Business context and reporting period
Novavax, Inc. is a clinical-stage vaccine developer using its virus-like particle platform. This Form 10-Q covers the quarter and six months ended June 30, 2011; financial amounts are in U.S. dollars. Key programs include seasonal and pandemic influenza vaccines and an RSV vaccine. No vaccine candidate had regulatory approval for sale.
Financial results and liquidity
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $3.0 million | $7,000 | $3.8 million | $117,000 |
| Operating expenses | $8.9 million | $9.5 million | $17.2 million | $21.0 million |
| Operating loss | $5.9 million | $9.5 million | $13.4 million | $20.9 million |
| Net loss | $5.0 million | $8.9 million | $12.4 million | $19.2 million |
| Loss per share | $0.04 | $0.09 | $0.11 | $0.19 |
Revenue was primarily from work under the HHS BARDA contract. The filing does not report gross profit or gross margin. R&D expense was $5.6 million for Q2 and $11.0 million for the six months; G&A was $3.3 million and $6.2 million, respectively.
At June 30, cash and cash equivalents were $13.1 million and short-term investments were $9.2 million, totaling $22.3 million, versus $31.7 million at December 31, 2010. Working capital was $19.4 million. Six-month operating cash use was $17.4 million; investing activities provided $14.1 million, principally from investment maturities, and financing provided $8.4 million, including $8.3 million net ATM stock-sale proceeds. Notes payable totaled $360,000; management said debt was not material.
Material changes versus prior comparable periods
- Revenue rose substantially as BARDA contract work commenced; Q2 revenue increased by $3.0 million year over year and six-month revenue by $3.7 million.
- Six-month R&D expense declined $4.4 million, or 28%, primarily due to lower outside testing and clinical-trial costs. G&A increased $0.5 million, or 9%, partly due to employee-related and severance costs.
- Net loss narrowed by $3.9 million in Q2 and $6.8 million for the six-month period, reflecting BARDA revenue and lower R&D spending. The six-month warrant-liability fair-value gain was lower than in 2010, partially offsetting improvement.
- Cash and investments declined from $31.7 million at year-end to $22.3 million at quarter-end, while cash increased partly because the company liquidated short-term investments and issued shares.
Outlook, commentary, risks and unusual items
- BARDA awarded a cost-plus-fixed-fee contract valued at $97 million for a 36-month base period, with an option for a further 24 months valued at $82 million. The company expected significant revenue in 2011 as it performed the contract; reimbursement depends on performance and allowable costs, which are subject to audit.
- Management believed available cash and investments, anticipated BARDA revenue, expected ATM proceeds, and current operations would fund planned activities for at least 12 months. It said additional capital would be needed later; other financing was not committed. Failure to perform under BARDA or obtain financing could force program delays, reductions, or organizational downsizing. Equity issuance could materially dilute shareholders.
- Programs and milestones: RSV Phase I interim top-line results were expected in Q3 2011; the company planned to begin a seasonal influenza Phase II trial in Q4 2011 and a pandemic H5N1 Phase I trial in early 2012. These were expectations, not assured outcomes.
- A February 2011 LG Life Sciences license provides an upfront payment, potential milestones, cost reimbursements, and prospective royalties. A $412,000 foreign withholding tax related to a license payment was recorded in the first half.
- Three auction-rate securities had $5.1 million par value and $4.3 million fair value; the balance included $912,000 of unrealized gains. These securities may need to be liquidated to fund operations.
- A July 2011 amendment to the Cadila services agreement created a potential payment if services provided by March 2013 are below $7.5 million: the company may owe the shortfall up to $2.0 million and 50% of any excess shortfall. Only $0.2 million of services had been purchased through June 30.
- The company was pursuing collection of $1.572 million in aggregate principal on defaulted notes from two former directors; trials were anticipated in late 2011 or 2012 if settlements were not reached.
- Development risks include clinical safety and efficacy, regulatory approval, manufacturing scale-up, competition, and the seasonal timing of influenza products. Management reported disclosure controls were effective and no material second-quarter change in internal control over financial reporting.
Important facts for investors to verify
- Progress, allowable-cost recovery, audits, and future revenue under the BARDA contract.
- Cash burn, ATM share sales and dilution, and whether management’s stated 12-month liquidity expectation remains supportable.
- RSV and influenza clinical data, trial timing, regulatory progress, and manufacturing scale-up.
- Realizability and valuation of auction-rate securities, and any resulting impairment.
- Potential Cadila shortfall payment and outcome of the former-director note collection cases.