Erika Trahan - IR Gregory Glenn - President of Research & Development John Trizzino - Senior VP, Chief Business Officer & CFO Stanley Erck - President, CEO & Director

Kevin DeGeeter - Ladenburg George Zavoico - B Riley Ted Tenthoff - Piper Jaffray Vernon Bernardino - Seaport

Good day, ladies and gentlemen, and welcome to Novavax' First Quarter 2018 Financial Results Conference Call. [Operator Instructions] And as a reminder, this conference is being recorded. Now I'd like to turn the conference over to Erika Trahan, Investor Relations. Please go ahead.

Thank you, operator. Good afternoon, everyone. This is Erika Trahan, Senior Manager of Investor and Public Relations at Novavax. I would like to thank everyone for joining today's call to discuss first quarter 2018 operational highlights and financial results. A press release of our earnings 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. Joining me on today's call is Novavax's President and CEO, Stan Erck; along with our President of Research and Development, Dr. Greg Glenn; and our Chief Business Officer and Chief Financial Officer, John Trizzino. Before we begin our prepared remarks, I need to remind you that we will be making forward-looking statements during the teleconference that could include financial, clinical or commercial projections. Statements relating to future financial or business performance, conditions or strategies and other financial and business-related matters, including expectations regarding revenue, operating expenses, cash usage and clinical development and anticipated milestones are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Novavax cautions that these forward-looking statements are subject to numerous assumptions, risks and uncertainties, which change over time. I'll now turn it over to Stan to begin today's call.

Thanks, Erika. Welcome to our first quarter 2018 earnings call. To set your expectations, this call will be fairly brief. I'll start with an update on the status of our lead programs in RSV and Flu. Greg will then provide some commentary on the importance of our global contributors to the Prepare trial, and last but not least, John will report on our financials. So let's get started. Since our last call, we presented important updates for both our RSV and Flu programs at the Annual World Vaccine Congress last month. These presentations are available on our website, so we won't review their content here, but, of course, we're happy to answer any of your questions during the Q&A portion of today's call. What I will emphasize is that what you'll see in these presentations represents what we believe are best-in-class product candidates. Additionally, with regard to our RSV F Vaccine, we expect to have a clear advantage of being first to market. Based on our understanding of RSV vaccine developments occurring throughout the world, the exclusivity we expected to achieve with our RSV F Vaccine seems likely to continue for many years. Focusing on our RSV F Vaccine, we continue to make substantial progress in the Prepare, which is our Phase III clinical trial for infants via maternal immunization. Following the successful information analysis that we announced last December and which we believe significantly de-risked this program, this Monday, we announced that we achieved enrollment of 3,000 active vaccinees in the Prepare trial, which, including the placebo arm, totaled 4,600 enrollees. Heading this enrollment target was an important milestone for Novavax. With this number of participants in the Phase III trial, we'll be ready to conduct a prespecified interim efficacy analysis 6 months after the last infant is born. We expect to report results for the interim analysis during the first quarter of 2019. Conducting the interim analysis of the Prepare trial is obviously a critical element on our pathway to licensure for our RSV F Vaccine. Currently, our expectation is that the efficacy readout in the first quarter will allow us to conclude the Prepare trial and will form the basis of our marketing applications with the U.S. FDA and the European Medicines Agency. We are currently targeting filing these marketing applications by the first quarter of 2020. I remind you that our RSV F Vaccine for this indication has been granted Fast Track Designation by the FDA. While I'm talking about the RSV F Vaccine program, I'll take a couple of minutes to review our prospective of the market opportunity here and our competitive position in that market. As you heard me say before, RSV remains an urgent global unmet medical need due to the significant mortality and morbidity associated with the RSV disease in infants in the absence of any vaccine to prevent it or any treatment once an infant becomes ill. We believe there is at least a $1.5 billion market for this vaccine in higher income countries. And, obviously, the market opportunity gets much bigger when we consider to the rest of the world, given that RSV infants in all geographies. We expect that we will receive the important recommendations from CDC's Advisory Committee on Immunization Practices, or ACIP, shortly after FDA approval. As I said earlier, our vaccine will be first-to-market and, thus, by definition, will be first-in-class. And we expect that exclusivity will continue for the foreseeable future. We also expect that there will be a high uptake of this vaccine similar to pediatric vaccine uptake, given the disease burden is high, and that there is a high level of compliance with ACIP recommendations for pediatric vaccines. Moving on to our NanoFlu program. As we detailed in our last earnings call, we reported positive top line results for Phase I/II clinical trial back in February. In this trial, we demonstrated improved immune responses compared to Fluzone High-Dose, the market-leading flu vaccine for older adults. Repeated, low vaccine effectiveness and the high number of hospitalizations in recent flu seasons highlight the urgent need for better, more effective flu vaccine. NanoFlu showed significantly improved levels of antibodies against the H3N2 strain, which was associated with roughly 75% of flu-related hospitalizations in the 2017-'18 flu season in the U.S. We've demonstrated superior immune responses compared to Fluzone High-Dose when tested against several H3N2 strains that have evolved over the years. What's next for NanoFlu? We plan to discuss our Phase I/II data and the upcoming Phase II trial design with the FDA in the next few months. The Phase II trial is scheduled to begin this fall. We expect the Phase II trial will explore 2 important issues. One, the effect of our Matrix-M adjuvant by comparing adjuvanted and unadjuvanted doses. And two, the effect of quadrivalent formulations compared to the trivalent vaccines used in our Phase I/II trial. We expect to announce top line data from the Phase II trial during the first quarter of next year. Following the availability of the Phase II data, we will schedule an interface to meeting with the FDA to discuss our plans for our Phase III trial, and we hope to initiate that pivotal trial in the second half of 2019. And with that, I'll turn the call over to Greg for some comments about the Prepare trial.

Thanks, Stan, and good afternoon, everyone. With regards to the Phase III Prepare trial for infants via maternal immunization, I want to take a few minutes to highlight the importance of this enrollment milestone that we've recently reached and thank the parties involved. It is truly a historical achievement and brings us closer to our goal of protecting infants against RSV disease, the leading cause of infant hospitalization in the United States. We have enrolled pregnant women in over 80 trial sites in 11 countries, including more than 1,000 women within the United States. These women volunteered to receive an investigational vaccine for which they and their infants are being studied for both safety and efficacy of the vaccine against RSV disease. As I've discussed before, the safety of our RSV F Vaccine is being carefully monitored by an independent Data and Safety Monitoring Board. At this sentimental moment, I want to take this opportunity to thank the dedicated staff at these sites across the globe, many of which are run by well-known experienced RSV experts. I also thank the experts on the Data and Safety Monitoring Board, who have assisted in the implementation of trial and monitored the safety of the volunteers over the past 2.5 years. We also wish to thank both PATH and the Bill & Melinda Gates Foundation for their visionary support of this program. And finally and most importantly, I want to thank the women who participated in this trial. They share our vision of a future with a licensed vaccine available to protect infants against RSV disease and prevent serious consequences associated with this disease in newborn babies. I'll now turn the call over to John Trizzino to review the financial results for the quarter.

Thank you, Greg. Today, we announced financial results for the first quarter of 2018. A summary of our financial statements can be found in today's press release, but I wanted to highlight some key components of our results. For the quarter, we recorded a net loss of $46.4 million or $0.14 per share compared to a net loss of $43.9 million or $0.16 per share in the first quarter of 2017. The increase in net loss was mainly due to higher R&D spending associated with the Phase III Prepare trial, partially offset by increased revenue under the $89 million Bill & Melinda Gates Foundation grant agreement. Revenue in the quarter increased year-over-year 70% to $9.7 million compared to $5.7 million for the same period in 2017. This increase was driven by higher revenue recorded under the Gates Foundation grant, given increased enrollment in the Prepare trial. As you know, the Bill & Melinda Gates Foundation revenue is directly related to the operating activity in the Prepare trial. We continue to expect an increase in BMGF revenue in 2018 relative to 2017 as a result of the increased level of activities in the Prepare trial. Related to our net loss for the quarter, R&D expenses increased 18% to $44.5 million in the quarter due to the increased development activities, again, associated with the Phase III Prepare trial. G&A expenses were essentially flat at $8.7 million in the quarter. As of March 31, 2018, Novavax had $164.2 million in cash, cash equivalents, marketable securities and restricted cash on the balance sheet, which does not include net proceeds of the $54 million raised through our April public offering. Net cash used in operating activities for the first quarter of 2018 was $66.1 million compared to $44.5 million in the first quarter of 2017. This increase in cash usage was primarily due to approximately $16 million of one-time payments that included a lease termination fee for our Clopper Road facility, a lease payment to Wyeth and an annual bonus payment to our employees, which did not occur in the first quarter of last year. The cash usage was also impacted by the adoption of a new accounting standard, which requires restricted cash to be included in the beginning and ending cash -- and ending balances of the statements of cash flows. This accounting change increased our cash used in operating activities by approximately $9 million and $6 million in the first quarter of 2018 and 2017, respectively. We expect our cash used in operating activities to significantly decrease for the subsequent quarters of 2018 as compared to the first quarter of 2018. This concludes my financial review. I'll now turn the call back over to Stan.

Thanks, John. I'm excited about our pipeline and our prospects for the remainder of 2018 and beyond, and particularly with regard to our 2 lead programs in RSV and Flu. We look forward to updating you on our progress as we continue to execute against our key milestones. We'll wrap it up here and open it up to Q&A. Operator, Q&A?

[Operator Instructions] Our first question from Joel Beatty with Citi.

This is Sean calling in for Joel. I got a few here. Is the event rate for the Phase III in line with your initial expectations?

Yes, we don't share specific information, but it's in line with our expectations.

Great. And then just a little bit more color on that. I'm trying to better understand sensitivity of your pivotal endpoint. Can you talk a bit about how often RSV is detected via PCR during other respiratory infections? And then also for the pulse oxim respiratory thresholds? Are those assessed at specific time point or continuously during hospitalization?

Okay. So let's start at the back. So the way the trial works is active and passive surveillance in any infant that has a symptom that has been seen by the site, so it's not in the hospital. So to step aside, and the clinicians there will assess using swab. They examine the infant for signs and symptoms of lower respiratory tract illness, measure the respiratory rate and do pulse oximetry. So that's how the data is collected within the site and either by our contacting the subject, the mother, who said they have infection or they're going to call us for specific time. So I think that's just to be clear about how the endpoints are collected. And first question, pardon me, that question was, remind me?

Curious of whether RSV is detected via PCR during other respiratory infections?

Well, I'm not sure. I mean, when you say other respiratory infections, I mean, we do -- obviously, there are other ideologies of respiratory infection, so we do multiple ex-PCR for multiple organ and multiple viruses. So, of course, we do see that RSV is the leading cause of infant hospitalizations or as a clinical manifestation of disease, since it's been leading cause of infant hospitalization in the U.S., so -- and the second leading cause of global mortality.

That's helpful. And then as my final question, just one quick one on the enrollment update. With the 100% enrollment, will you continue to enroll women to offer additional analysis? Or will this interim be the final?

No, our expectation is based upon what we know so far is, is that we -- our expectation -- we know -- we've paused now enrollment, so we stopped at 4,600. And we want to follow all 4,600 until the, obviously, the last baby is born and 180 days beyond that. And our expectation from what we know now and the rate of infection that we observed is, is that when we open the interim analysis that we will meet our expectation and stop -- formally stop the trial and start preparing our BLA. In fact, I think we'll start preparing our BLA before that date.

Our next question comes from Kevin DeGeeter with Ladenburg.

So just a follow-up on the kind of a run rate line of questioning here. Greg, can you remind us just how much do you know about -- or how you go about assessing the event rate prior to unblinding?

Yes. So we track performance of surveillance. We -- PCRs are sent to our central lab, so we see the PCR positive samples. We are blinded, so we don't know in which category they went, but we're able to track the cases that are PCR positive.

Perfect. Appreciate the clarification.

A lot of it has to do with -- to be sure that we're -- our sites are performing and doing surveillance well, which we believe it's going very well.

Great. And then just one more, I guess, for John. Should -- you mentioned cash is, which in particular working its way lower as we go through 2018 from this Q1 levels. But one things about reported R&D, should we think about that as beginning to work down in the second half of the year after completion of enrollment of Prepare? And will that sort of remain at a plateaued level until follow up is completed on the majority of the -- these mothers and kids?

You know, Kevin, we don't give specific guidance on cash burn. But as I mentioned in my remarks, we do expect to see a significant decrease over the subsequent quarters for the balance of the year. And so that's going to be attributed to the reduction, mostly of kind of R&D expenses. So I think that's enough to kind of give you an indication of what we expect our spending to be through the balance of '18.

Our next question comes from George Zavoico with B Riley.

With regard to -- with regard to the enrollment and your tracking of the event rate, is there any evidence that because this trial is now be going on for 2 or 3 years, is there evidence of the attack rates for RSV have varied from year-to-year? Some high, some low? Or is it really that important for the infant population as opposed to the elderly?

Yes, I think it's pretty even. It's a global trial. So the merits of the trial is it's a global trial, so we have northern, southern and tropical regions, all which have some small variance in season. But I think across the time frame we're conducting the trial, we're seeing very much a kind of attack rate, which is in line with our expectations.

Okay. That's good. Good to hear. And the -- with regard to the NanoFlu Phase II, that's going to be quadrivalent, right? And you already know the strains and you're already preparing the vaccine, manufacturing the vaccine? Is that correct??

That's great. Yes.

And then just to be clear, it'll be against quadrivalent Fluzone, right?

That's correct. We'll...

Well, it'll be against whatever Fluzone comes out. If they ship trivalent, then we'll compare it to the trivalent. But we continue to compare it to the market-leading vaccine in older adults.

Okay. And finally, you mentioned that ACIP is expected to recommend the vaccine for use in the third trimester of pregnant women. What do you base that high confidence on? And as a follow on question to that, you already know that the vaccine is going to be effective in 45 -- 40% to 45% up to 100% vaccine efficacy. Would ACIP still recommend if it's in the low range? I mean, I hope it's going to be in the high range -- higher part of that range. But is there a level of confidence between within that range as per the recommendation?

Yes, George, Stan. So yes, our expectation is based on a couple of things. So we started working with ACIP a couple of years ago when we're doing the older adult program. They, the CDC, the ACIP, set up a working group for RSV specifically because of Novavax's progress in both of these vaccines. And so they're familiar with us, they know the vaccine really well. We picked the number, the 40 -- the threshold in the 40s. Because anything above that we believe would be recommended by the ACIP, and we're not going to tell you that today, but we've talked to them. We know other vaccines. They get approved by ACIP. We know that once the tradition of ACIP is to recommend positively for vaccines to get approved by the FDA. So they -- I don't know, if any, that the FDA has approved, that ACIP has not approved.

I think also, George, it's Greg to chime in, this is a very large unmet medical need where there is no specific treatment. And so it would -- we think it'd be seen very positively. And then as you know, we are collecting an important secondary endpoints, and so those -- the totality of the data is going to be important. But I think we meet the lower end of this efficacy, all right. I think if Stan is correct, they will recommend it. But again, we are collecting important secondary endpoint data as well, so they'll look at the whole data set, I think, as part of their recommendation.

Okay. And finally, John, your -- stopped enrolling in Prepare, so now you're just following patients. So that clearly contributes to the decrease in operating expenses and R&D expenses. But you're also starting the Phase II NanoFlu trial in that same period. So the cost savings is going to be much more than the cost increase for the NanoFlu. And that's because the NanoFlu trial is going to be fairly small, right? Could you just remind us of what size trial you expect that to be?

So we are, again, George, we don't give specific guidance on the cost of trials or cash burn, but we expected that, that won't offset each other and that we would have a decrease in total R&D expenses for the year. I think you will see over the subsequent quarters, as I mentioned in my remarks, and as Kevin questioned as well, that we're going to see a significant reduction in that quarter, the remaining 3 quarters in 2018 compared to the first quarter.

Our next question comes from Ted Tenthoff with Piper Jaffray.

So Stan and Greg, I was wondering if you guys could walk us through assuming positive data with the RSV vaccine. Well, assuming you're going to take a step back. When is the final birth happens and we do the follow-up? What are the steps for collecting data? And how can you accelerate that? And then on the far side of what we hope will be positive data, what are the steps to BLA? And assuming positive data, how quickly do you think you might be able to file that?

Yes, Ted, thanks for the question. This is Stan. So what we're doing now is we now are following -- this is the peak of data collection right now because we've just got into our 4,600 -- well, actually, the baby hasn't been born yet. So by the end of this quarter, we'll be at the peak. And then every month thereafter, people will be dropping out of -- kids will be dropping out of the trial because they go past day 1 A. And think about it in the fourth quarter as you get to October and November, your down at the last kids and we've been working all throughout this 3-year process and in lieu more than 3 years by the time we get done process of cleaning up data from year 1, year 2 and now year 3. So that's a process. And when we get to -- so what times it is, it is a 180 days after the last baby is born, right? That's the end, but it won't be like we have all the data from the 4,600 people to clean by then. We'll be trying to stay ahead of the game there, and so we'll be down to our last kid. And then we open it up very shortly after the last child reaches 180 days. So what do expect? Our expectation is very positive right now because we've had informational analysis. We have seen the attack rates that are in line with what we had planned on for the trial design, and so our expectations are high. And our -- and so what we'll do is when we open up those data, we will already have begun. In fact, very shortly, we're going to have our first BLA planning meeting and we'll start all the activities that go into BLA, so not just the clinical data, obviously. And so we're going to get as much ahead of that game as possible. And we'll be filing -- we'll be incorporating all the safety and efficacy data from the Prepare trial into the BLA starting in some time during the first quarter of next year. We have every incentive, obviously, to make that process grow as quickly as possible during 2019. I think our -- we have set the market expectation to this by the first quarter of 2020, we will have filed the BLA. And we have Fast Track. So somewhere, our expectations some time during 2020, we'll have approval and then we'll go directly to the ACIP, which has means 3x a year, February, June and October and we'll go to the very first ACIP Meeting following FDA approval. And all during that time, we'll be doing all the manufacturing activities to start products and launch shortly after ACIP or after FDA approval.

All right. Well, lot of work to do, but that's really helpful to go through it.

It's all good work to be done.

Our next question comes from Vernon Bernardino with Seaport.

I just wanted to follow-up on George's questions. At this point, you said that your, I think, maybe implied that you're definitely getting surveillance data and you said the attack rate is in line with your expectations. Is there a number that you have an idea so far as the attack rate?

No. With respect to the attack rate, I'm referring to what we would say in the literature is within the analogue, which is hospitalization. And there, we think it's a 2% to 4% range about normal for infants under 6 months of age.

So we monitor -- Vernon, we monitor infections that result in illnesses, but we don't know placebo versus active. So it's hard to -- we can make certain assumptions and have expectations, but it's hard to know exactly what the attack rate is for a population. But Greg is right, we do have a surrogate, which is hospitalizations. To give us some idea of is the trial -- is the RSV infection rate globally tracking with what we have in our literature.

I show no further questions in queue, so I'd like to turn it back over to Mr. Erck for closing remarks.

Okay. Thanks, everybody. This is -- these are 2 very big milestones, the most important of which probably is the RSV because of the need for an RSV vaccine and our leadership position in RSV. And so we're excited. We got to a point that I think skeptics would have told us we wouldn't be able to get to by now and so we did. And now it's a matter of time before we open up the envelope, and we're excited to be on that pathway. Thank you.

Thank you. Ladies and gentlemen, that does conclude today's conference. Thank you very much for your participation. You may all disconnect. Have a wonderful day.