Novavax, Inc. (NVAX) Earnings Call Transcript & Summary

All right. Welcome, everyone. Day 2, 2023 Jefferies Healthcare Conference. My name is Roger Song, one of the senior biotech analyst in the U.S. Next presenting company is Novavax. Welcome Filip and Jim.

All right.

All right. So this is a fireside chat. And I'm going to ask a few questions, and hopefully, we can have a good dialogue.

All right. Fantastic. Thanks for having us.

Yes. Thank you. Okay. Let's get started since I think earlier this year, you have a new CEO lay out some pretty kind of promising strategy for your company? And maybe just remind us what are the key priorities at this moment for Novavax, and how should investor focus on Novavax moving forward?

And once again, thank you, Roger, and Jefferies for having us here today. Filip's with me are our President of R&D. And thank you for everybody in person. I think the question you're asking is the exact right way to start. And the way you're asking where should investors focus, it is right in line with where we're focused. Our key 3 priorities are, first and foremost, it's making sure we have that updated variant vaccine available for the fall 2023 season is aligned with regulatory agencies that is competitive in terms of its presentation and on time and in the right quantity. And so an exceptionally important priority for the company for which we have incredible focus all of us. The second important priority, it's about ensuring that we reduce spend. We gate our activities. We ensure we have that cash runway through prioritization of efforts to make sure we've got the runway to meet the first priority and importantly, allow the company to evolve from a pandemic era into an endemic era company in the right size and scope and our recent announcements, certainly put us on that track. And then finally, an important third priority is about highlighting the value and creating value with our technology platform. And certainly, increasingly across not only the COVID results we've seen but some really promising early Phase II results around our flu, flu kick and high-dose COVID and certainly, most recently some information around some of our partners, serum around malaria vaccine R21. But given that, I might hand off the Filip I think that's some really compelling information that we've had just recently.

Yes, right. So it's almost like separate different buckets of value. Certainly, the clinical candidates that we disclosed that data in the last earnings call and those were all quite promising, right? I mean the flu data we showed, we went against the market leaders in that space, which is really Sanofi. And if you want to beat Sanofi, we have a candidate for you right now. And the flu combination with COVID data also very good. These are non-inferior results once again to market leader flu vaccines and comparable till we saw with our COVID vaccine. We see a way forward with that as well. So those have been derisked largely. I mean the technical risk from a Phase III perspective now is quite low for those 2 programs. There's the partner program that Jim mentioned as far as the R21, the malaria vaccine candidate that's now licensed in Ghana and Nigeria and that's going through additional licensures through our partner serum. But that really shows that we've taken this Matrix asset, reduce it to practice. And now we have a giant safety database from our COVID vaccine that shows us adjuvant works well, and is competitive from a [indiscernible] perspective for our other adjuvant systems. And there's finally the very early pipeline, which we haven't talked about, but our preclinical candidates that also have value. And I guess what people look at our results from our technology like the Bill & Melinda Gates Foundation, we signed that MTA recently, to allow them access to our adjuvant for diseases they're interested in [indiscernible], this first instance. So that's ongoing. And we expect further recognition use of our adjuvant in those fields.

Excellent. Okay. Maybe let's drill down one by one for those strategic pillars. We start from this top line, the revenue, the core business of the COVID. I remember you provided the revenue guidance for 2023, $1.4 billion to $1.6 billion. Maybe just pass out what's the component within this revenue guidance and how confident you are for each component.

Certainly. You're correct. On our Q1 call, we provided full year guidance, total revenue of $1.4 billion to $1.6 billion. And the components of that guidance are: first, grant revenue. As you remember, we have under Operation Warp Speed, an exceptionally important partner in the U.S. government. And the remaining amounts that we're expecting this year are $340 million to $360 million for grant revenue. And then the remaining approximately $1 billion to $1.24 billion is product sales under our APAs. Now if I were to break down a little bit further, the product sales under APAs. And actually, what I'll do is I'll use the midpoint because the midpoint is $1.5 billion. We've got approximately $800 million that is linked to secured APAs, some of our pandemic era APAs that we've spread out over future periods, and we've got secured delivery schedules for approximately $800 million worth. In addition to that, we've got $350 million at the midpoint is our estimate for the U.S. market. When we look at the sizing for the U.S. market at approximately $350 million at the midpoint, we think that is, call it, low to mid percentage market share, and we acknowledge that, any new entrant into a market [indiscernible], they're going to need to temper their enthusiasm in terms of expectations. We think we appropriately have done so in establishing that estimate. So now you have the $800 million secured $350 million tied to the U.S. market, which is uncontracted at this time. And then finally, the midpoint on grants at $350 million. And so those are your components.

Awesome. For this $800 million, let's say, ex-U.S. APA, I remember you have in total $2.1 billion APA probably at this point, you think you will spread out 2023, 2024, maybe into 2025 to deliver all of those. So how sure is this $800 million ex-U.S. APA at this moment? Do you already have the order from those countries and that you just start to manufacture and deliver?

Yes. So really good question, and because that's a question we often get from investors as well. We are purposely noting them as secured delivery schedules. And in our Q1 disclosure, you'll see this in our [indiscernible], we speak about early in Q1, renegotiating our APA for approximately 20 million doses for Europe. And then we had also gone through negotiations, and this is part of spreading out doses over time with both Australia and New Zealand also disclosed. And so this delivery schedule reflects recent renegotiations for deliveries. Now that said, that's where we are today. That's our expectation. Certainly, countries can do things that you don't expect in the future, but these are per delivery schedules in our contracts.

Yes, absolutely. You all have some kind of uncertainty associated. I remember on the [indiscernible] earnings call, I believe maybe, Jim, from you, you say you have a $500 million inflow in 2Q, 3Q. Is that a part of this $800 million? Or I believe you have some other secured $100 million renegotiation from those countries? Maybe just elaborate on what that $500 million inflow have come from?

Yes. All right. Great question. So one of the things that we spoke to and I spoke to on our most recent call, is that in terms of our cash runway, here are some not only -- here's how we characterize it. We ended the first quarter with $637 million in cash, but we acknowledge that, hey, we were -- we've made great progress in reducing our liabilities. And part of that was $140 million in liabilities that we were paying off in April, okay? And it related to a par resolution and U.K. payment. So if you started with $637 million and you back out $140 million, you're at about $500 million. Add to that, the $500 million that Roger just referenced. And that $1 billion that we have in terms of cash runway to put us in a position to be prepared for the fall vaccination season. And then in terms of the components of those Q2, Q3 cash inflows, they're following. We had $100 million that has been both negotiated, and we've already received in April, tied to a renegotiated or dose cancellation, under an APA. So that's the first $100 million. Our run rate in terms of grant revenue, well, that's about 150 to 200 over that period. So now you've got 250 to 300, and then the balance is net cash from APAs. And so that's the cash runway up through the fall season.

Excellent. Excellent. That's very good. Thank you for the clarification. And then now we talk about the fourth season because that's also part of the revenue guidance related to the U.S. market. And we know the VRBPAC is going to have meeting June 15 in the coming weeks. And how this meeting will impact your strategy and the potential the revenue in this year because they believe they're going to select the strain kind of to be manufactured. And also, you have some kind of inventory kind of building kind of start to at risk manufacturing. How this will impact the strategy and also what's your current expectation about this VRBPAC meeting outcome?

Yes, you're right. We've been very public about our approach to getting the strain selected and really mimics what is done on the flu side of the business that, in general, manufacturers -- manufactured at risk. And there's ongoing dialogue a 2-way dialogue between regulators and manufacturers. There's never been a case when the regulators have pushed forward a flu strain that is not manufacturable and some of them are. So this is usual business between regulators and companies and that's been ongoing with us on the COVID space. Now you are probably aware that [indiscernible] has made a straight recommendation. And we've heard recent comments from Peter Marks from the FDA as well as Marco from the EMA about what their expectations are. And that's really in line with what our thinking is. I've previously disclosed that we were in the midst of manufacturing 115 as well as 116 -- 1.5 versus 1.16. And those are ongoing. They are meeting next week, we had our last meeting with the FDA just yesterday and in preparation for the VRBPAC.It's now our expectation is that it's not going to stray significantly from what's been announced by WHO. Those guys talk as well. So they're trying to get a global recommendation put out there because a fragmented market would really generate chaos on the vaccine side of the basis. So we're going in optimistic that it's been really in line with the strategy we put in place.

Yes. Got it. And one of the key feature of Novavax vaccine, you do have this cross-reactive kind of activity there. Understanding probably they will select the stream most prevalent, maybe already you have the data from the manufacturer. So if they kind of out of brew kind of selection. Is that possible you can still kind of react to that and timely to deliver for the fall?

Yes. So there are almost 2 components to that. If there's this like strain approach, which, once again, harkens back to influenza if you can demonstrate to the strain you have in hand is antigenically like to that, which is recommended and they allow you to use it. So these are small change -- small amino acid changes that show that. Now you're right, we do have this benefit of a very broad immune response. I think that's really more relevant to future drift, forward drift versus the strain selection itself. The strains that are prevalent right now, 1.5, 1.16, 2.3 and 1.9 are really very, very similar. There are single amino acid differences in the receptor binding domain. So we expect all those to perform well. We'll be presenting data on this next week.

Excellent. Great. And then maybe we can touch a little bit on the second pillar in terms of the cost reduction and the cash runway. And I believe you're having some global restructuring and cost reduction. Maybe just kind of give us a little bit more -- remind us the details and also how this will operationally impact your other ex-U.S. and the U.S. commercial sales?

Yes, certainly. And as you know, this improvement to our cost structure, reducing cost is into such an important pillar of our big 3 priorities for this year. We entered this year with just continued appreciation of our technology platform, but acknowledge that we had a significant financial burden in the form of current liabilities that we needed to address coming into the year as a part of our 10-K, we announced a going concern. And specifically around it, we noted that we have an operating plan that we believe that if we execute against that provides sufficient cash flow. However, it's not without risk. I mean there's significant risk, of course, tied to the ever-changing COVID market and delivery vaccine. We do think we've got a great plan. We also noted that we had outstanding arbitration. And so for all those reasons, we recognize that we needed to reduce cost. We needed to gate and reduce the size and scope of our operations and announced just that on our earnings call. So, what we've announced is that we are moving to the intent of reducing our R&D plus SG&A by 40% to 50% as compared to 2022 by the full year 2024. And so this is a significant change in size and scope of our operations as we size the company to the endemic opportunity. I should note that this excludes the Phase III or any investment in a Phase III program like flu kick or stand-alone flu. And when you look at the components of that resizing of our organization, it is driven by significant reduction in sizing and rationalization of our manufacturing network. It was a 25% approximately overall reduction in our workforce. 20% of our full-time employees and the remainder coming from contractors. We had a far more focused prioritization of our pipeline to make sure we maintain that focus on the top priority and then some consolidation around facilities. But all of which with an eye towards, let's get this company rightsized for success. Let's make sure we retain the key talent that we need to be successful in that first priority, and have that cash runway and ready to perform this fall and deliver against our mission of getting that updated vaccine out to the markets globally.

Excellent. Since you mentioned this going concern, let's talk a little bit because that's underlying risk in investors' mind. So in terms of this current liability, one of the big chunk is from the Gavi kind of arbitration. I know it's a legal issue, you probably cannot comment too much. But what is the potential outcome from there, and also potential kind of process? Because my base case you're probably not going to fully pay, repay everything. Of course, you have your stand, say, okay, you don't need to pay anything, but Gavi probably think it the other way. So how should we think about the different scenario? And how you [ baked ] into your operational financial plan?

Well, I do appreciate you asking the question because, of course, we get that asked by investors quite often. Because it is a legal matter and in arbitration, of course, very limited things that we can say, but I'll share the following, that we've got a strong belief in our merits in this case, we do not believe the amounts that are under dispute are approximately $700 million. We do not believe we owe those amounts. But with that said, we've got great respect for Gavi. We've got a shared mission. We genuinely do. We want to serve these low-income markets with both our COVID vaccine and you heard about the malaria vaccine. And it does create some degree of frustration on our part that we've got the shared mission and great opportunity to work together, and we'd hope that we can, right, that we can put these things behind us. I can't speak to specifics around the arbitration beyond saying -- in reliance on our U.S. and U.K. council, they note that if you just look at the time line, should this go to a formal arbitration and, which is inherently uncertain, it would be unlikely this year. It'd be more likely to play out any decision next year in 2024. Certainly not a guarantee there, but that's as we just look at time lines and our thinking on it. But I do go back to the shared mission, and our respect for Gavi and our desire to continue to serve those people globally in those markets.

Awesome. That's -- yes, that's good to thank you for some of the additional kind of comments. I know it's kind of a legal issue. You cannot have too much details. I think Novavax as one of the few manufacturer can do a very highly effective and safe kind of vaccine, you have -- you're serving the global public health. Gavi probably share the same vision.

Absolutely.

Yes. Okay. All right. So we have a couple more minutes in about the third pillar. So third pillar is related to pipeline, your platform and also the [indiscernible] opportunity. Maybe just overall, what is the business development and the corporate development kind of the process so far and I believe you hired executive focusing on this and what's the progress there.

Yes. I'll provide me just an initial comment here and Filip will provide a lot more updates regarding the different categories of value. But you're right, Elaine O’Hara joined us recently. And just with a great career out of Sanofi and exceptionally talented. When we talked about our cost structure, where we're going as a company and our focus. We noted that we had not excluded, we had not included in that forward-looking guidance on our cost structure, the advancement of our pipeline, whether it's flu, flu kick or even some of the early-stage opportunities. And when we think about our value, it is really taking advantage of our commercial footprint. The technology platform in all of its components, including Matrix-M. And I guess that's where I'm going to hand off to Filip because there is so much exciting here to be shared regarding our platform.

Yes. And I guess I covered the details at the top of the hour, but I think it's probably worthwhile to just loop back to the early results that we announced in the last quarter, meaning, and those are still partial results. We haven't really received any more data from that data set yet. But they were quite favorable, and we were gratified to see them. And I would like Jim said, we don't -- we've also stated that we don't have the budget to advance us through late-stage development at this point. And that's really a feature of some of the partnering work that Elaine is looking into doing because these things are right to be advanced in some of these fields we probably have a superior product. In other fields, we think we're probably ahead of the competition with the combination vaccine itself. So we do think there's a ton of value there that needs to be unlocked, and once we get the resources straightened out for that, I think it's going to be -- going forward, we've built our manufacturing capacity globally. We know we can make vaccines. We know our adjuvant works. We know it's licensable through our greater than 40 licenses we have for COVID. So it really is pretty much a derisk program, derisk 2 programs. If you think about the combination influenza as well as the standalone flu vaccine. And I guess the last thing we talked about was this concept of this high dose COVID vaccine for the older adult market. This is one that really mimics what's been done on the flu side of things, we're boosting people who have been serially exposed to an illness in this case COVID, you do better when you have more antigen in those vaccines. And we did, in fact, see a signal that with our high dose COVID vaccine, we were getting better immune responses. And this is to follow that up. We have a Phase II study that will be starting in the next handful of months to look at some further dosage levels and adjuvant levels to see if we, in fact, do have something that is more promising in that space. And that's really more important in the ex-U.S. market. That's where the ex-U.S. market is focused more in trying to save healthcare consumption in older adults, once again, very much mimicking what ex U.S. does in for influenza.

Awesome. And then just clarify for the COVID-flu combo and the flu alone, probably your way for the partner and then just try to do this. And then for COVID high dose, it will take into the Phase II, but what's the strategy there in the next.

Yes. So that's an important point of clarification. I think where we are today is that we've got an exceptional platform it keeps being validated through clinical data, either our own or our partners, so talking about stand-alone flu, flu kick and the malaria data. And when you've got great data it creates options. And those options could include our ability to move forward ourselves or contemplate having partners. So I wouldn't necessarily note it as a partner-only strategy, but rather a part of a continuum that comes from what is a validated and effective -- safe and effective technology platform that is further boosted by great clinical data. We've got really enticing initial Phase II data more to come, but the initial data readout is really promising for flu and flu kick. And as I said, that creates options for us, either to kind of seek our own path forward or perhaps some partners.

Excellent. Thanks for all the very insightful strategic kind of sharing. Maybe just on the top of the hour, what the any last minute kind of thing you want to discuss, we haven't touched.

I think as we're looking forward in the coming days, so if investors are looking at us in sort of the unlocking of value here at Novavax. I think that the next 3 to 4 months are just amazing period of time to really unlock some of that value. And it's everything from learning more about our performance in the fall season to have a protein-based vaccine that our market research tells us there are patients, physicians, health care systems and providers who would really like to have protein choice. And so I think the ability to showcase that this fall and moving through both the label, the recommendations and the presentation to be competitive this fall is going to be a really important next 3 to 4 months where this plays out. I think that as data continues to come out with respect to the Phase II flu kick also continued validation of our technology platform. So I think it's an exceptionally important window and then, of course, progress on all 3 of the pillars, including continued refinement of our cost structure, cash runway, with an eye towards creating long-term value.

Excellent. Thank you. Thank you, Jim and Filip, and thank you, everyone, for attending.

Thanks.

All right. Thank you.