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NOVAVAX INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) Any statements in the discussion below and elsewhere in this report, about expectations, beliefs, plans, objectives, assumptions or future events or performance of Novavax, Inc. (Novavax, and together with its wholly owned subsidiary, Novavax AB (formerly known as Isconova AB), the "Company," "we" or "us") are not historical facts and are forward-looking statements. Such forward-looking statements include, without limitation, statements with respect to our expectations regarding future revenue and expense levels; potential market sizes and demand for our product candidates; the efficacy, safety and intended utilization of our product candidates; the development of our clinical-stage product candidates and our recombinant vaccine and adjuvant technologies; the future development of our product candidates; the conduct, timing and results of clinical trials; plans for and potential timing of regulatory filings; reimbursement by Department of Health and Human Services, Biomedical Advanced Research and Development Authority (HHS BARDA); the potential modification to our license agreement with Wyeth; our available cash resources and the availability of financing generally, plans regarding partnering activities, business development initiatives and the adoption of stock incentive plans, and other factors referenced herein. You generally can identify these forward-looking statements by the use of words or phrases such as "believe," "may," "could," "will," "would," "possible," "can," "estimate," "continue," "ongoing," "consider," "anticipate," "intend," "seek," "plan," "project," "expect," "should," "would," or "assume" or the negative of these terms, or other comparable terminology, although not all forward-looking statements contain these words. Any or all of our forward-looking statements in this Quarterly Report may turn out to be inaccurate or materially different than actual results. Among the factors that could cause actual results to differ materially from those indicated in the forward-looking statements are risks and uncertainties inherent in our business including, without limitation, the progress, timing or success of our clinical trials; difficulties or delays in development, testing, GMP manufacturing and scale-up, obtaining regulatory approval for producing and marketing our product candidates; regulatory developments in the U.S. or in foreign jurisdictions; decisions by regulatory authorities and HHS BARDA; risks associated with our reliance on collaborations for the development and commercialization of our product candidates; unexpected adverse side effects or inadequate efficacy of our product candidates that could delay or prevent product development or commercialization, or that could result in recalls or product liability claims; our ability to attract and retain key scientific, management or operational personnel; the size and growth potential of the markets for our product candidates and our ability to serve those markets; the scope and validity of patent protection for our product candidates; competition from other pharmaceutical or biotechnology companies; our ability to establish and maintain strategic collaborations or to otherwise obtain additional financing to support our operations on commercially reasonable terms; successful administration of our business and financial reporting capabilities; and risks identified under Item 1A "Risk Factors" of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2013. In light of these risks and uncertainties, forward-looking events and circumstances discussed in this Quarterly Report may not occur as indicated in forward-looking statements, and actual results could differ materially from those anticipated or implied by the forward-looking statements. We, therefore, caution readers not to place undue reliance on such forward-looking statements contained in this Quarterly Report. We cannot guarantee future results, events, levels of activity, performance or achievement. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by law. Overview We are a clinical-stage biopharmaceutical company focused on the discovery, development and commercialization of recombinant protein nanoparticle vaccines and adjuvants. Our vaccine technology platform is based on proprietary recombinant nanoparticle vaccine technology that includes both virus-like particle vaccines ("VLPs") and nanoparticle vaccines. In each case, these vaccine candidates are genetically engineered three-dimensional nanostructures that incorporate immunologically important proteins. Our vaccine product pipeline targets a variety of infectious diseases with candidates currently in clinical development for respiratory syncytial virus ("RSV"), seasonal influenza and pandemic influenza. We have additional pre-clinical stage programs in a variety of infectious diseases, including Middle East Respiratory Syndrome (MERS) and the Ebola virus disease (EVD). Through our Swedish wholly owned subsidiary, Novavax AB, we are also developing proprietary immune-stimulating saponin-based adjuvants, which we expect to utilize in conjunction with our pandemic influenza vaccine candidates and potentially with other vaccine candidates that may benefit from such an adjuvant. Our MatrixTM adjuvant technology utilizes selected quillaja fractions, which form separate matrix structures, to develop modern, multi-purpose immune-modulating adjuvant products for a broad range of potential vaccine applications. We acquired the Matrix technology through our acquisition of Novavax AB in the third quarter of 2013 based on our assessment that this saponin-based adjuvant technology could represent a powerful complement to our recombinant vaccine programs. During the first quarter of 2014, under our contract with HHS BARDA, we initiated a clinical trial using our lead adjuvant for human applications, Matrix-MTM, in combination with our H7N9 vaccine candidate and reported positive results from this clinical trial in the third quarter of 2014. Matrix-M is also used in clinical trials with our collaborator Genocea Biosciences in its vaccine candidate against herpes simplex virus type 2. 16 Our joint venture with Cadila Pharmaceuticals Limited ("Cadila"), named CPL Biologicals Private Limited ("CPLB"), is developing and manufacturing vaccines, biological therapeutics and diagnostics in India. CPLB is owned 20% by us and 80% by Cadila. CPLB operates a manufacturing facility in India for the production of vaccines and is actively developing a number of vaccine candidates that were genetically engineered by us. Clinical Product Pipeline A current summary of our significant research and development programs and status of related products in development follows: Program Development Phase Collaborator Respiratory Syncytial Virus (RSV) · Maternal Immunization Phase 2 PATH · Elderly Phase 2 · Pediatric Pre-clinical Influenza · Seasonal Quadrivalent Phase 2 HHS BARDA/LGLS · Pandemic (H7N9)1 Phase 1/2 HHS BARDA/LGLS · Pandemic (H5N1)1 Phase 1 HHS BARDA/LGLS Combination (Influenza/RSV) Pre-clinical Ebola Pre-clinical CPLB Programs (India) · Seasonal Trivalent Influenza Phase 3 · Monovalent (H1N1) Influenza Phase 3 · Rabies Phase 1/2 Respiratory Syncytial Virus (RSV) RSV is a widespread disease that causes infections of the lower respiratory tract. While RSV affects individuals of all ages, it acutely impacts infants, the elderly, young children and others with compromised immune systems. RSV is the number one cause of hospitalization in infants ages 0 to 12 months in the U.S. and is a significant cause of infant morbidity and mortality globally.2 Current estimates indicate that RSV is responsible for over 30 million new acute lower respiratory infection episodes and between 150,000 and 200,000 deaths in children under five years of age.3 In the U.S., nearly all children become infected with RSV before they are two years of age; it has been associated with 20% of hospitalizations and 15% of office visits for acute respiratory infection in young children.4 In addition, it is estimated that between 11,000 to 17,000 elderly and high-risk adults die of RSV infection or its complications annually in the U.S., and up to 180,000 are hospitalized for serious respiratory symptoms.5 The World Health Organization (WHO) estimates that the annual global disease burden for RSV is 64 million cases. Because there is no approved prophylactic vaccine, an RSV vaccine has the potential to protect millions of patients from this far-reaching unmet medical need. 1 Although we initiated development of our pandemic influenza vaccine program under our contract with HHS BARDA against the A(H5N1) strain, because of concern over the potential mutation and spread of the A(H7N9) influenza strain in China, we independently initiated a second pandemic vaccine program in the first half of 2013 against A(H7N9). In February 2014, we amended our contract with HHS BARDA to re-prioritize our development efforts on a pandemic influenza vaccine against the A(H7N9) strain with a Phase 1/2 clinical trial using our H7N9 candidate and Matrix-M™ adjuvant, which began in the first quarter of 2014. HHS BARDA has indicated that, while not a current development priority, the H5N1 vaccine program remains a viable potential development opportunity under our contract. 2 Dawson-Caswell, D, et al., (2011) Am Fam Physician. 83:143 - 146 3 Nair, H., et al., (2010) Lancet. 375:1545 - 1555 4 Hall, CB, et al., (2009) N Engl J Med. 360(6):588-98 5 Falsey, A., et al., (2014) Infectious Disorders. 12(2): 98-102 17 We are developing a RSV F-protein nanoparticle vaccine candidate (RSV F vaccine candidate) to prevent RSV disease, and are actively pursuing clinical trials in three susceptible target populations: 1) infants via maternal immunization, 2) the elderly and 3) pediatrics. Maternal Immunization Development Program - Clinical Experience In April 2013, we announced top-line data from a Phase 2 dose-ranging clinical trial in women of childbearing age. The data were similar to, or exceeded, immune responses seen in our first Phase 1 clinical trial. This randomized, blinded, placebo-controlled Phase 2 clinical trial evaluated the safety and immunogenicity of two dose levels of our RSV F vaccine candidate, with and without an aluminum phosphate adjuvant, in 330 women of childbearing age. We further reported that the vaccine candidate was well-tolerated, the two-dose alum-adjuvanted groups showed a 13 to 16-fold rise in anti-F IgG antibodies to the F protein compared to a six to ten-fold rise in the non-alum groups. In addition, titers of palivizumab-competing antibodies (PCAs), which are antibodies that demonstrate protection similar to the monoclonal antibody currently marketed as Synagis® used to prevent RSV in pre-mature infants, rose eight to nine-fold with four-fold rises in 92% of subjects in the two-dose alum-adjuvanted groups. Recently, we announced follow-up data from this clinical trial which demonstrated that our RSV F vaccine candidate reduced the incidence of RSV infection by as much as 50%, suggesting that our RSV F vaccine candidate, which is expected to provide benefits to newborns, pediatrics and the elderly, could also benefit pregnant women receiving the vaccine. In April 2014, we announced top-line data from a Phase 2 dose-confirmatory trial clinical trial of our RSV F vaccine candidate in 720 women of childbearing age. The randomized, blinded, placebo-controlled Phase 2 study was designed to evaluate the immunogenicity and safety of multiple formulations of the vaccine candidate adjuvanted with aluminum phosphate. We reported that the vaccine candidate was well-tolerated with no vaccine-related serious adverse events. In addition, we reported that the highest immune responses, as measured by RSV F and PCA levels, were achieved in a single dose formulation, which also demonstrated rapid and sustainable increases in those antibody levels. These data, along with the data from our other RSV F vaccine candidate clinical trials are expected to support the advancement of our maternal immunization program in pregnant women; we have initiated discussions with the FDA in support of the planned initiation of a Phase 2 clinical trial of our RSV F vaccine candidate in pregnant women in the fourth quarter of 2014. In September 2014, we initiated enrollment in a Phase 2 clinical trial of our RSV vaccine candidate in 50 healthy women in the third trimester of pregnancy. The study is a randomized, observer-blinded, placebo-controlled Phase 2 study, which is designed to evaluate the safety and immunogenicity of the RSV F vaccine candidate in this population. The trial is also designed to assess the impact of maternal immunization on infant safety and RSV-specific antibody levels through one year and six months of life, respectively. We expect to announce data from this trial in the third quarter of 2015. Elderly Development Program - Clinical Experience In July 2013, we announced top-line data from a Phase 1 clinical trial in the elderly that was initiated in October 2012. This clinical trial was a randomized, blinded, placebo-controlled Phase 1 clinical trial that evaluated the safety and immunogenicity in 220 elderly adults, 60 years of age and older, who received a single intramuscular injection of our RSV F vaccine candidate (with and without alum) or placebo plus a single dose of licensed influenza vaccine or placebo at days 0 and 28. The top-line data further corroborated our previous clinical experiences with our RSV F vaccine candidate: we reported that the vaccine candidate was well-tolerated, that the higher dose groups had better overall immune responses than the lower dose groups, and that essentially undetectable Day 0 levels of PCA increased to between 80% and 97% of active vaccine recipients by Day 28. In May 2014, we announced one-year follow-up data from this Phase 1 clinical trial demonstrating that the 90?g dose without adjuvant resulted in anti-F levels and PCA levels that were significantly elevated and maintained over baseline throughout a 118 day period. These data suggest that the vaccine candidate sustained levels that may provide protection during an entire RSV season and support the accelerated development of the RSV F vaccine candidate as an annual seasonal vaccine for the elderly. 18 In October 2014, we announced the initiation of a Phase 2 clinical trial of our RSV F vaccine candidate in healthy elderly subjects. The trial is a randomized, observer-blinded, placebo-controlled Phase 2 study scheduled to enroll 1,600 elderly subjects (>60 years of age). The trial is designed to evaluate the incidence of all respiratory illnesses due to RSV, including medically-attended respiratory illnesses due to RSV, and hospitalizations for respiratory illness due to RSV in community-living elderly adults who have been treated with placebo. The study is also designed to evaluate the safety and immunogenicity of a 135?g dose of the RSV F vaccine candidate compared with placebo. The trial will also estimate the efficacy of the RSV F vaccine candidate in reducing the incidence of respiratory illnesses due to RSV. We expect to announce data from this trial in the third quarter of 2015. Pediatric Development Program - Pre-clinical Experience While the burden of RSV disease on newborn infants is well understood, RSV is also a prevalent and currently unaddressed problem in pediatric patients. This third market segment for our RSV F vaccine candidate remains an important opportunity. Our pediatric development plan will likely be based on a series of clinical trials that "step-down" from our past clinical trials in healthy adults into younger pediatric subjects. We also expect that our clinical experience in pregnant women will be significantly important to understanding a vaccine for this patient population. We expect to initiate a Phase 1 clinical trial in pediatric subjects in the fourth quarter of 2014. PATH Vaccine Solutions (PATH) Clinical Development Agreement In July 2012, we entered into a clinical development agreement with PATH to develop our RSV F vaccine candidate for the maternal immunization indication in low-resource countries (our "RSV Collaboration Program"). Under our RSV Collaboration Program, we have been awarded approximately $6 million, including $3.5 million in funding pursuant to a December 2013 amendment to partially support our Phase 2 dose-confirmation clinical trial in 720 women of childbearing age, as described above. We retain global rights to commercialize the product and plan to support PATH in its goal to make an RSV maternal vaccine product affordable and available in low-resource countries. To the extent PATH elects to continuously fund 50% of our external clinical development costs for the RSV Collaboration Program, but we do not continue development, we would then grant PATH a fully-paid license to our technology for our RSV F vaccine candidate for use in pregnant women in such low-resource countries. We are currently discussing further development under the RSV Collaboration Program with PATH. Influenza Seasonal Influenza Vaccine Developing and commercializing a Novavax seasonal influenza vaccine remains an important strategic goal and viable opportunity for us. The Advisory Committee for Immunization Practices of the Center for Disease Control and Prevention recommends that all persons aged six months and older should be vaccinated annually against seasonal influenza. In conjunction with this universal recommendation, attention from the 2009 influenza H1N1 pandemic, along with reports of other cases of avian-based influenza strains, has increased public health awareness of the importance of seasonal influenza vaccination, the market for which is expected to continue to grow worldwide in both developed and developing global markets. 19 Among the seasonal influenza vaccines licensed in the U.S., only four products are quadrivalent vaccines (meaning four separate influenza strains: two influenza A strains and two influenza B strains) as opposed to trivalent vaccines (meaning three influenza strains: two influenza A strains and one influenza B strain). However, in coming years, additional quadrivalent seasonal influenza vaccines are expected to be produced and licensed within and outside of the U.S. With two distinct lineages of influenza B viruses circulating, governmental health authorities have advocated for the addition of a second influenza B strain to provide additional protection. Current estimates for seasonal influenza vaccine growth in the top seven markets (U.S., Japan, France, Germany, Italy, Spain and UK), show potential expansion from the current market of approximately $3.2 billion (2012/13 season) to $5.3 billion by the 2021/2022 season.6We believe that recombinant seasonal influenza vaccines, like the candidate we are developing, have an important advantage: once licensed for commercial sale, large quantities of vaccines can be quickly and cost-effectively manufactured without the use of either the live influenza virus or chicken eggs. Top-line data from our most recent Phase 2 clinical trial for our quadrivalent influenza vaccine candidate were announced in July 2012. In that clinical trial, our quadrivalent VLP vaccine candidate demonstrated immunogenicity against all four viral strains based on hemagglutination inhibition (HAI) responses at day 21, and was well-tolerated, as evidenced by the absence of any observed vaccine-related serious adverse events along with an acceptable reactogenicity profile. Our vaccine candidate met the FDA accelerated approval seroprotection rates criterion for all four viral strains. The potential to fulfill the seroconversion rates criterion was demonstrated for three of the four viral strains. The fourth strain, B/Brisbane/60/08, despite fulfilling the seroprotection criterion, failed to demonstrate a satisfactory seroconversion rate. Following our last Phase 2 clinical trial, we focused our seasonal influenza vaccine candidate activities on locking the manufacturing process that is expected to provide consistent and enhanced immune responses in all strains. With these activities significantly completed, we have completed manufacturing work for the A and B strain influenza VLPs to be used in the next Phase 2 clinical trial with our quadrivalent vaccine candidate, which is expected to begin late in the fourth quarter of 2014. Pandemic Influenza Vaccine In the aftermath of the 2009 H1N1 influenza pandemic, preventing a human influenza pandemic remains a key priority with both governmental health authorities and influenza vaccine manufacturers. In the U.S. alone, the 2009 H1N1 pandemic led to the production of approximately 126 million doses of monovalent (single strain) vaccine. Public health awareness and government preparedness for the next potential influenza pandemic are driving development of vaccines that can be manufactured quickly against a potentially threatening influenza strain. Until the spring of 2013, industry and health experts focused attention on developing a monovalent H5N1 influenza vaccine as a potential key defense against a future pandemic threat; however, recent attention from a significant number of reported cases in China of an avian-based influenza strain of H7N9 has shifted to the potential development of an H7N9 influenza vaccine. In collaboration with HHS BARDA, we have now developed and delivered compelling safety and immunogenicity data on two pandemic vaccine candidates, H5N1 and H7N9, which provide the U.S. government with alternatives for dealing with future potential threats. In October 2012, under our collaboration with HHS BARDA, we reported positive results from two Phase 1 clinical trials of our pandemic (H5N1) vaccine candidate in combination with two different adjuvants, both of which are designed to improve the immunogenicity of vaccines at lower doses and thus provide antigen dose-sparing. The top-line data demonstrated safety and immunogenicity of varying dose-levels of the vaccine, with and without adjuvant, and further demonstrated statistically significant robust adjuvant effects on immune response. 6 Influenza Vaccines Forecast. Datamonitor (2013) 20 In April 2013, we initiated manufacturing of a new monovalent influenza vaccine candidate against prototype A(H7N9). This strain was first recognized by Chinese health authorities as a potential pandemic influenza threat in late March 2013. In a three month period, we developed a recombinant baculovirus expressing the published A(H7N9) viral HA and NA gene sequences, developed and purified a VLP vaccine antigen, conducted multiple animal studies and initiated a Phase 1 clinical trial in Australia independent of our HHS BARDA contract. In November 2013, we announced the publication of the clinical results from the Phase 1 clinical trial in The New England Journal of Medicine. The publication highlighted the fact that 81% of subjects treated with a 5ug dose of vaccine with a saponin-based adjuvant achieved protective HAI levels, and 97% of subjects showed an anti-neuraminidase antibody response. We achieved protective levels from vaccinations within 116 days of the announcement of the H7N9 outbreak from the industry's first clinical trial of a vaccine against an A(H7N9) influenza strain. In February 2014, we modified our contract with HHS BARDA to focus our development on our H7N9 vaccine candidate. In September 2014, we announced data from a Phase 1/2 clinical trial of our H7N9 vaccine candidate in conjunction with our proprietary saponin-based adjuvant, Matrix-M. The study, initiated in the first quarter of 2014, was a dose-ranging, randomized, observer-blinded, placebo-controlled clinical trial, in 610 healthy subjects, designed to determine the contribution of Matrix-M to potential antigen dose sparing regimens. Subjects were administered two identical doses of either placebo, 15 ?g of H7N9 VLP alone, or one of three dose levels of H7N9 VLP in combination with one of two dose levels of Matrix-M. The trial indicated that the H7N9 VLP, with and without Matrix-M, was well tolerated. Matrix-M adjuvanted formulations demonstrated a clear immunogenicity benefit relative to the unadjuvanted formulations. A very clear dose sparing profile was demonstrated with the lower dose adjuvanted formulations providing statistically significantly greater immune responses relative to the unadjuvanted formulations. The results of this study give us confidence to dedicate resources towards additional development of the chemistry, manufacturing and control (CMC) profiles of our influenza products in anticipation of progressing into Phase 3. In October, 2014, we announced that the FDA had granted "Fast Track" designation to our H7N9 vaccine candidate adjuvanted with Matrix-M, which is a special regulatory designation available for treatments that potentially address unmet medical needs against serious or life-threatening diseases or conditions. The Fast Track program is intended to facilitate development and expedite regulatory review of such treatments. Potential Accelerated Approval Pathway for Influenza In the past, we have referenced attainment of accelerated approval immunogenicity endpoints for seroprotection and seroconversion as a potential pathway for licensure of our influenza vaccines. The criteria for granting such accelerated approval of a Biologics License Application (BLA, the biologic equivalent to a New Drug Application or NDA) for new seasonal and pandemic influenza vaccines was published by the FDA's Center for Biologics Evaluation and Research. Under this FDA guidance, developers that can demonstrate results that meet or exceed certain specified immunogenicity endpoint criteria in their clinical trials may, at the FDA's discretion, be granted a license to market a product prior to submission of traditional clinical endpoint efficacy trial data. It should be noted that FDA licensure based on accelerated approval nevertheless requires sponsors to conduct a post-licensure clinical endpoint efficacy study to demonstrate the clinical benefit of the vaccine, which would thereby support traditional approval of the vaccine. Because it is not possible to conduct a clinical endpoint efficacy study for a pandemic vaccine in advance of a declared pandemic, FDA's pandemic guidance allows for submission of seasonal influenza clinical efficacy data for the purpose of confirming clinical benefit of a pandemic vaccine manufactured by the same process. Thus, the demonstration of efficacy with a seasonal vaccine provides a key link between the seasonal and pandemic programs. Accelerated approval further necessitates a shortage of influenza vaccine relative to the total population recommended to receive such vaccine, a situation that persists with seasonal influenza vaccines. Although we have not ruled out this accelerated approval approach, particularly for our pandemic program or certain subject populations within the seasonal influenza program, we do not expect to pursue accelerated approval of our quadrivalent seasonal influenza vaccine, largely because of the uncertainty as to whether the accelerated approval pathway will be available to us at the time of our BLA submissions and the unknown ability of current and new influenza strains to meet such accelerated approval criteria. We are planning, therefore, to pursue traditional licensure of our quadrivalent seasonal influenza vaccine by conducting a clinical endpoint efficacy study for the purpose of submitting the data within the original BLA. Positive efficacy data would also support the requirement for clinical efficacy data for our pandemic vaccine program. We plan to discuss with the FDA our licensure pathways (both the traditional pathway for seasonal and possible accelerated pathways for pandemic and certain subject populations within the seasonal program) during future formal meetings. The impact of such an efficacy trial could potentially delay FDA licensure by a year or more of our seasonal influenza vaccine. 21 HHS BARDA Contract for Recombinant Influenza Vaccines In February 2011, HHS BARDA awarded us a contract that funds the development of both our seasonal and pandemic influenza vaccine candidates. The contract, valued at $97 million for the first three-year base-period, was extended in February 2014 by seven months to September 2014; this base-period extension was intended to allow us to continue to access base-period funding. In September 2014, HHS BARDA exercised the option-period under the contract, which extends the contract for an additional two years, until September 2016, and allocated $70 million (of the original $79 million option-period funding) to the option-period in addition to any funding remaining from the original $97 million base-period funding. Our contract with HHS BARDA is a cost-plus-fixed-fee contract in which they reimburse us for allowable direct contract costs, allowable indirect costs and a fixed-fee earned in the ongoing clinical development and product scale-up of our multivalent seasonal and monovalent pandemic influenza vaccine candidates. HHS BARDA originally directed us to develop our monovalent pandemic influenza vaccine against the A(H5N1) strain. With the recent amendment, we are developing our monovalent pandemic influenza vaccine against the A(H7N9) strain; nevertheless, our H5N1 vaccine program, while not a current development priority, remains a viable potential development opportunity under the contract. We recognized revenue of $20.0 million during the nine months ended September 30, 2014, and have recognized approximately $72 million in revenue since the inception of the contract. Under certain circumstances, HHS BARDA reimbursements may be delayed or even potentially withheld. In March 2012, we decided to conduct a Phase 2 clinical trial of our quadrivalent seasonal influenza vaccine candidate in Australia (the 205 Trial) under appropriate local regulatory authorization. Based on our discussions with HHS BARDA in 2012, the outside clinical trial costs for the 205 Trial may only be submitted for reimbursement to HHS BARDA and recorded as revenue by us after we submit the 205 Trial data in a quadrivalent investigational new drug application (Quadrivalent IND), and those costs are approved by HHS BARDA. FDA acceptance of the Quadrivalent IND is expected shortly before initiation of the next Phase 2 dose-confirmatory clinical trial, which is expected to begin later in the fourth quarter of 2014. The outside clinical trial costs of the 205 Trial conducted in 2012 totaled $2.9 million. These costs have been recorded as an expense in the period incurred as a cost of government contracts revenue. LG Life Sciences, Ltd. (LGLS) License Agreement In February 2011, we entered into a license agreement with LGLS that allows LGLS to use our technology to develop and commercially sell our influenza vaccines in South Korea and certain other emerging-market countries. LGLS received an exclusive license to our influenza VLP technology in South Korea and a non-exclusive license in the other specified countries. At its own cost, LGLS is responsible for funding both its clinical development of the influenza VLP vaccines and a manufacturing facility to produce such vaccines in South Korea. We received an upfront payment and may receive reimbursements of certain development and product costs, payments related to the achievement of certain milestones and royalty payments in the high single digits from LGLS's future commercial sales of influenza VLP vaccines. Combination Respiratory (Influenza and RSV) With the ongoing development of both our RSV F vaccine candidate (as a potential annual seasonal vaccine for the elderly) and our seasonal influenza vaccine candidate, we see an important opportunity to develop a combination respiratory vaccine for the elderly population, although we have not ruled out developing a combination respiratory vaccine for children and infants. Early pre-clinical development efforts and data from animal models have given us confidence that such a combination vaccine is viable and provides acceptable immunogenicity. We intend to explore this development opportunity by conducting a Phase 1 clinical trial in such a combination vaccine in 2015. 22 CPLB Programs (India) Influenza CPLB initiated Phase 1/2 clinical trials on its seasonal trivalent VLP vaccine candidate and monovalent H1N1 influenza vaccine candidate in 2012. The results of these trials showed safety and immunogenicity data similar to our experiences, particularly when taking into account differences between the Indian subjects' baseline titers and the baseline titers of the subjects in our trials. In October 2013, CPLB initiated the manufacture of Phase 3 material in anticipation of starting Phase 3 clinical trials for both vaccine candidates in 2014, applications for which have been approved by the office of the Drug Controller General of India. CPLB initiated Phase 3 trials of its monovalent H1N1 influenza vaccine candidate in July 2014 and its seasonal trivalent VLP influenza vaccine candidate in October 2014. Rabies CPLB is developing a rabies G protein vaccine candidate that we genetically engineered and has initiated a Phase 1/2 clinical trial in India in January 2014. Our common objective with CPLB is to develop a recombinant vaccine that can be administered both as a pre-exposure prophylaxis for residents of certain higher-risk geographies, as well as travelers to such locations, and also has potential to provide post-exposure prophylaxis with fewer doses. In October 2014, CPLB presented clinical results from the Phase 1/2 clinical trial, demonstrating that all vaccine recipients, at various doses levels and schedules, showed seroprotective antibody levels at day 14 and sustained through day 180. The vaccine candidate, which was found to be safe and well-tolerated, also induced seroprotective levels with two-dose and three-dose regimens. Discovery Programs Our vaccine platform technology provides an efficient system to rapidly develop antigens to selected targets, refine manufacturing processes and optimize development across multiple vaccine candidates. We pay close attention to global reports of emerging diseases for which there do not appear to be immediate cures and where a vaccine protocol could offer potential protection. In addition to our response to the A(H7N9) influenza strain (see discussion above), we have been monitoring reports concerning the Middle East Respiratory Syndrome Coronavirus (MERS), a novel coronavirus first identified in September 2012 by an Egyptian virologist, as well as the recent outbreak of the Ebola virus disease (EVD) in West Africa. MERS became an emerging threat in 2013, with the WHO currently reporting more than 800 confirmed cases of infection and approximately 300 deaths. The MERS virus is a part of the coronavirus family that includes the severe acute respiratory syndrome coronavirus (SARS). Because of the public health priority given to MERS, within weeks of getting the virus' sequence, we successfully produced a vaccine candidate designed to provide protection against MERS. This vaccine candidate, which was made using our recombinant nanoparticle vaccine technology, is based on the major surface spike protein, which we had earlier identified as the antigen of choice in our work with a SARS vaccine candidate. In April 2014, in collaboration with the University of Maryland, School of Medicine, we published results that showed our investigational vaccine candidates against both MERS and SARS blocked infection in laboratory studies. Although the development of a MERS vaccine candidate currently remains a pre-clinical program, we believe that our MERS vaccine candidate offers a viable option to interested global public health authorities. 23 Recent news reports have centered around EVD, formerly known as Ebola hemorrhagic fever, which is a severe, often fatal illness in humans. There is currently no licensed treatment proven to neutralize EVD, but a range of vaccine and therapeutic candidates are under development. Five strains of EVD have been identified; the strain currently afflicting West Africa is known as the Guinea-EVD strain. Current publicly known vaccine approaches target earlier strains of the virus. Our Ebola glycoprotein (GP) vaccine candidate, which was modeled using the 2014 Guinea-EVD strain, has recently been successfully tested in both rodent and rabbit pre-clinical models. We have also tested the vaccine with our Matrix-M adjuvant in these same pre-clinical models, which appears to significantly contribute to enhanced immunogenicity and induction of neutralizing antibodies. We recently initiated a non-human primate study and expect to initiate a Phase 1 clinical trial in December 2014 to evaluate the safety and immunogenicity of this vaccine candidate in ascending doses, with and without our Matrix-M adjuvant. Clinical studies subsequent to Phase 1 data are under discussion and will be developed based on data from this Phase 1 clinical trial. In order to begin the Phase 1 clinical trial, we have initiated small-scale GMP production of our EVD GP vaccine. Sales of Common Stock In October 2012, we entered into an At Market Issuance Sales Agreement (2012 Sales Agreement), under which our Board of Directors (the Board) approved the sale of up to an aggregate of $50 million in gross proceeds of our common stock. The shares of common stock are potentially available pursuant to a shelf registration statement filed with the SEC in March 2013, which replaced the previous shelf registration statement filed in 2010. The Board's standing Finance Committee (the Finance Committee) assists with the Board's responsibilities to monitor, provide advice to our senior management and approve capital raising activities that are not otherwise approved by the Board. The Finance Committee has been authorized by the Board, absent any action by the Board to the contrary, to take any additional actions necessary to carry out the Board's authorization of the issuance and sale of the common stock pursuant to the 2012 Sales Agreement. In doing so, the Finance Committee is authorized to set the amount of shares to be sold, the period of time during which such sales may occur and the minimum sales price per share. As of September 30, 2014, we have approximately $15 million available under the 2012 Sales Agreement. The most recent sales that occurred under the 2012 Sales Agreement were on September 10, 2013. In June 2014, we completed a public offering of 28,750,000 shares of our common stock, including 3,750,000 shares of common stock that were issued upon the exercise in full of an option to purchase additional shares granted to the underwriters, at a price of $4.00 per share resulting in net proceeds of approximately $108 million. Critical Accounting Policies and Use of Estimates There are no material changes to our critical accounting policies as described in Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2013, as filed with the SEC. Recent Accounting Pronouncements Not Yet Adopted We have considered the applicability and impact of all Financial Accounting Standards Board's Accounting Standards Updates (ASUs). In May 2014, the Financial Accounting Standards Board issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASU 2014-09"), which supersedes nearly all existing revenue recognition guidance under Topic 605, Revenue Recognition. The new standard requires a company to recognize revenue when it transfers goods and services to customers in an amount that reflects the consideration that the company expects to receive for those goods or services. ASU 2014-09 defines a five-step process that includes identifying the contract with the customer, identifying the performance obligations in the contract, determining the transaction price, allocating the transaction prices to the performance obligations in the contract and recognizing revenue when (or as) the entity satisfies the performance obligations. ASU 2014-09 will be effective for us on January 1, 2017. We are evaluating the potential impact that ASU 2014-09 will have on our consolidated financial position and results of operations. 24 Results of Operations The following is a discussion of the historical financial condition and results of operations of the Company and should be read in conjunction with the financial statements and notes thereto set forth in this Quarterly Report. Three Months Ended September 30, 2014 and 2013 (amounts in tables are presented in thousands, except per share information) Revenue: Three Months Ended September 30, Change 2013 2014 2013 to 2014 Revenue: Total revenue $ 8,214 $ 4,802 $ 3,412 Revenue for the three months ended September 30, 2014 was $8.2 million as compared to $4.8 million for the same period in 2013, an increase of $3.4 million or 71%. Revenue for the three months ended September 30, 2014 and 2013 is primarily comprised of services performed under the HHS BARDA contract. The increase in revenue is primarily due to the higher level of activity in the three months ended September 30, 2014 associated with our Phase 1/2 pandemic (H7N9) clinical trial and manufacturing work for our Phase 2 seasonal influenza clinical trial under the HHS BARDA contract, as compared to the same period in 2013. For 2014, we expect a significant increase in revenue associated with our increased clinical trial and product development activities under the HHS BARDA contract to support the initiation of later-stage clinical trials of our seasonal influenza and pandemic (H7N9) influenza vaccine candidates. Costs and Expenses: Three Months Ended September 30, Change 2013 2014 2013 to 2014 Costs and Expenses: Cost of government contracts revenue $ 4,027 $ 2,276 $ 1,751 Research and development 19,219 13,948 5,271 General and administrative 4,757 3,857 900 Total costs and expenses $ 28,003 $ 20,081 $ 7,922 Cost of Government Contracts Revenue Cost of government contracts revenue includes direct costs of salaries, laboratory supplies, consultants and subcontractors and other direct costs associated with our process development, manufacturing, clinical, regulatory and quality assurance activities under research contracts. Cost of government contracts revenue increased to $4.0 million for the three months ended September 30, 2014 from $2.3 million for the same period in 2013, an increase of $1.8 million, or 77%. The increase in cost of government contracts revenue is primarily related to the costs of our Phase 1/2 clinical trial using our H7N9 candidate and Matrix-M adjuvant and manufacturing work for our Phase 2 seasonal influenza clinical trial, as compared to the same period in 2013. For 2014, we expect a significant increase in cost of government contracts revenue associated with our increased clinical trial and product development activities under the HHS BARDA contract to support the initiation of later-stage clinical trials of our seasonal influenza and pandemic (H7N9) influenza vaccine candidates. 25 Research and Development Expenses Research and development expenses include salaries, laboratory supplies, consultants and subcontractors and other expenses associated with our process development, manufacturing, clinical, regulatory and quality assurance activities for internally funded programs. In addition, indirect costs, such as fringe benefits and overhead expenses, are also included in research and development expenses. Research and development expenses increased to $19.2 million for the three months ended September 30, 2014 from $13.9 million for the same period in 2013, an increase of $5.3 million, or 38%. The increase in research and development expenses was primarily due to the milestone payment accrued under the Wyeth agreement and higher employee-related costs, as compared to the same period in 2013. For 2014, we expect a significant increase in research and development expenses primarily due to additional RSV F vaccine candidate clinical trials and employee-related costs to support product development of our RSV F vaccine candidate and other potential vaccine candidates. Costs and Expenses by Functional Area We track our cost of government contracts revenue and research and development expenses by the type of costs incurred in identifying, developing, manufacturing and testing vaccine candidates. We evaluate and prioritize our activities according to functional area and therefore believe that project-by-project information would not form a reasonable basis for disclosure to our investors. At September 30, 2014, we had 227 employees dedicated to our research and development programs versus 153 employees as of September 30, 2013. Historically, we did not account for internal research and development expenses by project, since our employees work time is spread across multiple programs, and our internal manufacturing clean-room facility produces multiple vaccine candidates. The following summarizes our cost of government contracts revenue and research and development expenses by functional area for the three months ended September 30 (in millions). 2014 2013 Manufacturing $ 12.8 $ 8.7 Vaccine Discovery 1.7 1.5 Clinical and Regulatory 8.7 6.0 Total cost of government contracts revenue and research and development expenses $ 23.2 $ 16.2 We do not provide forward-looking estimates of costs and time to complete our research programs due to the many uncertainties associated with vaccine development. As we obtain data from pre-clinical studies and clinical trials, we may elect to discontinue or delay clinical trials in order to focus our resources on more promising vaccine candidates. Completion of clinical trials may take several years or more, but the length of time can vary substantially depending upon the phase, size of clinical trial, primary and secondary endpoints and the intended use of the vaccine candidate. The cost of clinical trials may vary significantly over the life of a project as a result of a variety of factors, including: the number of patients who participate in the clinical trials and the specific patient population; the number of sites included in the clinical trials; whether clinical trial locations are domestic, international or both; the time to enroll patients; the duration of treatment and follow-up; the safety and efficacy profile of the vaccine candidate; and the cost and timing of, and the ability to secure, regulatory approvals. As a result of these uncertainties, we are unable to determine with any significant degree of certainty the duration and completion costs of our research and development projects or when, and to what extent, we will generate future cash flows from our research projects. 26 Generaland Administrative Expenses General and administrative expenses increased to $4.8 million for the three months ended September 30, 2014 from $3.9 million for the same period in 2013, an increase of $0.9 million, or 23%. The increase was primarily due to higher employee-related costs, as compared to the same period in 2013. For 2014, we expect general and administrative expenses to increase primarily due to a full year of expenses relating to Novavax AB and pre-commercialization activities. Other Income (Expense): Three Months Ended September 30, Change 2013 2014 2013 to 2014 Other Income (Expense): Interest income $ 128 $ 53 $ 75 Interest expense (47 ) (64 ) 17 Other income (expense) (19 ) (10 ) (9 ) Change in fair value of warrant liability - - - Realized gains on investments - - - Total other income (expense) $ 62 $ (21 ) $ (83 ) We had total other income of $0.1 million for the three months ended September 30, 2014 compared to total other expense of less than $0.1 million for the same period in 2013. Net Loss: Three Months Ended September 30, Change 2013 2014 2013 to 2014 Net Loss: Net loss $ (19,727 ) $ (15,300 ) $ (4,427 ) Net loss per share $ (0.08 ) $ (0.09 ) $ 0.01 Weighted shares outstanding 238,304 168,537 69,767 Net loss for the three months ended September 30, 2014 was $19.7 million, or $0.08 per share, as compared to $15.3 million, or $0.09 per share, for the same period in 2013, an increased net loss of $4.4 million. The increased net loss was primarily due to higher research and development spending, including the milestone payment accrued under the Wyeth agreement and higher employee-related costs, as compared to the same period in 2013. The increase in weighted average shares outstanding for the three months ended September 30, 2014 as compared to the same period in 2013 is primarily a result of sales of our common stock in 2013 and 2014 and shares issued in connection with the acquisition of Novavax AB. 27 Nine Months Ended September 30, 2014 and 2013 (amounts in tables are presented in thousands, except per share information) Revenue: Nine Months Ended September 30, Change 2013 2014 2013 to 2014 Revenue: Total revenue $ 23,935 $ 12,167 $ 11,768 Revenue for the nine months ended September 30, 2014 was $23.9 million as compared to $12.2 million for the same period in 2013, an increase of $11.8 million or 97%. Revenue for the nine months ended September 30, 2014 and 2013 is primarily comprised of services performed under the HHS BARDA contract and the PATH clinical development agreement, and to a lesser extent in 2014, revenue from Novavax AB. The increase in revenue is primarily due to the higher level of activity in the nine months ended September 30, 2014 associated with our Phase 1/2 pandemic (H7N9) clinical trial and manufacturing work for our Phase 2 seasonal influenza clinical trial under the HHS BARDA contract, as compared to the same period in 2013. We also had increased revenue in the nine months ended September 30, 2014 associated with our Phase 2 clinical trial in women of childbearing age under the PATH clinical development agreement and Novavax AB resulting from nine months of activity in 2014 as compared to only two months in 2013. Costs and Expenses: Nine Months Ended September 30, Change 2013 2014 2013 to 2014 Costs and Expenses: Cost of government contracts revenue $ 12,150 $ 5,619 $ 6,531 Research and development 48,940 33,989 14,951 General and administrative 14,871 10,740 4,131 Total costs and expenses $ 75,961 $ 50,348 $ 25,613 Cost of Government Contracts Revenue Cost of government contracts revenue includes direct costs of salaries, laboratory supplies, consultants and subcontractors and other direct costs associated with our process development, manufacturing, clinical, regulatory and quality assurance activities under research contracts. Cost of government contracts revenue increased to $12.2 million for the nine months ended September 30, 2014 from $5.6 million for the same period in 2013, an increase of $6.5 million, or 116%. The increase in cost of government contracts revenue is primarily related to the costs of our Phase 1/2 clinical trial using our H7N9 candidate and Matrix-M adjuvant and manufacturing work for our Phase 2 seasonal influenza clinical trial, as compared to the same period in 2013. Research and Development Expenses Research and development expenses include salaries, laboratory supplies, consultants and subcontractors and other expenses associated with our process development, manufacturing, clinical, regulatory and quality assurance activities for internally funded programs. In addition, indirect costs, such as fringe benefits and overhead expenses, are also included in research and development expenses. Research and development expenses increased to $48.9 million for the nine months ended September 30, 2014 from $34.0 million for the same period in 2013, an increase of $15.0 million, or 44%. Excluding the increase in research and development expenses of $3.3 million from Novavax AB resulting from nine months of activity in 2014 as compared to only two months in 2013, the increase in research and development expenses was primarily due to higher employee-related costs, the milestone payment accrued under the Wyeth agreement and, to a lesser degree, facility costs, as compared to the same period in 2013. 28 Costs and Expenses by Functional Area The following summarizes our cost of government contracts revenue and research and development expenses by functional area for the nine months ended September 30 (in millions). 2014 2013 Manufacturing $ 35.5 $ 21.9 Vaccine Discovery 4.4 4.0 Clinical and Regulatory 21.2 13.7 Total cost of government contracts revenue and research and development expenses $ 61.1 $ 39.6 Generaland Administrative Expenses General and administrative expenses increased to $14.9 million for the nine months ended September 30, 2014 from $10.7 million for the same period in 2013, an increase of $4.1 million, or 38%. Excluding the increase in general and administrative expenses of approximately $0.9 million from Novavax AB resulting from nine months of activity in 2014 as compared to only two months in 2013, the increase was primarily due to higher employee-related costs, as compared to the same period in 2013. Other Income (Expense): Nine Months Ended September 30, Change 2013 2014 2013 to 2014 Other Income (Expense): Interest income $ 160 $ 149 $ 11 Interest expense (150 ) (132 ) (18 ) Other income (expense) - (10 ) 10 Change in fair value of warrant liability - 267 (267 ) Realized gains on investments 615 - 615 Total other income (expense) $ 625 $ 274 $ 351 We had total other income of $0.6 million for the nine months ended September 30, 2014 compared to total other income of $0.3 million for the same period in 2013. The change in fair value of the warrant liability resulted in a $0.3 million decrease in total other income for the nine months ended September 30, 2014 as compared to the same period in 2013. The warrants expired unexercised on July 31, 2013. For the nine months ended September 30, 2014, we sold our auction rate security and received proceeds of $1.8 million resulting in a realized gain of $0.6 million. 29 Net Loss: Nine Months Ended September 30, Change 2013 2014 2013 to 2014 Net Loss: Net loss $ (51,401 ) $ (37,929 ) $ (13,472 ) Net loss per share $ (0.23 ) $ (0.24 ) $ 0.01 Weighted shares outstanding 221,578 156,555 65,023 Net loss for the nine months ended September 30, 2014 was $51.4 million, or $0.23 per share, as compared to $37.9 million, or $0.24 per share, for the same period in 2013, an increased net loss of $13.5 million. The increased net loss was primarily due to higher research and development spending, including higher employee-related costs and the milestone payment accrued under the Wyeth agreement, as compared to the same period in 2013. The increase in weighted average shares outstanding for the nine months ended September 30, 2014 as compared to the same period in 2013 is primarily a result of sales of our common stock in 2013 and 2014 and shares issued in connection with the acquisition of Novavax AB. Liquidity Matters and Capital Resources Our future capital requirements depend on numerous factors including, but not limited to, the commitments related to and progress of, our research and development programs, the progress of pre-clinical and clinical testing, the time and costs involved in obtaining regulatory approvals, the costs of filing, prosecuting, defending and enforcing patent claims and other intellectual property rights and manufacturing costs. We plan to continue to have multiple vaccines and products in various stages of development, and we believe our operating expenses and capital requirements will fluctuate depending upon the timing of certain events, such as the scope, initiation, rate and progress of our pre-clinical studies and clinical trials and other research and development activities. As of September 30, 2014, we had $190.3 million in cash and cash equivalents and investments as compared to $133.1 million as of December 31, 2013. These amounts consisted of $34.5 million in cash and cash equivalents and $155.8 million in investments as of September 30, 2014 as compared to $119.5 million in cash and cash equivalents and $13.6 million in investments at December 31, 2013. The following table summarizes cash flows for the nine months ended September 30, 2014 and 2013 (in thousands): |