Novavax, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022; comparison with the corresponding 2021 periods. Novavax is a biotechnology company whose commercial product is its COVID-19 vaccine, NVX-CoV2373, marketed under names including Nuvaxovid and Covovax. It also develops influenza, COVID-19/influenza combination, and other vaccine candidates. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $734.6m | $178.8m | $1,624.5m | $924.1m |
| Product sales | $626.1m | — | $1,267.2m | — |
| Operating loss | $127.2m | $307.1m | $400.9m | $861.6m |
| Net loss | $168.6m | $322.4m | $475.7m | $897.5m |
| Net loss per share, diluted | $2.15 | $4.31 | $6.13 | $12.13 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $(298.1)m | $665.4m |
- Q3 cost of sales was $434.6m, or 69% of product sales, implying a 31% product gross margin on reported cost of sales. It included $249.0m of excess, obsolete or expired inventory charges and losses on firm purchase commitments. For the first nine months, cost of sales was $720.9m, or 57% of product sales, including $504.3m of those charges.
- Research and development expense fell to $304.3m in Q3 from $408.2m; nine-month expense fell to $977.4m from $1,571.6m. Selling, general and administrative expense rose to $122.9m in Q3 from $77.8m and to $327.0m year to date from $214.1m.
- Other expense, primarily foreign-exchange losses, was $34.8m in Q3 and $53.0m for the first nine months. Nine-month interest expense was $15.3m.
- Cash, cash equivalents and restricted cash totaled $1,293.0m at September 30, down from $1,528.3m at year-end 2021. Current assets were $1,760.0m versus current liabilities of $1,668.0m.
- The $325m principal amount of 3.75% convertible notes, maturing February 1, 2023, was classified as current. Finance lease liabilities totaled $113.6m. Stockholders’ deficit was $566.0m.
Changes versus prior period
- Commercial vaccine sales began in 2022, driving revenue growth despite lower grant revenue: Q3 grants declined to $106.3m from $135.0m; nine-month grants declined to $313.3m from $854.4m. Royalties and other revenue also declined year to date, to $44.0m from $69.7m.
- Net losses narrowed year over year, principally because of vaccine sales and lower R&D expense, partly offset by inventory charges and lower grant revenue. Nine-month operating cash flow shifted from a $665.4m inflow to a $298.1m outflow, in part as prior-period APA advances were applied to deliveries rather than received as new upfront cash.
- Inventory increased to $82.4m from $8.9m, while accounts receivable decreased to $111.6m from $455.0m. Deferred revenue totaled $1,440.2m, down from $1,595.5m at year-end; approximately $4bn of transaction price remained allocated to unsatisfied or partially unsatisfied performance obligations.
Outlook, risks and unusual items
- Management expected 2022 revenue to increase significantly from 2021 as vaccine sales under supply agreements grew. It expected R&D expense to decrease, SG&A expense to increase significantly, and capital expenditures to continue increasing. No specific numerical revenue or earnings guidance was provided.
- Reported cost of sales benefited from some vaccine manufacturing costs having been expensed as R&D before authorization. Management estimated about $0.1bn of commercial inventory had been expensed before approval and expected to use most of this reduced-cost inventory through 2023. Its non-GAAP adjusted cost-of-sales measure was estimated at 71% of product sales for Q3 and 70% year to date; management said standard cost of sales to high-income countries was expected to be 15%–30% of sales.
- Demand and contract fulfillment are uncertain. Gavi had paid $700m upfront, but Novavax had received orders for only about 2m doses and Gavi was seeking to revise dose timing and quantities; Gavi may seek recovery of prior payments, which Novavax disputes it is entitled to do. Under the revised UK agreement, at least $40m was repayable and up to $225m could be repayable if required advisory-committee recommendations were not achieved. The EC reduced its order to 65m doses and delivery scheduling remained under discussion.
- A Fujifilm settlement provided for payments of up to $185m related to canceled manufacturing activity. Novavax recorded a $98.3m Q3 R&D benefit because the settlement was below previously recognized embedded-lease expense; remaining payments are subject to specified mitigation provisions. The company said further manufacturing-footprint changes could entail significant costs.
- Other material uncertainties include regulatory and clinical outcomes, manufacturing and supply execution, customer demand, and currency movements. A securities class action and related derivative litigation remained pending; a Par Sterile Products arbitration was scheduled for July 2023, with potential loss not reasonably estimable and an adverse outcome potentially material. Management reported no material changes to previously disclosed risk factors.
- Clinical updates included global authorizations and booster-label expansion efforts, ongoing pediatric and variant studies, and continued development of influenza and combination vaccines. The filing described positive results for the combination candidate but did not provide assurance of future approvals or commercial demand.
Important facts for investors to verify
- Whether actual orders and deliveries under Gavi, UK, EC, U.S. government and other supply agreements support the reported performance obligations and reduce refund or revenue-reversal risk.
- Whether inventory write-downs, firm purchase-commitment losses, and the reduced-cost pre-approval inventory materially affect future margins and cash generation.
- How Novavax will address the $325m convertible-note maturity in February 2023 and fund operating cash burn, capital spending and manufacturing commitments.
- Whether clinical, regulatory and manufacturing milestones are achieved on schedule, and whether evolving COVID-19 vaccine demand supports sales expectations.
- Developments in the Par arbitration and shareholder litigation, including any change in the currently unestimable exposure.