NOVAVAX INC annual report, FY2017

Novavax, Inc. — FY2017 Form 10-K

Reporting period: Fiscal year ended December 31, 2017; the filing also reports fourth-quarter results. Filed March 14, 2018. Novavax is a clinical-stage biotechnology company developing recombinant nanoparticle vaccines and adjuvants. It had no approved products and depended mainly on grants, contracts and capital markets to fund operations.

Financial results and liquidity

Revenue rose 103%, largely because of increased reimbursements under the Bill & Melinda Gates Foundation (BMGF) grant as enrollment in the maternal RSV trial expanded. The grant provided $29.7 million of FY2017 revenue. The HHS BARDA contract expired in September 2016. Operating and net losses narrowed as development spending and employee-related costs fell; the business remained deeply loss-making, so conventional operating margins are not a meaningful measure.

At year-end, cash and cash equivalents were $106.3 million and marketable securities were $51.0 million, totaling $157.3 million; working capital was $129.6 million. This excludes restricted cash, which totaled approximately $29.1 million current and non-current. Total assets were $302.5 million, total liabilities $404.2 million, and stockholders’ deficit $101.7 million. The $325 million face-value convertible notes carry a 3.75% coupon and mature February 1, 2023; their year-end carrying value, net of issuance costs, was $317.8 million. Interest expense was $14.1 million.

FY2017 financing cash flow was $64.5 million, principally from $63.4 million net proceeds from stock sales. Capital expenditures were $4.2 million. Shares outstanding were 323.2 million at year-end and 343.7 million as of March 9, 2018. The company reported $36.3 million of additional net proceeds from stock sales between January 1 and March 9, 2018.

Fourth-quarter 2017 revenue was $10.4 million and net loss was $50.8 million, or $0.16 per share, compared with $5.4 million revenue and a $57.1 million net loss, or $0.21 per share, in fourth-quarter 2016.

Material changes and development updates

• FY2017 revenue increased from FY2016, while R&D expense decreased 29% and G&A expense decreased 26%. FY2016 had included higher RSV development spending and BARDA contract activity.
• The Phase 3 Prepare trial of the RSV vaccine in pregnant women continued. A 2017 informational analysis of about 1,300 participants suggested potential efficacy of 45%–100%, but was not the planned efficacy readout. The prespecified interim analysis was expected after enrollment of approximately 4,600 women, with results expected in early 2019.
• The RSV Phase 3 Resolve trial in older adults failed its primary and secondary efficacy objectives and did not demonstrate vaccine efficacy. Earlier Phase 2 E-201 results showed efficacy signals; later analyses suggested fewer COPD-exacerbation hospitalizations, an exploratory finding. A 2017 Phase 2 study found adjuvanted RSV formulations well tolerated and more immunogenic, but further older-adult trials were not expected in 2018 without additional funding.
• NanoFlu was in Phase 1/2. In February 2018, Novavax reported positive top-line immune-response and tolerability results in older adults versus a licensed high-dose influenza vaccine and expected to begin Phase 2 in the third quarter of 2018.
• The Ebola vaccine remained in Phase 1. Zika development was suspended in 2017 amid lower case numbers and funding uncertainty. Novavax’s India joint venture reported limited CadiFlu sales; Phase 3 rabies vaccine data were expected in 2018.

Outlook, risks and unusual items

Management expected 2018 revenue under the BMGF grant to exceed 2017 as Prepare enrollment continued. It expected R&D and G&A expenses to rise in 2018, while capital expenditures were expected to remain near 2017 levels. Management believed available capital plus anticipated grant revenue would fund planned operations for at least 12 months from the filing date, but acknowledged that additional financing would be needed for later development and commercialization. Failure to raise capital or perform under the grant could force program delays, reductions or cancellations.

The BMGF grant is for up to $89.1 million and includes global-access commitments to provide a certain amount of RSV vaccine at affordable prices in specified low- and middle-income countries. Grant funding reimburses only specified costs and does not assure clinical success or approval. Other key risks include clinical-trial failure, regulatory and manufacturing hurdles, competition, reliance on collaborators and suppliers, and potential equity dilution. The company had a history of losses, an accumulated deficit of $1.114 billion, no product-sales revenue, and no assurance of future profitability. Its stock price was volatile and had traded below Nasdaq’s $1 minimum bid threshold during 2017.

In January 2018, Novavax terminated a Gaithersburg lease and paid a $5.3 million fee; it expected to record approximately $1 million of net expense in first-quarter 2018 after related adjustments. A $4.0 million Wyeth license milestone was accrued at year-end and expected to be paid in first-quarter 2018. The 2017 tax law change reduced the company’s U.S. deferred tax assets, offset by a corresponding valuation-allowance reduction; no income tax provision was recorded. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective. No material pending legal proceedings were reported.

Important facts for investors to verify

• Prepare’s enrollment, interim-analysis timing and eventual efficacy results; distinguish the 2017 informational analysis from the prespecified clinical endpoint analysis.
• Available unrestricted cash, operating cash burn, grant reimbursements and financing needs; assess dilution from post-year-end stock sales and any further issuance.
• Terms, conversion exposure and repayment obligations of the $325 million notes, including the 2023 maturity and fundamental-change provisions.
• Whether NanoFlu’s early immune-response findings translate into clinical benefit and progress through later trials; also track funding and plans for RSV older-adult development.
• Whether the filing’s stated cash runway and 2018 expense outlook remain achievable, and the financial effects of lease termination and other contractual commitments.