic (H5N1) and seasonal influenza vaccines, as well as other vaccine candidates. The JV is actively developing a rabies vaccine candidate that was genetically engineered by Novavax; it recently completed initial pre-clinical immunogenicity studies on this vaccine candidate and is now complete with pre-clinical toxicology studies. Because we do not control the JV, we account for our investment using the equity method. Since the carrying value of our contribution was nominal and there is no guarantee or commitment to provide future funding, we have not recorded nor do we expect to record losses related to this investment in the future.

A current summary of our significant research and development programs and status of development follows:

Program                             Development Phase
Pandemic (H1N1) Influenza           Phase II (ended)
Pandemic (H5N1) Influenza           Phase I
Seasonal Influenza                  Phase II
Respiratory Syncytial Virus (RSV)   Phase II
Rabies (through JV)                 Pre-clinical

HHS BARDA Contract Award for Recombinant Influenza Vaccines

In February 2011, we were awarded a contract from HHS BARDA valued at $97 million for the first 36 month base-period, with an HHS BARDA option for an additional period of 24 months valued at $82 million, for a total contract value of up to $179 million. The HHS BARDA contract award provides significant funding for our ongoing clinical development and product scale-up of both our seasonal and pandemic (H5N1) influenza vaccine candidates. This is a cost-plus-fixed-fee contract in which HHS BARDA will reimburse us for direct contract costs incurred plus allowable indirect costs and a fixed-fee earned in the further development of our multivalent seasonal and monovalent pandemic (H5N1) influenza vaccines.

Under certain circumstances HHS BARDA reimbursements may be delayed or even potentially withheld. In March 2012, we decided to conduct our Phase II dose-ranging clinical trial of our trivalent and quadrivalent seasonal influenza vaccine candidates (the 205 Trial) under our existing U.S. investigational new drug application (IND) for our trivalent seasonal influenza vaccine candidate (Trivalent IND) as opposed to waiting to conduct the 205 Trial under a new IND for our quadrivalent vaccine candidate (Quadrivalent IND). In July 2012, we reported that we expected to launch our next quadrivalent Phase II clinical trial in 2013 rather than in the second half of 2012; similarly, the filing of the Quadrivalent IND, which we had previously indicated was expected in the second half of 2012 will also be delayed. Based on our discussions with HHS BARDA, because the 205 Trial includes our quadrivalent seasonal influenza vaccine candidate, the outside clinical trial costs for the 205 Trial will only be submitted for reimbursement to HHS BARDA and recorded as revenue by us after we submit the 205 Trial data to our Quadrivalent IND. Until then, the outside clinical trial costs of the 205 Trial will be expensed and included in cost of government contracts revenue. The financial impact of this delay in revenue recognition is based on the outside clinical trial costs of the 205 Trial that are expected to total approximately $3.1 million, of which $2.8 million was incurred through September 30, 2012.

Pandemic (H1N1) Influenza

In 2009 and 2010, we dedicated significant resources to demonstrate our ability to develop a recombinant monovalent VLP vaccine against H1N1 influenza, which had been declared a pandemic. We produced a non-cGMP H1N1 VLP vaccine candidate within 3 weeks after the genetic sequence of the novel H1N1 influenza virus was announced and manufactured a cGMP vaccine candidate within 11 weeks of the announcement. We conducted a Phase II clinical trial in Mexico, in collaboration with Laboratorio Avi-Mex S.A. de C.V. and GE Healthcare; we published the final data results in 2011 and presented at the World Health Organization (WHO) Meeting for the Evaluation of Pandemic Influenza Vaccines in Clinical Trials. Our results showed that our H1N1 VLP influenza vaccine exceeded the immunogenicity criteria for seasonal influenza vaccine licensure at all dose levels, including the lowest 5g dose and that a single administration of the VLP vaccine induced high levels of hemagglutination-inhibition (HAI) titers in subjects without pre-existing detectable immunity to H1N1 influenza. Although H1N1 influenza is no longer considered a pandemic and is being addressed as an active strain in the determination of ongoing seasonal influenza strains, we nevertheless expect that the data from our H1N1 clinical trials will be used to support our pandemic (H5N1) and seasonal influenza VLP vaccine programs in the U.S. and in other countries.

Pandemic (H5N1) Influenza

We have made significant progress in the development of our monovalent pandemic influenza vaccine that targets the H5N1 influenza strain. In 2007, we released results from an important pre-clinical study in which ferrets that received our H5N1 vaccine candidate were protected from a lethal challenge of the H5N1 virus. After filing an IND, we initiated a Phase I/IIa clinical trial. We released interim data from the first portion of this clinical trial in December 2007. These interim results demonstrated that our pandemic (H5N1) influenza vaccine can generate a protective immune response. We conducted the second portion of the Phase I/IIa trial in 2008 to gather additional subject immunogenicity and safety data and determine a final dose through the completion of this clinical trial. In August 2008, we reported favorable results from this clinical trial, which demonstrated strong neutralizing antibody titers across all three doses tested. The vaccine was well-tolerated at all dose levels as compared with placebo, and no serious adverse events were reported. The vaccine also induced robust HAI responses, which have been shown to be important for protection against influenza disease. In conjunction with our HHS BARDA contract, in May 2012, we launched two Phase I trials of our H5N1 vaccine candidate in combination with several alternative adjuvant candidates. These trials were designed to evaluate the safety and tolerability of the vaccines in the presence and absence of adjuvants; the ability of VLP vaccine antigens with and without adjuvants to generate antibody levels that fulfill the FDA's criteria for accelerated approval, and the ability of these vaccines to provide an expanded number of doses and possible cross-protection against other virus strains to the U.S. population. In October 2012, we reported positive results from these clinical trials. The data from the trials demonstrated the safety and immunogenicity of varying dose-levels of the vaccine, with and without adjuvant, and further demonstrated that statistically significant robust adjuvant effects on the immune responses were achieved. The vaccine safety was acceptable with no vaccine-related serious adverse events observed. Notably, in both trials the unadjuvanted vaccine elicited HAI titers ? 40 in >82% of subjects at a dose of
45 g, which would fulfill FDA criteria for accelerated approval.

Seasonal Influenza

We are actively developing our multivalent VLP vaccine that targets the seasonal influenza virus. In April 2010, we reported the final results of our Phase II trial in older adults (60 years of age or older) in a dose-ranging study comparing our seasonal trivalent (three strain) influenza VLP vaccine with a commercially available inactivated trivalent influenza vaccine (TIV). The results showed that the vaccine was both safe and immunogenic against the 2009-2010 seasonal influenza virus strains in older adults. The CDC has indicated that currently approved seasonal influenza vaccines may be suboptimally effective in preventing hospitalization for pneumonia and influenza in older adults; however, we believe that some features of our seasonal influenza VLP vaccine have the potential to offer improved efficacy.

In March 2012, we initiated the 205 Trial. We developed a quadrivalent formulation of our seasonal influenza vaccine candidate as many influenza vaccine manufacturers move from trivalent to quadrivalent formulations, an industry move that has been acknowledged by WHO and the FDA. In July 2012, topline results for the 205 Trial were reported and demonstrated that the quadrivalent VLP vaccine candidate achieved its primary endpoints of safety and immunogenicity. The VLP vaccine candidate demonstrated immunogenicity against all four viral strains based on HAI responses at day 21, was also well-tolerated with no vaccine-related serious adverse events observed and reactogenicity was considered acceptable. We also announced that a secondary endpoint of the study was to evaluate the potential of the VLP vaccine candidate to fulfill the FDA Center for Biologics Evaluation and Research (CBER) criteria for accelerated approval, specifically by meeting certain seroconversion rates and seroprotection rates. The VLP vaccine candidate met the FDA seroprotection rates for all four viral strains; however, the seroconversion rates were met by three of the four viral strains. The fourth virus, B/Brisbane/60/08, despite fulfilling the seroprotection rates, failed to meet the seroconversion rates. In addition, we also compared the immunogenicity of the VLP vaccine candidate against that of a licensed TIV produced in eggs. In general, the results showed the comparator TIV to reach higher levels of HAI than our VLP vaccine candidate. Finally, we reported that we are evaluating further process development and assay refinements that we believe will further improve the immunogenicity profile of the VLP vaccine candidate and will delay the start of our next Phase II trial until 2013. The timing of the launch of our Phase III registration will be coordinated with the completion of the aforementioned Phase II trial launch in 2013.

Respiratory Syncytial Virus (RSV)

We have developed a recombinant nanoparticle vaccine to prevent RSV. In pre-clinical studies, we have demonstrated positive results in models designed to test the safety and efficacy of our RSV vaccine candidate. In December 2010, we initiated a blinded, placebo-controlled, dose-escalating Phase I trial to assess the safety and tolerability of aluminum phosphate-adjuvanted and unadjuvanted formulations of our RSV vaccine candidate. A secondary objective of the study was to evaluate total and neutralizing anti-RSV antibody responses and assess the impact of the adjuvant. The study enrolled 150 healthy adults 18 to 49 years old who were allocated to six cohorts that included four dose levels of vaccine. The primary safety findings were local pain and tenderness at the site of injection, the majority of which were mild in nature with no dose-related increase observed. There were no observed vaccine-related serious adverse events or trends for related systemic side effects. The antibody response to the RSV F protein was significantly increased compared to placebo (p<0.001) in all groups and increased by 19-fold in the highest-dose adjuvant group at day 60. A significant dose-response pattern was observed. High rates of seroconversion were seen at all doses including a rate of 100% at the highest-dose-adjuvant group. In October 2012, we initiated two separate dose-ranging clinical trials, one in women of child bearing age and the other in elderly adults. The first trial is a randomized, blinded, placebo-controlled Phase II trial that will evaluate the immunogenicity and safety of two dose levels of our RSV vaccine candidate with and without aluminum phosphate as an adjuvant, enrolling 330 women of childbearing age. Top-line data is expected to be reported in first quarter of 2013. The second trial is a randomized, blinded, placebo-controlled Phase I trial that will evaluate the immunogenicity and safety of two doses of our RSV vaccine candidate, also with and without aluminum phosphate as an adjuvant, enrolling 220 elderly adults. Top-line results are expected to be reported in the first half of 2013.

License Agreement with LG Life Sciences, Ltd. (LGLS)

In February 2011, we entered into a license agreement with LGLS that allows LGLS to use our technology to develop and commercially sell our influenza vaccines in South Korea and certain other emerging-market countries. LGLS received an exclusive license to our influenza VLP technology in South Korea and a non-exclusive license in the other specified countries. At its own cost, LGLS is responsible for funding its clinical development of the influenza VLP vaccines and completing a manufacturing facility in South Korea. We received an upfront payment and may receive reimbursements of certain development and product costs, payments related to the achievement of certain milestones and royalty payments at a rate between 10% and 20% from LGLS's future commercial sales of influenza VLP vaccines, which royalty rate is subject to reduction if certain timelines for regulatory licensure are not met.

Clinical Development Agreement with PATH Vaccine Solutions (PATH)

In July 2012, we entered into a clinical development agreement with PATH to develop our vaccine candidate to protect against RSV through maternal immunization in low-resource countries (the "RSV Collaboration Program"). We were awarded approximately $2.0 million by PATH for initial funding under the agreement to partially support our Phase II dose-ranging clinical trial in women of childbearing age as described above. The agreement would expire July 31, 2013, unless we and PATH decide to continue the RSV Collaboration Program. We retain global rights to commercialize the product and have made a commitment to make the vaccine affordable and available in low-resource countries. To the extent PATH has continued to fund 50% of our external clinical development costs for the RSV Collaboration Program, but we do not continue development, we would then grant PATH a fully-paid license to our RSV vaccine technology for use in pregnant women in such low-resource countries.

Sales of Common Stock

In October 2012, the Company sold 12,385,321 shares of its common stock to two affiliates of RA Capital Management, LLC (RA Capital), three affiliates of Camber Capital Management LLC and three affiliates of Ayer Capital Management LLC at a price of $2.18 per share, resulting in approximately $26.9 million in net proceeds. The shares were offered under an effective shelf registration statement previously filed with the SEC.

The Board of Directors of the Company (the "Board") has appointed a standing Finance Committee (the "Committee") to assist the Board with its responsibilities to monitor, provide advice to senior management of the Company and approve all capital raising activities. The Committee has been authorized by the Board to approve all At Market Issuance sales transactions. In doing so, the Committee sets the amount of shares to be sold, the period of time during which such sales may occur and the minimum sales price per share. In September 2012, the Company entered into an At Market Issuance Sales Agreement, under which the Company may sell an aggregate of $50 million in gross proceeds of its common stock. This agreement replaces the previous sales agreement entered in March 2010, which also allowed for the sale of an aggregate of $50 million in gross proceeds of its common stock, but had recently met its limitation of sales of shares. The shares of common stock are being offered pursuant to a shelf registration statement filed with the SEC. For the nine months ended September 30, 2012, the Company sold 8.4 million shares at an average sales price of $1.70 per share, resulting in $14.0 million in net proceeds; this amount excludes $0.8 million received in early 2012 for 0.7 million shares traded in late December 2011. Since entering into the March 2010 sales agreement through November 7, 2012, the Company has sold 24,957,715 shares of its common stock and received gross proceeds of $49.9 million. No sales have occurred under the September 2012 sales agreement.

In May 2012, we sold 10,000,000 shares of our common stock to two affiliates of RA Capital at a price of $1.22 per share, resulting in $12.1 million in net proceeds. The shares were offered under an effective shelf registration statement previously filed with the SEC.

Critical Accounting Policies and Use of Estimates

There are no material changes to the Company's critical accounting policies as described in Item 7 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2011, as filed with the SEC.

Recent Accounting Pronouncements Not Yet Adopted

We have considered the applicability and impact of all Financial Accounting Standards Board's Accounting Standards Updates (ASUs). Recently issued ASUs were evaluated and determined to be not applicable in this Quarterly Report.

Results of Operations

The following is a discussion of the historical financial condition and results of operations of the Company and should be read in conjunction with the financial statements and notes thereto set forth in this Quarterly Report.

Three Months Ended September 30, 2012 and 2011 (amounts in tables are presented in thousands, except per share information)

Revenue:



                             Three Months Ended
                                September 30,
                 2012        2011        Change 2011 to 2012
Revenue:
Total revenue   $ 5,765     $ 5,008     $                 757

Revenue for the three months ended September 30, 2012 was $5.8 million as compared to $5.0 million for the same period in 2011, an increase of $0.8 million or 15%. Revenue for 2012 and 2011 is primarily comprised of services performed under the HHS BARDA contract that was awarded in February 2011. The increase in revenue relates to increased costs associated with our product development activities and clinical trials performed under the HHS BARDA contract.

Revenue for the three months ended September 30, 2012 was negatively impacted due to the Company electing to conduct the 205 Trial without immediate HHS BARDA reimbursement of its outside clinical trial costs, which are expected to total approximately $3.1 million, of which $0.4 million was incurred during the three months ended September 30, 2012 (see discussion of the 205 Trial in Management's Discussion and Analysis of Financial Condition and Results of Operations-Overview on page 17). In July 2012, we reported that we expected to launch our next quadrivalent Phase II clinical trial in 2013 rather than in the second half of 2012; similarly, the filing of the Quadrivalent IND, which we had previously indicated was expected in the second half of 2012 will also be delayed. Until then, we will not record revenue associated with the outside clinical trial costs of our 205 Trial and such costs will be expensed and included in cost of government contracts revenue. For 2012, we expect to generate significant revenue from conducting multiple clinical trials, ongoing process development and the manufacture of clinical materials under the HHS BARDA contract.

Costs and Expenses:



                                                     Three Months Ended
                                                       September 30,
                                         2012        2011        Change 2011 to 2012
Costs and Expenses:
Cost of government contracts revenue   $  3,838     $ 2,190     $               1,648
Research and development                  6,395       4,049                     2,346
General and administrative                2,381       2,737                      (356 )
Total costs and expenses               $ 12,614     $ 8,976     $               3,638

Cost of Government Contracts Revenue

Cost of government contracts revenue was $3.8 million for the three months ended September 30, 2012 as compared to $2.2 million for the same period in 2011, an increase of $1.6 million, primarily due to increased costs associated with our product development activities and clinical trials performed under the HHS BARDA contract that was awarded in February 2011. These costs include direct costs of salaries, laboratory supplies, consultants and subcontractors and other direct costs associated with our process development, manufacturing, clinical, regulatory and quality assurance activities under government research contracts.

Cost of government contracts revenue for the three months ended September 30, 2012 includes $0.4 million of direct clinical trial costs of our 205 Trial (see discussion of the 205 Trial in Management's Discussion and Analysis of Financial Condition and Results of Operations-Overviewon page 17). For 2012, we expect a significant increase in the cost of government contracts revenue from conducting multiple clinical trials, ongoing process development and the manufacture of clinical materials under the HHS BARDA contract.

Research and Development Expenses

Research and development expenses were $6.4 million for the three months ended September 30, 2012, as compared to $4.0 million for the same period in 2011, an increase of $2.3 million or 58%, primarily due to increased costs relating to our RSV clinical trials, higher employee-related costs and expenses associated with our new manufacturing facility. Research and development expenses include salaries, laboratory supplies, consultants and subcontractors and other expenses associated with our process development, manufacturing, clinical, regulatory and quality assurance activities for internally funded programs and our collaboration agreements. In addition, indirect costs, such as fringe benefits and overhead expenses, are also included in research and development expenses. For 2012, we expect a continued increase in research and development expenses primarily due to two anticipated clinical trials in RSV (an internally funded program at this time), higher employee-related costs and expenses associated with our new manufacturing facility.

Costs and Expenses by Functional Area

We track our cost of contract revenue and research and development expenses by the type of costs incurred in identifying, developing, manufacturing and testing vaccine candidates. We evaluate and prioritize our activities according to functional area and therefore believe that project-by-project information would not form a reasonable basis for disclosure to our investors. At September 30, 2012, we had 98 employees dedicated to our research and development programs versus 83 employees as of September 30, 2011. Historically, we did not account for internal research and development expenses by project, since our employees work time is spread across multiple programs and our internal manufacturing clean-room facility produces multiple vaccine candidates.

The following summarizes our cost of government contracts revenue and research and development expenses by functional area for the three months ended September
30 (in millions).

                                                               2012           2011
Manufacturing                                               $      5.0     $      3.3
. . .
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