Business context and reporting period
Novavax, Inc. filed this unaudited Form 10-Q for the quarter ended September 30, 2013. It is a clinical-stage biopharmaceutical company developing recombinant nanoparticle vaccines and adjuvants; its candidates include seasonal and pandemic influenza and RSV. On July 31, 2013, Novavax acquired Isconova AB, renamed Novavax AB, adding saponin-based adjuvant technology. Results include Novavax AB only from the acquisition date.
Financial performance and position
Unless otherwise stated, figures are in millions of U.S. dollars. The filing presents quarterly and nine-month results.
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $4.8 | $5.8 | $12.2 | $17.5 |
| Operating loss | $(15.3) | $(6.8) | $(38.2) | $(20.2) |
| Net loss | $(15.3) | $(7.2) | $(37.9) | $(20.5) |
| Basic and diluted loss per share | $(0.09) | $(0.05) | $(0.24) | $(0.16) |
Revenue was primarily from the HHS BARDA contract. For the first nine months, government-contract revenue was $11.0 million and research and development collaboration revenue was $1.2 million. The filing does not report a conventional gross margin; cost of government-contract revenue was $2.3 million in Q3 and $5.6 million for the nine months.
Research and development expense rose to $13.9 million in Q3 (from $6.6 million) and $34.0 million for the nine months (from $17.3 million), driven principally by RSV and H7N9 clinical activity, employee costs, and the acquired business. General and administrative expense was $3.9 million in Q3 and $10.7 million for the nine months, including higher professional and acquisition-related costs. Q3 included approximately $1.3 million of acquisition transaction costs in G&A.
At September 30, cash and cash equivalents were $122.5 million and investments were $23.9 million, totaling $146.4 million; working capital was $140.8 million. Cash and investments were $50.3 million at December 31, 2012. Total assets were $245.1 million and total liabilities $28.5 million. Notes payable and capital-lease obligations together were approximately $2.6 million; notes payable bear 12.1% interest. Net cash used in operating activities was $33.1 million for the nine months, versus $15.0 million in 2012. Investing activities provided $7.2 million, including investment maturities and acquisition-related cash, while financing activities provided $130.9 million, principally from equity offerings. Cash increased by $105.1 million to $122.5 million.
Material changes and unusual items
- Revenue declined 17% in Q3 and 31% for the nine-month period year over year, largely because 2012 included more HHS BARDA-funded influenza trial activity. Nine-month net loss increased by $17.5 million, primarily reflecting higher R&D spending.
- Novavax acquired 99.5% of Isconova shares and all outstanding options and warrants for approximately $42.0 million, primarily in 15.6 million Novavax shares valued at $41.9 million. Preliminary purchase accounting included $16.4 million of intangible assets and $25.3 million of goodwill. Novavax AB contributed $0.4 million revenue and a $1.5 million net loss after acquisition through September 30.
- Equity financing generated $94.7 million net proceeds from a September public offering and $34.0 million net proceeds from at-the-market sales during the nine months. The share count increased materially; weighted-average shares rose to 168.5 million in Q3 from 134.2 million.
- The 2008 warrants expired unexercised in July 2013; the related fair-value change contributed $0.3 million of other income for the nine-month period.
Outlook, management commentary, and risks
Management stated that available cash, investments, and anticipated HHS BARDA revenue were expected to fund operating plans into 2016. This is not a guarantee; management said additional capital may be needed, and future equity financing could dilute shareholders. If BARDA performance or financing is inadequate, the company may delay, reduce, or discontinue programs or downsize.
- Management expected 2013 revenue to be lower than 2012, with increased development work under BARDA partly offsetting fewer externally funded trials. It expected significantly higher R&D spending, higher G&A, and lower capital expenditures later in 2013 as facility scale-up work neared completion.
- HHS BARDA directed the pandemic program toward H7N9 and was working on a contract modification. The agency indicated intent to fund a U.S. Phase 1 trial with H7N9 and Matrix-M in the first half of 2014, contingent on completing that modification. A Phase 2 dose-confirmation trial for seasonal quadrivalent influenza was expected in Q1 2014. The $2.9 million of outside costs for a prior seasonal trial could be submitted for BARDA reimbursement only after a future Quadrivalent IND submission; reimbursement could be delayed or withheld.
- RSV reproductive toxicology work was expected to finish in Q1 2014; the filing also reports that a dose-confirmation trial in 720 women of childbearing age began and completed enrollment in October 2013. Management described a traditional efficacy-trial pathway for seasonal influenza as likely to add a year or more versus accelerated approval, whose availability and success are uncertain.
- Clinical and regulatory outcomes remain uncertain: no vaccine candidate had regulatory approval, and development may require further trials, time, and funding. Other risks include BARDA reimbursement and contract milestones, acquisition integration and realization of expected benefits, adjuvant safety or regulatory scrutiny, access to consistent Quillaja raw material, international operations and currency exposure, and reliance on partners.
- Potential obligations include $8.0 million unpaid under certain outside-provider agreements if services are completed in 2013, and a Cadila services commitment tied to a $7.5 million purchase threshold by March 2014. Novavax had purchased $2.4 million of services through September 30 and said it was seeking a possible amendment or extension, with no assurance of success. Government audits of BARDA costs for 2011 and 2012 were ongoing.
- Management concluded disclosure controls were effective as of September 30, 2013; integration of Novavax AB controls was in progress.
Important facts for investors to verify
- Whether the HHS BARDA contract modification, reimbursement of deferred trial costs, and expected H7N9 funding were completed as planned.
- Actual cash burn and whether management’s stated funding runway into 2016 remains supportable as clinical programs advance.
- Clinical safety, efficacy, regulatory pathway, and timing for RSV, seasonal quadrivalent influenza, H7N9, and Matrix-M programs.
- Final Isconova purchase-price allocation, integration progress, and evidence that expected adjuvant and development benefits are being realized.
- Exposure to Cadila and outside-provider commitments, BARDA audit outcomes, and any resulting cash or expense adjustments.
- Further share issuance, dilution, and the company’s ability to raise capital on acceptable terms.