Novavax, Inc. — Q3 2014 Form 10-Q
Business context and period. Clinical-stage biopharmaceutical company developing recombinant nanoparticle vaccines and adjuvants. This unaudited filing covers the three and nine months ended September 30, 2014, compared with the same 2013 periods. Its clinical pipeline included RSV and seasonal and pandemic influenza candidates; MERS and Ebola programs were preclinical.
Financial performance and position
- Revenue: Q3 revenue was $8.2 million, up 71% from $4.8 million; nine-month revenue was $23.9 million, up 97% from $12.2 million. Government-contract revenue was $7.5 million and $20.2 million, respectively, for those periods; most was associated with HHS BARDA influenza work.
- Expenses and losses: Q3 total costs and expenses were $28.0 million versus $20.1 million; operating loss was $19.8 million versus $15.3 million, and net loss was $19.7 million versus $15.3 million. Nine-month costs and expenses were $76.0 million versus $50.3 million; operating loss was $52.0 million versus $38.2 million, and net loss was $51.4 million versus $37.9 million. Loss per share was $0.08 for Q3 and $0.23 for nine months, versus $0.09 and $0.24, respectively, in 2013.
- Cash flow: Nine-month operating cash use was $47.2 million, compared with $33.1 million in 2013. Investing activities used $147.2 million, largely reflecting purchases of investments; financing provided $109.4 million, including about $108 million net proceeds from a June stock offering.
- Liquidity: Cash and cash equivalents plus investments totaled $190.3 million at September 30, 2014, including $34.5 million cash and $155.8 million investments. Working capital was $173.3 million. Management said available resources, expected BARDA revenue and other resources should fund operating plans into 2016.
- Debt and equity: Total liabilities were $30.9 million; notes payable were approximately $1.4 million and capital-lease obligations approximately $0.2 million. The company described its debt as not material. The June offering issued 28.75 million shares at $4.00 per share; 238.5 million shares were outstanding at September 30.
- Margins: The filing does not present a conventional consolidated gross margin. Government-contract revenue less its associated cost was approximately $3.5 million in Q3 and $8.1 million for the first nine months of 2014; these amounts exclude collaboration revenue and do not represent total-company gross profit.
Material changes and developments
- Revenue growth reflected greater HHS BARDA activity, including H7N9 clinical work and seasonal influenza manufacturing; nine-month comparisons also included more PATH activity and a full nine months of Novavax AB versus two months in 2013.
- Research and development expense increased 38% in Q3 and 44% for the nine-month period. Management attributed increases to employee costs, expanded programs and a $3.0 million Wyeth license milestone accrued in Q3 after CPLB began a Phase 3 H1N1 trial.
- HHS BARDA exercised a two-year contract option through September 2016 and allocated $70 million of the original $79 million option-period funding, in addition to any remaining base-period funding.
- The company sold its auction-rate security in January 2014 for $1.8 million, recording a $0.6 million realized gain. Accumulated foreign-currency translation losses were $4.1 million at September 30.
Outlook, commentary and risks
- Management expected significantly higher 2014 revenue and government-contract costs from increased BARDA-supported development, and higher R&D spending from RSV trials and staffing. It also expected higher capital spending than in 2013 to support clinical-trial material needs.
- Development milestones described included a Phase 2 RSV maternal trial initiated in September, an elderly RSV Phase 2 trial initiated in October, a seasonal quadrivalent influenza Phase 2 trial expected late in Q4 2014, and planned Ebola Phase 1 initiation in December 2014. These were expectations, not reported outcomes.
- HHS BARDA reimbursements may be delayed or withheld; allowable costs and indirect rates remain subject to audit. The 2013 government audit was ongoing, while audits for 2011 and 2012 had resulted in no significant adjustments. The company was also seeking BARDA approval to recover $2.9 million in outside costs from an earlier seasonal-influenza trial.
- The Wyeth milestone was accrued while the company discussed a possible amendment to reduce it; the filing does not say that a reduction was agreed. Cadila service purchases were $4.9 million through September 30 against a $7.5 million threshold by March 31, 2015; a shortfall could trigger a payment under the agreement.
- Management warned that further capital may be needed and may not be available on acceptable terms. Failure to perform under BARDA or obtain financing could require delaying, reducing or eliminating programs or downsizing. Clinical, manufacturing, regulatory, collaboration and product-safety risks remain significant; the filing reported no material changes to the prior annual report’s risk factors.
- Management stated disclosure controls were effective as of September 30, 2014, with no material change in internal control over financial reporting during the quarter.
Key facts investors should verify
- Remaining BARDA base-period funds, the terms and availability of the $70 million option allocation, and timing and approval of cost reimbursements.
- Whether RSV, influenza and Ebola trials proceeded on the stated schedules and whether subsequent results supported the company’s clinical expectations.
- Actual cash burn and capital requirements relative to management’s stated runway into 2016, including the impact of planned R&D and capital spending.
- Resolution of the $3.0 million Wyeth milestone discussions and any payment exposure under the Cadila services threshold.
- Potential dilution from future equity financing and the effect of outstanding stock awards; the company reported approximately $13.3 million of unrecognized stock-based compensation expense.