Item 1. Financial Statements
NOVAVAX, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per
share information)
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(unaudited)
|
|
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
132,225
|
|
|
$
|
93,108
|
|
Marketable securities
|
|
|
301,642
|
|
|
|
137,548
|
|
Restricted cash
|
|
|
29,619
|
|
|
|
34,964
|
|
Accounts receivable
|
|
|
406
|
|
|
|
2,320
|
|
Prepaid expenses and other current assets
|
|
|
20,703
|
|
|
|
19,317
|
|
Total current assets
|
|
|
484,595
|
|
|
|
287,257
|
|
Restricted cash
|
|
|
6,489
|
|
|
|
2,422
|
|
Property and equipment, net
|
|
|
36,558
|
|
|
|
32,342
|
|
Intangible assets, net
|
|
|
10,962
|
|
|
|
10,793
|
|
Goodwill
|
|
|
53,766
|
|
|
|
53,065
|
|
Other non-current assets
|
|
|
137
|
|
|
|
159
|
|
Total assets
|
|
$
|
592,507
|
|
|
$
|
386,038
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
11,237
|
|
|
$
|
11,889
|
|
Accrued expenses
|
|
|
27,147
|
|
|
|
26,734
|
|
Accrued interest
|
|
|
2,099
|
|
|
|
—
|
|
Deferred revenue
|
|
|
28,907
|
|
|
|
34,469
|
|
Notes payable
|
|
|
252
|
|
|
|
395
|
|
Deferred rent
|
|
|
1,337
|
|
|
|
1,409
|
|
Other current liabilities
|
|
|
72
|
|
|
|
1,598
|
|
Total current liabilities
|
|
|
71,051
|
|
|
|
76,494
|
|
Deferred revenue
|
|
|
8,091
|
|
|
|
4,171
|
|
Convertible notes payable
|
|
|
315,271
|
|
|
|
—
|
|
Deferred rent
|
|
|
9,413
|
|
|
|
9,534
|
|
Other non-current liabilities
|
|
|
3,248
|
|
|
|
3,170
|
|
Total liabilities
|
|
|
407,074
|
|
|
|
93,369
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingences
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value, 2,000,000 shares authorized; no shares issued and outstanding as of March 31, 2016 and December 31, 2015, respectively
|
|
|
—
|
|
|
|
—
|
|
Common stock, $0.01 par value, 600,000,000 shares authorized at March 31, 2016 and December 31, 2015; 271,226,476 shares issued and 270,771,046 shares outstanding at March 31, 2016 and 270,426,662 shares issued and 269,971,232 shares outstanding at December 31, 2015
|
|
|
2,712
|
|
|
|
2,704
|
|
Additional paid-in capital
|
|
|
920,001
|
|
|
|
951,569
|
|
Accumulated deficit
|
|
|
(727,282
|
)
|
|
|
(650,030
|
)
|
Treasury stock, 455,430 shares, cost basis at both March 31, 2016 and
December 31, 2015
|
|
|
(2,450
|
)
|
|
|
(2,450
|
)
|
Accumulated other comprehensive loss
|
|
|
(7,548
|
)
|
|
|
(9,124
|
)
|
Total stockholders’ equity
|
|
|
185,433
|
|
|
|
292,669
|
|
Total liabilities and stockholders’ equity
|
|
$
|
592,507
|
|
|
$
|
386,038
|
|
The accompanying notes are an integral part
of these financial statements.
NOVAVAX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share information)
(unaudited)
|
|
For the Three Months
Ended March 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
Government contracts
|
|
$
|
1,946
|
|
|
$
|
9,246
|
|
Research and development collaborations
|
|
|
2,272
|
|
|
|
631
|
|
Total revenue
|
|
|
4,218
|
|
|
|
9,877
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
68,952
|
|
|
|
28,347
|
|
General and administrative
|
|
|
10,528
|
|
|
|
5,843
|
|
Total expenses
|
|
|
79,480
|
|
|
|
34,190
|
|
Loss from operations
|
|
|
(75,262
|
)
|
|
|
(24,313
|
)
|
Other income (expense):
|
|
|
|
|
|
|
|
|
Investment income
|
|
|
473
|
|
|
|
121
|
|
Interest expense
|
|
|
(2,430
|
)
|
|
|
(36
|
)
|
Other expense
|
|
|
(33
|
)
|
|
|
(142
|
)
|
Net loss
|
|
$
|
(77,252
|
)
|
|
$
|
(24,370
|
)
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share
|
|
$
|
(0.29
|
)
|
|
$
|
(0.10
|
)
|
|
|
|
|
|
|
|
|
|
Basic and diluted weighted average number of common shares outstanding
|
|
|
270,179
|
|
|
|
241,223
|
|
CONSOLIDATED STATEMENTS OF COMPREHENSIVE
LOSS
(in thousands)
(unaudited)
|
|
For the Three Months
Ended March 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(77,252
|
)
|
|
$
|
(24,370
|
)
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
Net unrealized gains on marketable securities available-for-sale
|
|
|
317
|
|
|
|
43
|
|
Foreign currency translation adjustment
|
|
|
1,259
|
|
|
|
(3,194
|
)
|
Other comprehensive income (loss)
|
|
|
1,576
|
|
|
|
(3,151
|
)
|
Comprehensive loss
|
|
$
|
(75,676
|
)
|
|
$
|
(27,521
|
)
|
The accompanying notes are an integral part
of these financial statements.
NOVAVAX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
|
|
For the Three Months
Ended March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Operating Activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(77,252
|
)
|
|
$
|
(24,370
|
)
|
Reconciliation of net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,954
|
|
|
|
1,309
|
|
Amortization of net premiums on marketable securities
|
|
|
146
|
|
|
|
427
|
|
Amortization of debt issuance costs
|
|
|
237
|
|
|
|
―
|
|
Deferred rent
|
|
|
(193
|
)
|
|
|
(195
|
)
|
Non-cash stock-based compensation
|
|
|
4,961
|
|
|
|
1,932
|
|
Other
|
|
|
98
|
|
|
|
146
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Restricted cash
|
|
|
1,278
|
|
|
|
297
|
|
Accounts receivable
|
|
|
1,926
|
|
|
|
(78
|
)
|
Prepaid expenses and other assets
|
|
|
(1,289
|
)
|
|
|
(2,491
|
)
|
Accounts payable and accrued expenses
|
|
|
1,482
|
|
|
|
(7,574
|
)
|
Deferred revenue
|
|
|
(1,644
|
)
|
|
|
107
|
|
Other liabilities
|
|
|
(1,535
|
)
|
|
|
―
|
|
Net cash used in operating activities
|
|
|
(69,831
|
)
|
|
|
(30,490
|
)
|
|
|
|
|
|
|
|
|
|
Investing Activities:
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(5,517
|
)
|
|
|
(4,864
|
)
|
Proceeds from maturities of marketable securities
|
|
|
82,657
|
|
|
|
29,450
|
|
Purchases of marketable securities
|
|
|
(246,580
|
)
|
|
|
(6,798
|
)
|
Net cash provided by (used in) investing activities
|
|
|
(169,440
|
)
|
|
|
17,788
|
|
|
|
|
|
|
|
|
|
|
Financing Activities:
|
|
|
|
|
|
|
|
|
Principal payments on capital leases
|
|
|
(19
|
)
|
|
|
(16
|
)
|
Principal payments on notes payable
|
|
|
(143
|
)
|
|
|
(164
|
)
|
Proceeds from issuance of convertible notes
|
|
|
325,000
|
|
|
|
―
|
|
Payments of costs related to issuance of convertible notes
|
|
|
(9,966
|
)
|
|
|
―
|
|
Payments for capped call transactions and costs
|
|
|
(38,521
|
)
|
|
|
―
|
|
Net proceeds from sales of common stock
|
|
|
―
|
|
|
|
193,619
|
|
Proceeds from the exercise of stock options and employee stock purchases
|
|
|
2,000
|
|
|
|
2,057
|
|
Net cash provided by financing activities
|
|
|
278,351
|
|
|
|
195,496
|
|
Effect of exchange rate on cash and cash equivalents
|
|
|
37
|
|
|
|
(79
|
)
|
Net increase in cash and cash equivalents
|
|
|
39,117
|
|
|
|
182,715
|
|
Cash and cash equivalents at beginning of period
|
|
|
93,108
|
|
|
|
32,335
|
|
Cash and cash equivalents at end of period
|
|
$
|
132,225
|
|
|
$
|
215,050
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash activities:
|
|
|
|
|
|
|
|
|
Property and equipment purchases included in accounts payable and accrued expenses
|
|
$
|
3,180
|
|
|
$
|
3,118
|
|
Supplemental disclosure
of cash flow information:
|
|
|
|
|
|
|
|
|
Cash payments of interest
|
|
$
|
12
|
|
|
$
|
31
|
|
The accompanying notes are an integral part
of these financial statements.
NOVAVAX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2016
(unaudited)
Note 1 – Organization
Novavax, Inc. (“Novavax,”
and together with its wholly owned subsidiary, “Novavax AB,” the “Company”) is a clinical-stage vaccine
company focused on the discovery, development and commercialization of recombinant nanoparticle vaccines and adjuvants. Using innovative
proprietary recombinant nanoparticle vaccine platform technology, the Company produces vaccine candidates to efficiently and effectively
respond to both known and emerging disease threats. The Company’s vaccine candidates are genetically engineered three-dimensional
nanostructures that incorporate recombinant protein antigens critical to disease pathogenesis. The Company’s product pipeline
targets a variety of infectious diseases with vaccine candidates currently in clinical development for respiratory syncytial virus
(“RSV”), seasonal influenza, pandemic influenza and Ebola virus (“EBOV”).
Note 2 – Operations
The Company’s
vaccine candidates currently under development, some of which include adjuvants, will require significant additional research and
development efforts that include extensive preclinical studies and clinical testing, and regulatory approval prior to commercial
use.
As a clinical-stage
vaccine company, the Company has primarily funded its operations from proceeds through the sale of its common stock in equity offerings,
the issuance of convertible debt and revenue under its contract with the Department of Health and Human Services, Biomedical Advanced
Research and Development Authority (“HHS BARDA”) and, to a lesser degree, revenue under its prior contract with PATH
Vaccine Solutions (“PATH”)
and the grant agreement with the Bill & Melinda Gates Foundation (“BMGF”).
Management
regularly reviews the Company’s cash and cash equivalents and marketable securities relative to its operating budget and
forecast to monitor the sufficiency of the Company’s working capital, and anticipates continuing to draw upon available sources
of capital to support its product development activities.
Note 3 – Summary
of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited
consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United
States of America (“U.S. GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10
of Regulation S-X. The consolidated balance sheet as of March 31, 2016, the consolidated statements of operations and the consolidated
statements of comprehensive loss for the three months ended March 31, 2016 and 2015 and the consolidated statements of cash flows
for the three months ended March 31, 2016 and 2015 are unaudited, but include all adjustments (consisting of normal recurring adjustments)
that the Company considers necessary for a fair presentation of the financial position, operating results, comprehensive loss and
cash flows, respectively, for the periods presented. Although the Company believes that the disclosures in these consolidated financial
statements are adequate to make the information presented not misleading, certain information and footnote information normally
included in consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted as permitted
under the rules and regulations of the United States Securities and Exchange Commission (“SEC”).
The unaudited consolidated
financial statements include the accounts of Novavax, Inc. and its wholly owned subsidiary, Novavax AB. All intercompany accounts
and transactions have been eliminated in consolidation.
The accompanying consolidated
financial statements are presented in U.S. dollars. The functional currency of Novavax AB, which is located in Sweden, is the local
currency (Swedish Krona). The translation of assets and liabilities of Novavax AB to U.S. dollars is made at the exchange rate
in effect at the consolidated balance sheet date, while equity accounts are translated at historical rates. The translation of
the statement of operations data is made at the average exchange rate in effect for the period. The translation of operating cash
flow data is made at the average exchange rate in effect for the period, and investing and financing cash flow data is translated
at the exchange rate in effect at the date of the underlying transaction. Translation gains and losses are recognized as a component
of accumulated other comprehensive loss in the accompanying consolidated balance sheets. The foreign currency translation adjustment
balance included in accumulated other comprehensive loss was $7.8 million and $9.1 million at March 31, 2016 and December 31, 2015,
respectively.
The accompanying unaudited
consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the
Company’s Annual Report on Form 10-K for the year ended December 31, 2015. Results for this or any interim period are not
necessarily indicative of results for any future interim period or for the entire year. The Company operates in one business segment.
Use of Estimates
The preparation of
the consolidated financial statements in conformity with accounting principles generally accepted in the United States, requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ materially from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents consist of highly
liquid investments with maturities of three months or less from the date of purchase. Cash and cash equivalents consist of the
following at (in thousands):
|
|
March 31,
2016
|
|
|
December 31,
2015
|
|
Cash
|
|
$
|
7,182
|
|
|
$
|
29,569
|
|
Money market funds
|
|
|
49,321
|
|
|
|
14,950
|
|
Debt securities of U.S. government agencies
|
|
|
9,994
|
|
|
|
―
|
|
Government-backed security
|
|
|
39,500
|
|
|
|
20,000
|
|
Asset-backed securities
|
|
|
―
|
|
|
|
8,185
|
|
Corporate debt securities
|
|
|
26,228
|
|
|
|
20,404
|
|
Cash and cash equivalents
|
|
$
|
132,225
|
|
|
$
|
93,108
|
|
Cash equivalents are
recorded at cost, which approximate fair value due to their short-term nature.
Fair Value Measurements
The Company applies
Accounting Standards Codification (“ASC”) Topic 820,
Fair Value Measurements and Disclosures
, for financial
and non-financial assets and liabilities.
ASC 820 discusses valuation
techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash
flow) and the cost approach (cost to replace the service capacity of an asset or replacement cost). The statement utilizes a fair
value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following
is a brief description of those three levels:
|
·
|
Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets
or liabilities.
|
|
·
|
Level 2: Inputs other than quoted prices that are observable for the asset or liability, either
directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical
or similar assets or liabilities in markets that are not active.
|
|
·
|
Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions.
|
Marketable Securities
Marketable securities
consist of commercial paper, asset-backed securities, U.S. Treasury securities, debt securities of U.S. government agencies and
corporate notes. Classification of marketable securities between current and non-current is dependent upon the maturity date at
the balance sheet date taking into consideration the Company’s ability and intent to hold the investment to maturity.
Interest and dividend
income is recorded when earned and included in investment income in the consolidated statements of operations. Premiums and discounts,
if any, on marketable securities are amortized or accreted to maturity and included in investment income in the consolidated statements
of operations. The specific identification method is used in computing realized gains and losses on the sale of the Company’s
securities.
The Company classifies
its marketable securities with readily determinable fair values as “available-for-sale.” Investments in securities
that are classified as available-for-sale are measured at fair market value in the consolidated balance sheets, and unrealized
holding gains and losses on marketable securities are reported as a separate component of stockholders’ equity until realized.
Marketable securities are evaluated periodically to determine whether a decline in value is “other-than-temporary.”
The term “other-than-temporary” is not intended to indicate a permanent decline in value. Rather, it means that the
prospects for a near term recovery of value are not necessarily favorable, or that there is a lack of evidence to support fair
values equal to, or greater than, the carrying value of the security. Management reviews criteria, such as the magnitude and duration
of the decline, as well as the Company’s ability to hold the securities until market recovery, to predict whether the loss
in value is other-than-temporary. If a decline in value is determined to be other-than-temporary, the value of the security is
reduced and the impairment is recorded as other income, net in the consolidated statements of operations.
Restricted Cash
The Company’s
current and noncurrent restricted cash includes payments received under the Grant Agreement (See Note 10) and cash collateral accounts
under letters of credit that serve as security deposits for certain facility leases. The Company will utilize the Grant Agreement
funds as it incurs expenses for services performed under the agreement. At March 31, 2016 and December 31, 2015, the restricted
cash balances consist entirely of payments received under the Grant Agreement other than $0.9 million of security deposits recorded
in non-current restricted cash on the consolidated balance sheets.
Revenue Recognition
The Company performs
research and development for U.S. Government agencies and other collaborators under cost reimbursable and fixed price contracts,
including license, grant and clinical development agreements. The Company recognizes revenue under research contracts when a contract
has been executed, the contract price is fixed or determinable, delivery of services or products has occurred and collection of
the contract price is reasonably assured. Payments received in advance of work performed are recorded as deferred revenue and losses
on contracts, if any, are recognized in the period in which they become known.
Under cost reimbursable
contracts with U.S. Government agencies, the Company is reimbursed and recognizes revenue as allowable costs are incurred plus
a portion of the fixed-fee earned. The Company considers fixed-fees under cost reimbursable contracts to be earned in proportion
to the allowable costs incurred in performance of the work as compared to total estimated contract costs, with such costs incurred
representing a reasonable measurement of the proportional performance of the work completed. Under its HHS BARDA contract, certain
activities must be pre-approved by HHS BARDA in order for their costs to be deemed allowable direct costs. Direct costs incurred
under cost reimbursable contracts are recorded as research and development expenses. The Company’s HHS BARDA contract provides
the U.S. government the ability to terminate the contract for convenience or to terminate for default if the Company fails to meet
its obligations as set forth in the statement of work. The Company believes that if the government were to terminate the HHS BARDA
contract for convenience, the costs incurred through the effective date of such termination and any settlement costs resulting
from such termination would be allowable costs. Payments to the Company under cost reimbursable contracts with agencies of the
U.S. Government, such as the HHS BARDA contract, are provisional payments subject to adjustment upon annual audit by the government.
An audit of fiscal years 2013 and 2014 has been initiated, but has not been completed as of the date of this filing. Management
believes that revenue for periods not yet audited has been recorded in amounts that are expected to be realized upon final audit
and settlement. When the final determination of the allowable costs for any year has been made, revenue and billings may be adjusted
accordingly in the period that the adjustments are known and collection is probable.
Under its grant agreement
with BMGF, the Company is reimbursed for certain costs that support development activities, including the Company’s global
Phase 3 clinical trial in pregnant women in their third trimester, product licensing efforts and WHO prequalification of the RSV
F Vaccine. Payments received under the grant agreement are recognized as revenue in the period in which such research and development
activities are performed.
The Company’s
collaborative research and development agreements may include upfront payments, payments for research and development services,
milestone payments and royalties. Agreements with multiple deliverables are evaluated to determine if the deliverables can be divided
into more than one unit of accounting. A deliverable can generally be considered a separate unit of accounting if both of the following
criteria are met: (1) the delivered item(s) has value to the customer on a stand-alone basis; and (2) if the arrangement includes
a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable
and substantially in control of the Company. Deliverables that cannot be divided into separate units are combined and treated as
one unit of accounting. Consideration received is allocated among the separate units of accounting based on the relative selling
price method. Deliverables under these arrangements typically include rights to intellectual property, research and development
services and involvement by the parties in steering committees. Historically, deliverables under the Company’s collaborative
research and development agreements have been deemed to have no stand-alone value and as a result have been treated as a single
unit of accounting. In addition, the Company analyzes its contracts and collaborative agreements to determine whether the payments
received should be recorded as revenue or as a reduction to research and development expenses. In reaching this determination,
management considers a number of factors, including whether the Company is principal under the arrangement, and whether the arrangement
is significant to, and part of, the Company’s core operations. Historically, payments received under its contracts and collaborative
agreements have been recognized as revenue since the Company acts as a principal in the arrangement and the activities are core
to its operations.
When the performance
under a fixed price contract can be reasonably estimated, revenue for fixed price contracts is recognized under the proportional
performance method and earned in proportion to the contract costs incurred in performance of the work as compared to total estimated
contract costs. Costs incurred under fixed price contracts represent a reasonable measurement of proportional performance of the
work. Direct costs incurred under collaborative research and development agreements are recorded as research and development expenses.
If the performance under a fixed price contract cannot be reasonably estimated, the Company recognizes the revenue on a straight-line
basis over the contract term.
Revenue associated
with upfront payments under arrangements is recognized over the contract term or when all obligations associated with the upfront
payment have been satisfied.
Revenue from the achievement
of research and development milestones, if deemed substantive, is recognized as revenue when the milestones are achieved and the
milestone payments are due and collectible. If not deemed substantive, the Company would recognize such milestone as revenue upon
its achievement on a straight-line basis over the remaining expected term of the research and development period. Milestones are
considered substantive if all of the following conditions are met: (1) the milestone is non-refundable; (2) there is substantive
uncertainty of achievement of the milestone at the inception of the arrangement; (3) substantive effort is involved to achieve
the milestone and such achievement relates to past performance; and (4) the amount of the milestone appears reasonable in relation
to the effort expended and all of the deliverables and payment terms in the arrangement.
Net Loss per Share
Net loss per share
is computed using the weighted average number of shares of common stock outstanding. At March 31, 2016 and 2015, the Company had
outstanding stock options and unvested restricted stock awards totaling 32,803,931 and 23,250,163, respectively. At March 31, 2016,
the Company’s Notes are initially convertible into approximately 47,716,900 shares of the Company’s common stock. These
and any shares due to the Company upon settlement of its capped call transactions are excluded from the computation, as their effect
is antidilutive.
Recent Accounting Pronouncements
Recently Adopted
I
n
April 2015, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2015-03,
Interest - Imputation of Interest
(Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs
(“ASU 2015-03”). The new standard requires
that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the
carrying amount of that debt liability, consistent with debt discounts. This ASU became effective for the Company beginning January
1, 2016. The adoption of ASU 2015-03 did not have a material effect on the Company’s financial statements.
Not Yet Adopted
In February 2016, the
FASB issued ASU 2016-02,
Leases (Topic 842)
(“ASU 2016-02”) that increases transparency and comparability
among organizations by requiring the recognition of lease assets and lease liabilities on the balance sheet and disclosure of key
information about leasing arrangements for both lessees and lessors. The standard will be effective January 1, 2019 for the Company,
with early adoption permitted. The standard will be applied using a modified retrospective approach to the beginning of the earliest
period presented in the financial statements. The Company is currently evaluating when it will adopt the standard and the
expected impact to its consolidated financial statements and related disclosures.
In March 2016, the
FASB issued ASU 2016-09,
Compensation - Stock Compensation (Topic 718)
(“ASU 2016-09”) that simplifies
the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either
equity or liabilities, and classification on the statement of cash flows. The standard will be effective January 1, 2017 for the
Company, with early adoption permitted. The Company is currently evaluating when it will adopt the standard and the expected
impact to its consolidated financial statements and related disclosures.
In May 2014, the FASB
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
price to the performance obligations in the contract and recognizing revenue when (or as) the entity satisfies the performance
obligations. In July 2015, the FASB approved a one-year deferral of the effective date of the new standard to 2018 for public
companies, with an option that would permit companies to adopt the new standard as early as the original effective date of 2017.
Early adoption prior to the original effective date is not permitted. ASU 2014-09 allows for either full retrospective or
modified retrospective adoption. The Company is evaluating the potential impact that ASU 2014-09 will have on its consolidated
financial position and results of operations.
Reclassifications
For the three months
ended March 31, 2015, cost of government contracts revenue of $2.5 million has been reclassified to research and development expenses,
accounts receivable - unbilled of $0.9 million has been reclassified to accounts receivable and restricted cash of $0.9 million
has been reclassified from other non-current assets to restricted cash (non-current). These reclassifications have been made to
conform to the current year presentation.
Note 4 – Fair Value Measurements
The
following table represents the Company’s fair value hierarchy for its financial assets and liabilities measured at fair value
(in thousands):
|
|
Fair Value at March 31, 2016
|
|
|
Fair Value at December 31, 2015
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
49,321
|
|
|
$
|
―
|
|
|
$
|
―
|
|
|
$
|
14,950
|
|
|
$
|
―
|
|
|
$
|
―
|
|
U.S. Treasury securities
|
|
|
―
|
|
|
|
21,791
|
|
|
|
―
|
|
|
|
―
|
|
|
|
―
|
|
|
|
―
|
|
Debt securities of U.S. government agencies
|
|
|
―
|
|
|
|
35,871
|
|
|
|
―
|
|
|
|
―
|
|
|
|
―
|
|
|
|
―
|
|
Government-backed security
|
|
|
―
|
|
|
|
39,500
|
|
|
|
―
|
|
|
|
―
|
|
|
|
20,000
|
|
|
|
―
|
|
Asset-backed securities
|
|
|
―
|
|
|
|
62,557
|
|
|
|
―
|
|
|
|
―
|
|
|
|
28,924
|
|
|
|
―
|
|
Corporate debt securities
|
|
|
―
|
|
|
|
217,645
|
|
|
|
―
|
|
|
|
―
|
|
|
|
137,213
|
|
|
|
―
|
|
Total assets
|
|
$
|
49,321
|
|
|
$
|
377,364
|
|
|
$
|
―
|
|
|
$
|
14,950
|
|
|
$
|
186,137
|
|
|
$
|
―
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible notes payable
|
|
$
|
―
|
|
|
$
|
317,021
|
|
|
$
|
―
|
|
|
$
|
―
|
|
|
$
|
―
|
|
|
$
|
―
|
|
Fixed-income investments
categorized as Level 2 are valued at the custodian bank by a third-party pricing vendor’s valuation models that use verifiable
observable market data, e.g., interest rates and yield curves observable at commonly quoted intervals and credit spreads, bids
provided by brokers or dealers or quoted prices of securities with similar characteristics. Pricing of the Company’s
Notes (See Note 7) has been estimated using other observable inputs, including the price of the Company’s common stock, implied
volatility, interest rates and credit spreads among others. Over time, the Company expects a market for the Notes to develop. At
that time, the Company intends to use trade data as the principal basis for measuring fair value.
During the three months ended March 31,
2016, the Company did not have any transfers between levels
.
The amounts in the
Company’s consolidated balance sheet for accounts receivable and accounts payable approximate fair value due to their short-term
nature. Based on borrowing rates available to the Company, the fair value of capital lease and notes payable approximates their
carrying value. The Company’s milestone payment due to Wyeth (See Note 11) approximates its fair value at March 31, 2016,
as the liability has been calculated based on an anticipated future payment date discounted at borrowing rates available to the
Company.
Note 5 – Marketable Securities
Marketable securities
classified as available-for-sale as of March 31, 2016 and December 31, 2015 were comprised of (in thousands):
|
|
March 31, 2016
|
|
|
December 31, 2015
|
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair Value
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair Value
|
|
U.S. Treasury securities
|
|
$
|
21,779
|
|
|
$
|
12
|
|
|
$
|
—
|
|
|
$
|
21,791
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Debt securities of U.S. government agencies
|
|
|
25,869
|
|
|
|
8
|
|
|
|
—
|
|
|
|
25,877
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Asset-backed securities
|
|
|
62,555
|
|
|
|
8
|
|
|
|
(6
|
)
|
|
|
62,557
|
|
|
|
20,748
|
|
|
|
—
|
|
|
|
(9
|
)
|
|
|
20,739
|
|
Corporate debt securities
|
|
|
191,143
|
|
|
|
279
|
|
|
|
(5
|
)
|
|
|
191,417
|
|
|
|
116,821
|
|
|
|
29
|
|
|
|
(41
|
)
|
|
|
116,809
|
|
Total
|
|
$
|
301,346
|
|
|
$
|
307
|
|
|
$
|
(11
|
)
|
|
$
|
301,642
|
|
|
$
|
137,569
|
|
|
$
|
29
|
|
|
$
|
(50
|
)
|
|
$
|
137,548
|
|
Marketable Securities
– Unrealized Losses
The primary objective
of the Company’s investment policy is the preservation of capital; thus, the Company’s investment policy limits investments
to certain types of instruments with high-grade credit ratings, places restrictions on maturities and concentrations in certain
industries and requires the Company to maintain a certain level of liquidity.
The Company owned 69
available-for-sale securities as of March 31, 2016. Of these 69 securities, 9 had combined unrealized losses of less than $0.1
million as of March 31, 2016. The Company did not have any investments in a loss position for greater than 12 months as of March
31, 2016. The Company has evaluated its marketable securities and has determined that none of these investments has an other-than-temporary
impairment, as it has no intent to sell securities with unrealized losses and it is not more likely than not that the Company will
be required to sell any securities with unrealized losses, given the Company’s current and anticipated financial position.
Note 6 – Goodwill and Other Intangible Assets
Goodwill
The change in the carrying amounts of goodwill
for the three months ended March 31, 2016 was as follows (in thousands):
|
|
Amount
|
|
Balance at December 31, 2015
|
|
$
|
53,065
|
|
Currency translation adjustments
|
|
|
701
|
|
Balance at March 31, 2016
|
|
$
|
53,766
|
|
Identifiable Intangible
Assets
Purchased intangible assets consisted of
the following as of March 31, 2016 and December 31, 2015 (in thousands):
|
|
March 31, 2016
|
|
|
December 31, 2015
|
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Intangible
Assets, Net
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Intangible
Assets, Net
|
|
Finite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proprietary adjuvant technology
|
|
$
|
9,179
|
|
|
$
|
(1,224
|
)
|
|
$
|
7,955
|
|
|
$
|
8,858
|
|
|
$
|
(1,070
|
)
|
|
$
|
7,788
|
|
Collaboration agreements
|
|
|
4,145
|
|
|
|
(1,138
|
)
|
|
|
3,007
|
|
|
|
3,999
|
|
|
|
(994
|
)
|
|
|
3,005
|
|
Total identifiable intangible assets
|
|
$
|
13,324
|
|
|
$
|
(2,362
|
)
|
|
$
|
10,962
|
|
|
$
|
12,857
|
|
|
$
|
(2,064
|
)
|
|
$
|
10,793
|
|
Amortization expense
for the three months ended March 31, 2016 and 2015 was $0.2 million.
Estimated amortization
expense for existing intangible assets for the remainder of 2016 and for each of the five succeeding years ending December 31 will
be as follows (in thousands):
Year
|
|
Amount
|
|
2016 (remainder)
|
|
$
|
664
|
|
2017
|
|
|
885
|
|
2018
|
|
|
885
|
|
2019
|
|
|
885
|
|
2020
|
|
|
756
|
|
2021
|
|
|
575
|
|
Note 7 – Long-Term Debt
In the first quarter
of 2016, the Company issued
$325 million
aggregate
principal amount of convertible senior unsecured notes that will mature on
February 1, 2023
(the
“Notes”).
The Notes are senior unsecured debt obligations
and were issued at par. The Notes were issued pursuant to an indenture dated January 29, 2016 (the “Indenture”), between
the Company and the trustee.
The Company received $315.0 million in net proceeds from
the offering after deducting underwriting fees and offering expenses. The Notes bear cash interest at a rate of 3.75%, payable
on
February 1
and
August 1
of
each year, beginning on
August 1, 2016
. The Notes are not redeemable prior to
maturity and are convertible into shares of the Company’s common stock. The Notes are initially convertible into
approximately 47,716,900 shares of the Company’s stock based on the initial conversion rate of 146.8213 shares of the Company’s
common stock per
$1,000
principal amount of the Notes. This represents an
initial conversion price of approximately
$6.81
per share of the Company’s
common stock,
representing an approximate 22.5% conversion premium based on the last reported sale price of the Company’s
common stock of $5.56 per share on January 25, 2016. In addition, the holders of the Notes may require the Company to repurchase
the Notes at par value plus accrued and unpaid interest following the occurrence of a Fundamental Change (as described in the Indenture).
If a holder of the Notes converts upon a Make-Whole Adjustment Event (as described in the Indenture), they may be eligible to receive
a make-whole premium through an increase to the conversion rate up to a maximum of 179.8561 shares per $1,000 principal amount
of Notes (subject to other adjustments as described in the Indenture).
The Notes are accounted
for in accordance with ASC 470-20,
Debt with Conversion and Other Options
and ASC 815-40,
Contracts in Entity’s
Own Equity.
Under ASC 815-40, to qualify for equity classification (or nonbifurcation, if embedded) the instrument (or embedded
feature) must be both (1) indexed to the issuer’s stock and (2) meet the requirements of the equity classification guidance.
Based upon the Company’s analysis, it was determined the Notes do contain embedded features indexed to its own stock, but
do not meet the requirements for bifurcation, and therefore do not need to be separately accounted for as an equity component.
Since the embedded conversion feature meets the equity scope exception from derivative accounting, and also since the embedded
conversion option does not need to be separately accounted for as an equity component under ASC 470-20
,
the proceeds received
from the issuance of the convertible debt was recorded as a liability on the consolidated balance sheet.
In connection with
the issuance of the Notes, the Company also paid $38.5 million, including expenses, to enter into privately negotiated
capped call transactions with certain financial institutions (the “capped call transactions”). The capped call transactions
are expected generally to reduce the potential dilution upon conversion of the Notes in the event that the market price per share
of the Company’s common stock, as measured under the terms of the capped call transactions, is greater than the strike price
of the capped call transactions, which initially corresponds to the conversion price of the Notes, and is subject to anti-dilution
adjustments generally similar to those applicable to the conversion rate of the Notes. The cap price of the capped call transactions
will initially be $9.73 per share, which represents a premium of approximately 75% based on the last reported sale price
of our common stock of $5.56 per share on January 25, 2016, and is subject to certain adjustments under the terms of the capped
call transactions. If, however, the market price per share of the Company’s common stock, as measured under the terms of
the capped call transactions, exceeds the cap price of the capped call transactions, there would nevertheless be dilution upon
conversion of the Notes to the extent that such market price exceeds the cap price of the capped call transactions. The Company
evaluated the capped call transactions under ASC 815-10 and determined that it should be accounted for as a separate transaction
and that the capped call transactions will be classified as an equity instrument.
The Company incurred
approximately $10.0 million of debt issuance costs during the first quarter of 2016 relating to the issuance of the Notes, which
were recorded as a reduction to the Notes on the consolidated balance sheet. The $10.0 million of debt issuance costs is being
amortized and recognized as additional interest expense over the contractual term of the Notes of 7 years using the effective interest
rate method. The Company also incurred $0.9 million of expenses related to the capped call transactions, which were recorded as
a reduction to additional paid-in-capital.
Total convertible notes
payable consisted of the following at (in thousands):
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Principal amount of Notes
|
|
$
|
325,000
|
|
|
$
|
―
|
|
Unamortized debt issuance costs
|
|
|
(9,729
|
)
|
|
|
―
|
|
Total convertible notes payable
|
|
$
|
315,271
|
|
|
$
|
―
|
|
Interest expense incurred in connection
with the Notes consisted of the following: (in thousands):
|
|
Three Months Ended
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Coupon interest
|
|
$
|
2,099
|
|
|
$
|
―
|
|
Amortization of debt issuance costs
|
|
|
237
|
|
|
|
―
|
|
Total interest expense on Notes
|
|
$
|
2,336
|
|
|
$
|
―
|
|
Note 8 – Stockholders’ Equity
During the first quarter
of 2016, in connection with the Company’s issuance of the Notes, the Company also entered into privately negotiated capped
call transactions. The cost of the capped call transactions and associated expenses totaling $38.5 million were recorded
to additional paid-in-capital.
In March 2015, the
Company completed a public offering of 27,758,620 shares of its common stock, including 3,620,689 shares of common stock that were
issued upon the exercise in full of the option to purchase additional shares granted to the underwriters, at a price of $7.25 per
share resulting in proceeds, net of offering costs of $11.6 million, of approximately $190 million.
In 2012, the Company
entered into an At Market Issuance Sales Agreement (“Sales Agreement”), under which the Company sold an aggregate of
$50 million in gross proceeds of its common stock. During 2015, the Company sold 1.4 million shares at an average sales price of
$10.63 per share, resulting in $14.6 million in net proceeds. The Sales Agreement was fully utilized at that time.
Note 9 – Stock-Based
Compensation
Stock Options
The Amended and Restated
2005 Stock Incentive Plan (“2005 Plan”) expired in February 2015 and no new awards may be made under such plan, although
awards will continue to be outstanding in accordance with their terms. The Board adopted the 2015 Stock Incentive Plan (“2015
Plan”) in March 2015, which was subsequently approved at the Company’s annual meeting of stockholders in June 2015.
Under the 2015 Plan, equity awards may be granted to officers, directors, employees and consultants of and advisors to the Company
and any present or future subsidiary. The 2015 Plan authorizes the issuance of up to 25,000,000 shares of common stock under equity
awards granted under the plan. All such shares authorized for issuance under the 2015 Plan have been reserved. The Company will
seek approval at its June 2016 annual meeting of stockholders to increase the number of shares of common stock available for issuance
under the 2015 Plan by 6,000,000 shares. The 2015 Plan will expire on March 4, 2025.
The 2015 Plan permits
and the 2005 Plan permitted the grant of stock options (including incentive stock options), restricted stock, stock appreciation
rights, and restricted stock units. In addition, under the 2015 Plan, unrestricted stock, stock units and performance awards may
be granted. Stock options and stock appreciation rights generally have a maximum term of 10 years and may be or were granted with
an exercise price that is no less than 100% of the fair market value of the Company’s common stock at the time of grant.
Grants of stock options are generally subject to vesting over periods ranging from six months to four years.
Stock Options Awards
The following is a summary of option activity
under the 2015 Plan and 2005 Plan for the three months ended March 31, 2016:
|
|
2015 Plan
|
|
|
2005 Plan
|
|
|
|
Stock Options
|
|
|
Weighted-
Average
Exercise Price
|
|
|
Stock Options
|
|
|
Weighted-
Average
Exercise Price
|
|
Outstanding at January 1, 2016
|
|
|
8,357,003
|
|
|
$
|
8.97
|
|
|
|
15,450,542
|
|
|
$
|
3.31
|
|
Granted
|
|
|
9,723,437
|
|
|
$
|
4.99
|
|
|
|
—
|
|
|
$
|
—
|
|
Exercised
|
|
|
—
|
|
|
$
|
—
|
|
|
|
(511,650
|
)
|
|
$
|
1.72
|
|
Canceled
|
|
|
(123,526
|
)
|
|
$
|
8.37
|
|
|
|
(136,875
|
)
|
|
$
|
4.48
|
|
Outstanding at March 31, 2016
|
|
|
17,956,914
|
|
|
$
|
6.82
|
|
|
|
14,802,017
|
|
|
$
|
3.35
|
|
Shares exercisable at March 31, 2016
|
|
|
1,916,292
|
|
|
$
|
8.94
|
|
|
|
10,041,892
|
|
|
$
|
2.79
|
|
Shares available for grant at March 31, 2016
|
|
|
6,998,086
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of stock
options granted under the 2015 Plan and 2005 Plan was estimated at the date of grant using the Black-Scholes option-pricing model
with the following assumptions:
|
|
Three
Months Ended
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Weighted-average Black-Scholes fair value of stock options granted
|
|
|
$2.45
|
|
|
|
$2.92
|
|
Risk-free interest rate
|
|
|
1.25%-1.70%
|
|
|
|
1.19%
|
|
Dividend yield
|
|
|
0%
|
|
|
|
0%
|
|
Volatility
|
|
|
57.86%-68.28%
|
|
|
|
53.58%-53.89%
|
|
Expected term (in years)
|
|
|
4.26-7.28
|
|
|
|
4.26
|
|
Expected forfeiture rate
|
|
|
0%-16.33%
|
|
|
|
16.33%
|
|
The total aggregate
intrinsic value and weighted-average remaining contractual term of stock options outstanding under the 2015 Plan and 2005 Plan
as of March 31, 2016 was approximately $32.0 million and 8.3 years, respectively. The total aggregate intrinsic value and weighted-average
remaining contractual term of stock options exercisable under the 2015 Plan and 2005 Plan as of March 31, 2016 was approximately
$25.6 million and 6.7
years, respectively. The aggregate intrinsic value represents the total intrinsic value (the difference
between the Company’s closing stock price on the last trading day of the period and the exercise price, multiplied by the
number of in-the-money options) that would have been received by the option holders had all option holders exercised their options
on March 31, 2016. This amount is subject to change based on changes to the closing price of the Company’s common stock.
The aggregate intrinsic value of options exercised and vesting of restricted stock awards for the three months ended March 31,
2016 and 2015 was $1.8 million and $3.8 million, respectively.
Employee Stock Purchase Plan
In April 2013, the
Company adopted an Employee Stock Purchase Plan (the “ESPP”), which authorized an aggregate of 2,000,000 shares of
common stock to be purchased, which will increase 5% on each anniversary of its adoption up to a maximum of 3,000,000 shares. The
ESPP allows employees to purchase shares of common stock of the Company at each purchase date through payroll deductions of up
to a maximum of 15% of their compensation, at 85% of the lesser of the market price of the shares at the time of purchase or the
market price on the beginning date of an option period (or, if later, the date during the option period when the employee was first
eligible to participate). At March 31, 2016, there were 821,846 shares available for issuance under the ESPP. The Company will
seek approval at its June 2016 annual meeting of stockholders to increase the maximum number of shares of common stock available
for issuance under the ESPP by 1,000,000 shares.
The ESPP is considered
compensatory for financial reporting purposes. As such, the fair value of ESPP shares was estimated at the date of grant using
the Black-Scholes option-pricing model with the following assumptions:
|
|
Three Months Ended
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Range of Black-Scholes fair values of ESPP shares granted
|
|
|
$
1.86-$3.38
|
|
|
|
$
1.06-$2.24
|
|
Risk-free interest rate
|
|
|
0.22%-0.44%
|
|
|
|
0.05%-0.35%
|
|
Dividend yield
|
|
|
0%
|
|
|
|
0%
|
|
Volatility
|
|
|
46.14%-86.75%
|
|
|
|
40.79%-64.24%
|
|
Expected term (in years)
|
|
|
0.5-2.0
|
|
|
|
0.5-2.0
|
|
Expected forfeiture rate
|
|
|
5%
|
|
|
|
5%
|
|
Restricted Stock Awards
The following is a
summary of restricted stock awards activity for the three months ended March 31, 2016:
|
|
Number of
Shares
|
|
|
Per Share
Weighted-
Average
Grant-Date
Fair Value
|
|
Outstanding and Unvested at January 1, 2016
|
|
|
25,000
|
|
|
$
|
8.72
|
|
Restricted stock granted
|
|
|
45,000
|
|
|
$
|
4.99
|
|
Restricted stock vested
|
|
|
―
|
|
|
$
|
―
|
|
Restricted stock forfeited
|
|
|
(25,000
|
)
|
|
$
|
8.72
|
|
Outstanding and Unvested at March 31, 2016
|
|
|
45,000
|
|
|
$
|
4.99
|
|
The Company recorded all stock-based compensation
expense in the consolidated statements of operations as follows (in thousands):
|
|
Three Months Ended
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Research and development
|
|
$
|
3,233
|
|
|
$
|
1,032
|
|
General and administrative
|
|
|
1,728
|
|
|
|
900
|
|
Total stock-based compensation expense
|
|
$
|
4,961
|
|
|
$
|
1,932
|
|
As of March 31, 2016,
there was approximately $53.1 million
of total unrecognized compensation expense (net of estimated forfeitures) related
to unvested stock options, ESPP and restricted stock awards. This unrecognized non-cash compensation expense is expected to be
recognized over a weighted-average period of 1.8
years, and will be allocated between research and development and general
and administrative expenses accordingly. This estimate does not include the impact of other possible stock-based awards that may
be made during future periods.
Note 10 –
U.S. Government Agreement, Collaboration and Joint Venture
HHS
BARDA Contract for Recombinant Influenza Vaccines
HHS BARDA initially
awarded the Company a contract in 2011, which funds the development of both the Company’s quadrivalent seasonal and pandemic
influenza virus-like particle (“VLP”) vaccine candidates. The contract with HHS BARDA is a cost-plus-fixed-fee contract,
which reimburses the Company for allowable direct contract costs incurred plus allowable indirect costs and a fixed-fee earned
in the ongoing clinical development and product scale-up of its multivalent seasonal and monovalent pandemic H7N9 influenza VLP
vaccine candidates. In September 2014, HHS BARDA exercised and initiated a two-year option to the contract, which included scope
to support development activities leading up to planned Phase 3 clinical studies, added $70 million of funding on top of the remainder
of the $97 million base period funding, and extended the contract until September 2016. In June 2015, the contract was amended
to increase the funding by $7.7 million to allow for the recovery of additional costs under the contract relating to the settlement
of indirect rates for fiscal years 2011 and 2012. This additional amount was received and recorded as revenue in the three months
ended June 30, 2015. During the three months ended March 31, 2016, the Company recognized revenue of $1.9 million, and has recognized
approximately $113 million in revenue since the inception of the contract. Billings under the contract are based on approved provisional
indirect billing rates, which permit recovery of fringe benefits, overhead and general and administrative expenses. These indirect
rates are subject to audit by HHS BARDA on an annual basis. An audit of fiscal years 2013 and 2014 has been initiated, but has
not been completed as of the date of this filing. Management believes that revenue for periods not yet audited has been recorded
in amounts that are expected to be realized upon final audit and settlement. When the final determination of the allowable costs
for any year has been made, revenue and billings may be adjusted accordingly in the period that the adjustments are known and collection
is probable.
Bill & Melinda Gates Foundation
(“BMGF”) Grant Agreement
In support of the Company’s
development of its respiratory syncytial virus fusion (F) protein nanoparticle vaccine candidate (“RSV F Vaccine”)
for infants via maternal immunization, in September 2015, the Company entered into an agreement (“Grant Agreement”)
with BMGF, under which it was awarded a grant totaling up to $89.1 million (the “Grant”). The Grant will support development
activities, including the Company’s global Phase 3 clinical trial in pregnant women in their third trimester, product licensing
efforts and WHO prequalification of the RSV F Vaccine. The Company concurrently entered into a Global Access Commitments Agreement
(“GACA”) with BMGF as a part of the Grant Agreement. Under the terms of the GACA, among other things, the Company agreed
to make the RSV F Vaccine available and accessible at affordable pricing to people in certain low and middle income countries.
Unless earlier terminated by BMGF, the GACA will continue in effect until the latter of 15 years from its effective date, or 10
years after the first sale of a product under defined circumstances. The term of the GACA may be extended in certain circumstances,
by a period of up to five additional years. Payments received under the Grant Agreement are being recognized in the period in which
the research and development activities are performed. Payments received in advance that are related to future performance are
deferred and recognized as revenue when the research and development activities are performed. Cash payments received under the
Grant are restricted as to their use until expenditures contemplated in the Grant are incurred. During the three months ended March
31, 2016, the Company recognized revenue of $1.6 million, and has recognized approximately $3 million in revenue since the inception
of the contract. At March 31, 2016, the Company’s current restricted cash and deferred revenue balances on the consolidated
balance sheet represent its estimate of costs to be reimbursed and revenue to be recognized, respectively, in the next twelve months
under the Grant Agreement.
CPLB Joint Venture
In 2009, the Company
formed a joint venture with Cadila Pharmaceuticals Limited (“Cadila”) named CPL Biologicals Private Limited (“CPLB”)
to develop and manufacture vaccines, biological therapeutics and diagnostics in India. CPLB is owned 20% by the Company and 80%
by Cadila. The Company accounts for its investment in CPLB using the equity method. Because CPLB’s activities and operations
are controlled and funded by Cadila, the Company accounts for its investment using the equity method. Since the carrying value
of the Company’s initial investment was nominal and there is no guarantee or commitment to provide future funding, the Company
has not recorded nor expects to record losses related to this investment in the foreseeable future.
Note 11 –
License agreement with Wyeth Holding Corporation
In 2007, the Company
entered into an agreement to license certain rights from Wyeth Holdings Corporation (now Wyeth Holdings LLC), a subsidiary of Pfizer
Inc. (“Wyeth”). The Wyeth license is a non-exclusive, worldwide license to a family of patents and patent applications
covering VLP technology for use in human vaccines in certain fields, with expected patent expiration in early 2022. The Wyeth license
provides for the Company to make an upfront payment (previously made), ongoing annual license fees, sublicense payments, milestone
payments on certain development and commercialization activities and royalties on any product sales. Except in certain circumstances
in which the Company continuously markets multiple products in a country within the same vaccine program, the milestone payments
are one-time only payments applicable to each related vaccine program. At present, the Company’s seasonal influenza VLP vaccine
program (including CPLB’s seasonal influenza program) and its pandemic influenza VLP vaccine program are the only two programs
to which the Wyeth license applies. The license may be terminated by Wyeth only for cause and may be terminated by the Company
only after it has provided ninety (90) days’ notice that the Company has absolutely and finally ceased activity, including
through any affiliate or sublicense, related to the manufacturing, development, marketing or sale of products covered by the license.
In September 2015, the Company entered into an amendment to the license agreement with Wyeth. Among other things, the amendment
restructured the $3 million milestone payment (“Milestone”) owed as a result of CPLB’s initiation of a Phase
3 clinical trial for its recombinant trivalent seasonal VLP influenza vaccine candidate in 2014. Under the amendment, the milestone
payment, which may increase slightly over time, would be due in connection with the initiation of a Phase 3 clinical trial for
the initial seasonal influenza VLP vaccine candidate being developed outside India, but in any case no later than December 31,
2017. The amendment also restructured the final milestone payment to apply to the initial seasonal influenza VLP vaccine candidate
being developed outside India. Thus, the aggregate milestone payments for a seasonal influenza VLP vaccine candidate developed
and commercialized was increased from $14 million to up to $15 million. In connection with the execution of the amendment, the
Company agreed to pay a one-time only payment to Wyeth. The amendment also increased annual license maintenance fees associated
with VLP vaccine candidates from $0.2 million to $0.3 million per year. Payments under the agreement to Wyeth as of March 31, 2016
aggregated $7.3 million. The Milestone has been accrued for, on a discounted basis calculated based on the probable future
payment date, in other non-current liabilities at March 31, 2016. The Milestone was recorded as a research and development expense
in 2014.
Note 12 –
Facility Leases
In May 2016, the Company
signed a new lease for a facility of approximately 150,000 square feet located in Gaithersburg, Maryland with a term expiring in
2030, unless terminated early by the Company in 2026. The lease contains provisions for future rent increases and periods in which
rent payments are reduced (abated). Also, the lease obligates the Company to pay building operating costs. Under the terms of the
lease, the landlord shall provide the Company with a tenant improvement allowance of $9.6 million. In addition, the Company extended
its Rockville, Maryland lease with a term expiring in 2020, unless terminated early by the Company in 2019.
Future minimum rental
commitments under non-cancelable leases are as follows (in thousands and including the new lease):
Year
|
|
Amount
|
|
2016 (remainder)
|
|
$
|
4,739
|
|
2017
|
|
|
6,677
|
|
2018
|
|
|
9,654
|
|
2019
|
|
|
9,794
|
|
2020
|
|
|
8,265
|
|
Thereafter
|
|
|
42,750
|
|
Total minimum lease payments
|
|
$
|
81,879
|
|
Note 13 – Related Party Transactions
Dr. Rajiv Modi,
a director of the Company, is also the managing director of Cadila. The Company and Cadila have formed a joint venture, CPLB (See
Note 10). A subsidiary of Cadila owns 2.5 million shares of the Company’s outstanding common stock as of March 31, 2016.
The Company and Cadila have also entered into a master services agreement, pursuant to which Cadila or CPLB may perform certain
research, development and manufacturing services for the Company. For the three months ended March 31, 2016, the Company has incurred
$0.3 million in expenses under the agreement. The amount the Company owed CPLB under the master services agreement at March 31,
2016 and December 31, 2015 was less than $0.1 million and $0.7 million, respectively.
Item 2. Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Any statements in
the discussion below and elsewhere in this Quarterly 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, 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
capabilities, goals, 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 development of our preclinical
product candidates; the conduct, timing and potential results from clinical trials and other preclinical studies; plans for
and potential timing of regulatory filings; the expected timing and content of regulatory actions; reimbursement by the
Department of Health and Human Services, Biomedical Advanced Research and Development Authority (“HHS BARDA”);
payments under our license with Wyeth Holdings LLC (formerly known as Wyeth Holdings Corporation), a subsidiary of Pfizer
Inc. (“Wyeth”); payments by the Bill & Melinda Gates Foundation (“BMGF”); 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 amendments thereto, 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.
Accordingly, these
statements involve estimates, assumptions and uncertainties that could cause actual results to differ materially from those expressed
or implied in them. Any or all of our forward-looking statements in this Quarterly Report may turn out to be inaccurate or materially
different than actual results.
Because the risk factors
discussed in this Quarterly Report and identified in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015,
and other risk factors of which we are not aware, could cause actual results or outcomes to differ materially from those expressed
in any forward-looking statements made by or on behalf of us, you should not place undue reliance on any such forward-looking
statements. These statements are subject to risks and uncertainties, known and unknown, which could cause actual results and developments
to differ materially from those expressed or implied in such statements. We have included important factors in the cautionary
statements included in this Quarterly Report, particularly those identified in Part II, Item 1A “Risk Factors,” and
in Part I, Item 1A “Risk Factors” of our Annual Report on Form 10-K, that we believe could cause actual results or
events to differ materially from the forward-looking statements that we make. These and other risks may also be detailed and modified
or updated in our reports and other documents filed with the Securities and Exchange Commission (“SEC”) from time
to time. You are encouraged to read these filings as they are made.
Although we believe
that the expectations reflected in our forward-looking statements are reasonable, we cannot guarantee future results, events,
levels of activity, performance or achievement. Further, any forward-looking statement speaks only as of the date on which it
is made, and 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. New factors emerge from time to time, and it is not possible for us to predict
which factors will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor,
or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
Overview
We are a clinical-stage
vaccine company focused on the discovery, development and commercialization of recombinant nanoparticle vaccines and adjuvants.
Using innovative proprietary recombinant nanoparticle vaccine platform technology, we produce vaccine candidates to efficiently
and effectively respond to both known and emerging disease threats. Our vaccine candidates are genetically engineered three-dimensional
nanostructures that incorporate recombinant proteins critical to disease pathogenesis. Our product pipeline targets a variety
of infectious diseases with vaccine candidates currently in clinical development for respiratory syncytial virus (“RSV”),
seasonal influenza, pandemic influenza and Ebola virus (“EBOV”). We have additional preclinical stage programs for
a variety of infectious diseases.
We are also developing
proprietary technology for the production of immune stimulating saponin-based adjuvants through our wholly owned Swedish subsidiary,
Novavax AB. Our lead adjuvant, Matrix-M™, has been successfully tested in a Phase 1/2 clinical trial for our pandemic H7N9
influenza virus-like particle vaccine candidate, and in a Phase 1 clinical trial for our EBOV vaccine candidate. Genocea Biosciences,
Inc. (“Genocea”) has licensed rights to our Matrix technology and has conducted Phase 2 clinical trials with its herpes
simplex 2 vaccine candidate using Matrix-M.
Clinical Product Pipeline
Our clinical product
pipeline includes vaccine candidates engineered to elicit differentiated immune responses with potential to provide increased
protection. Our nanoparticle technology platform targets antigens with conserved epitopes essential for viral function. Unlike
traditional vaccines that ‘mimic’ viruses and elicit naturally occurring immune responses to them, our nanoparticles
are engineered to elicit differentiated immune responses, which may be more efficacious than naturally-occurring immunity. Our
vaccine technology has the potential to be applied broadly to a wide variety of human infectious diseases.
A current summary
of our significant research and development programs, along with the programs of our joint venture, CPLB, and status of the related
products in development follows:
Program
|
|
Development Stage
|
|
Funding Collaborator
|
|
|
|
|
|
Respiratory Syncytial Virus (RSV)
|
|
|
|
|
·
Older
Adults
|
|
Phase 3
|
|
|
·
Infants
via Maternal Immunization
|
|
Phase 3
|
|
BMGF
|
·
Pediatrics
|
|
Phase 1
|
|
|
Influenza
|
|
|
|
|
·
Seasonal
Quadrivalent
|
|
Phase 2
|
|
HHS BARDA
|
·
Pandemic
H7N9
|
|
Phase 2
|
|
HHS BARDA
|
Combination (Influenza/RSV)
|
|
Preclinical
|
|
|
Ebola Virus (EBOV)
|
|
Phase 1
|
|
|
Respiratory Syncytial Virus (RSV)
We are developing
our respiratory syncytial virus fusion (F) protein nanoparticle vaccine candidate (“RSV F Vaccine”) for three susceptible
target populations: older adults (60 years of age and older), infants via maternal immunization and children six months to five
years of age (“pediatrics”). We estimate RSV F Vaccine peak revenue potential of six to eight billion dollars worldwide.
Currently there is no approved RSV vaccine available.
Repeat infection
and lifelong susceptibility to RSV are common and we currently estimate the global cost burden of RSV in excess of $88 billion.
Despite decades of effort to develop an RSV vaccine, there are currently no licensed vaccines. Although the monoclonal antibody
palivizumab (Synagis®) is effective in pre-term infants, it is not indicated for use in other populations. We made a breakthrough
in developing a vaccine that targets the fusion protein, or F-protein, of the virus. The F-protein has a highly conserved amino
acid sequence called antigenic site II, which we believe is an ideal vaccine target. Palivizumab, which also targets antigenic
site II, has demonstrated protection in five randomized clinical trials. We genetically engineered a novel F-protein antigen and
enhanced its immunogenicity by exposing antigenic site II. Novavax’ RSV F Vaccine assembles into a recombinant protein nanoparticle
optimized for F-protein antigen presentation. The RSV F Vaccine elicits palivizumab-competing antibodies at levels that we expect
to confer protection. The Novavax RSV F Vaccine is the first RSV vaccine to demonstrate efficacy in a clinical trial and we are
positioned to bring the first RSV vaccine to market to combat the 64 million RSV infections that occur globally each year.
1,2
RSV Older Adults
Program
Burden
of Disease
Adults 60 years of
age and older are at increased risk for RSV disease due to age related declines in their immune systems. In this population, RSV
is an important respiratory virus, distinct from influenza viruses, that is responsible for serious lower respiratory tract disease
and may lead to hospitalization or even death. Additionally, RSV infection can lead to exacerbation of underlying co-morbidities
such as chronic obstructive pulmonary disease, asthma and congestive heart failure. RSV infection occurs as a recurrent and predictable
annual epidemic throughout the world. In the U.S., the incidence rate is 2.5 million infections per year, and RSV is increasingly
recognized as a significant cause of morbidity and mortality in the population of 64 million older adults.
3,4
Based
on our analysis of published literature applied to 2014 population estimates, the disease causes 207,000 hospitalizations and
16,000 deaths among adults older than 65. Annually, we estimate that there are approximately 900,000 medical interventions directly
caused by RSV disease across all populations.
Clinical
Trial Update
In August 2015, we
announced positive top-line data from a Phase 2 clinical trial of our RSV F Vaccine in 1,600 older adults. The clinical trial
was designed to prospectively examine the incidence of all symptomatic respiratory illnesses associated with RSV infection, in
community-living older adults who were treated with placebo. The trial also evaluated safety and immunogenicity of our RSV F Vaccine
compared to placebo. Finally, the trial estimated the efficacy of our RSV F Vaccine in reducing the incidence of respiratory illness
due to RSV. The trial was the first to demonstrate efficacy of an active RSV immunization in any clinical trial population. In
the per protocol population, the clinical trial showed statistically significant vaccine efficacy in prevention of all symptomatic
RSV disease (41%) and, in an
ad hoc
analysis, showed a decrease in RSV disease with any symptoms of lower respiratory
tract infection (45%) in older adults. The clinical trial established an attack rate for symptomatic RSV disease of 4.9% in older
adults, 95% of which included lower respiratory track symptoms. Efficacy against more severe RSV illness, defined by the presence
of multiple lower respiratory tract symptoms or signs associated with difficulty breathing, was 64% in ad hoc analyses.
We initiated a pivotal
Phase 3 clinical trial, known as Resolve™, of our RSV F Vaccine in older adults in November 2015, and in December 2015,
we completed enrollment of 11,850 older adult subjects at 60 sites in the U.S. The primary objective of the clinical trial is
the prevention of moderate-severe RSV-associated lower respiratory tract disease, as defined by the presence of multiple lower
respiratory tract symptoms. We expect to provide top-line data from this clinical trial in the third quarter of 2016.
1
Nair,
H., et al., (2010) Lancet. 375:1545 - 1555
2
WHO Acute Respiratory Infections September 2009 Update: http://apps.who.int/vaccine_research/diseases/ari/en/index2.html
3
Falsey, A.R.
et al.
(2005) NEJM. 352:1749–59 extrapolated to 2015 census population
4
Falsey, A.R.
et al.
(1995) JID
.
172:389-94
In October 2015, we
completed enrollment of 1,330 older adults in our Phase 2 rollover clinical trial of our RSV F Vaccine in the older adults who
had participated in the recently concluded prior Phase 2 clinical trial. This trial is designed to evaluate safety and immunogenicity
in response to immunization with the RSV F Vaccine during a second RSV season. We expect to provide top-line data from this trial
in the second half of 2016.
RSV Infants via Maternal Immunization
Program
Burden
of Disease
RSV is the most common
cause of lower respiratory tract infections and the leading viral cause of severe lower respiratory tract disease in infants and
young children worldwide.
5
In the U.S., RSV is the leading cause of hospitalization of infants, and globally,
is second only to malaria as a cause of death in children under one year of age.
6,7
Despite the induction of post-infection
immunity, repeat infection and lifelong susceptibility to RSV is common.
8,9
Clinical Trial Update
In September 2015,
we announced positive top-line data from a Phase 2 clinical trial of our RSV F Vaccine in 50 healthy pregnant women and their
infants. This clinical trial evaluated the safety and immunogenicity of our RSV F Vaccine in pregnant women in their third
trimester, and assessed the transplacental transfer of maternal antibodies induced by the vaccine. The trial also examined the
impact of maternal immunization on infant safety during the first year of life and RSV-specific antibody levels through the infants'
first six months of life. Immunized women demonstrated a geometric mean 14-fold rise in anti-F IgG, 29-fold rise in palivizumab-competing
antibodies and a 2.7 and 2.1-fold rise in microneutralization titers against RSV/A and RSV/B, respectively. In contrast, women
who received placebo demonstrated no significant change in antibody levels. The infants’ antibody levels at delivery averaged
90-100% of the mothers’ levels, indicating efficient transplacental transfer of antibodies from mother to infant. The estimated
half-lives of infant PCA, anti-F IgG, RSV/A and RSV/B microneutralizing antibodies, based on data through day 60, were 41, 30,
36 and 34 days, respectively.
We announced the initiation
of a global pivotal Phase 3 clinical trial, known as Prepare™, of the RSV F Vaccine in 5,000 to 8,255 healthy pregnant women
in December 2015. The primary objective of the Prepare trial is to determine the efficacy of maternal immunization with the RSV
F Vaccine against symptomatic RSV lower respiratory tract infection with hypoxemia in infants through the first 90 days of life.
This Phase 3 trial utilizes a group sequential design and is expected to take between two and four years to complete. This trial
is supported by a grant (the “Grant”) of up to $89.1 million from BMGF. The Grant will support development activities,
product licensing efforts and WHO prequalification of our RSV F Vaccine. We concurrently entered into a Global Access Commitments
Agreement (“GACA”) with BMGF as a part of the grant agreement (the “Grant Agreement”). Under the terms
of the GACA, we agreed to make the RSV F Vaccine available and accessible at affordable pricing to people in certain low and middle
income countries.
In November 2014,
the U.S. Food and Drug Administration, Center for Biologics Evaluation and Research (“FDA”) granted Fast Track designation
to our RSV F Vaccine for protection of infants via maternal immunization. Fast Track designation is intended for products that
treat serious or life-threatening diseases or conditions, and that demonstrate the potential to address unmet medical needs for
such diseases or conditions. The program is designed to facilitate development and expedite review of drugs to treat serious and
life-threatening conditions so that an approved product can reach the market expeditiously.
5
Nair, H., et al., (2010) Lancet. 375:1545 - 1555
6
Hall, C.B.
et al
. (2013) Pediatrics;
132(2):E341-348
7
Oxford Vaccine Group: http://www.ovg.ox.ac.uk/rsv
8
Glezen, W.P.
et al
. (1986) Am J Dis
Child; 140:543-546
9
Glenn, G.M.
et al.
(2016) JID;
213(3):411-12
RSV Pediatrics
Program
Burden
of Disease
There are currently
approximately 18 million children in the U.S. between six months and five years of age.
10
In the U.S., RSV is
responsible for approximately 57,000 hospitalizations of children under five years of age annually, the vast majority of which
occur in infants less than one year old, and especially those under six months of age.
11,12,13,14,15
Clinical Trial Update
In September 2015,
we announced positive top-line data from a Phase 1 clinical trial of our RSV F Vaccine in healthy children between two and six
years of age. This clinical trial evaluated the safety and immunogenicity of our RSV F Vaccine, with one or two doses, with or
without aluminum phosphate adjuvant. Trial enrollment was concluded with a smaller than planned cohort so that dosing could be
completed ahead of the 2014-15 RSV season. The vaccine was well-tolerated and serum samples collected from a subset of 18 immunized
children in the per-protocol population, demonstrated that the RSV F Vaccine was highly immunogenic at all formulations and regimens.
There were greater than 10-fold increases in both anti-F IgG and PCA antibody titers in the adjuvanted group and greater than
6-fold increases in anti-F IgG and PCA antibody titers in the unadjuvanted group. We are assessing the data from this clinical
trial and in discussion with the regulatory agencies regarding the next steps in the development of our RSV F Vaccine for pediatrics.
Influenza
Influenza is a world-wide
infectious disease that causes illness in humans with symptoms ranging from mild to life-threatening or even death. Serious illness
occurs not only in susceptible populations such as pediatrics and older adults, but also in the general population because of
unique strains of influenza for which most humans have not developed protective antibodies. We are developing vaccine candidates
for both seasonal and pandemic influenza. Current estimates for seasonal influenza vaccine growth in the top seven markets (U.S.,
Japan, France, Germany, Italy, Spain and UK), show a potential increase from approximately $3.2 billion in the 2012/13 season
to $5.3 billion by the 2021/2022 season.
16
Traditional vaccine
manufacturing methods utilize live influenza virus to infect eggs in order to produce trivalent seasonal influenza vaccine candidates.
Our egg-free recombinant nanoparticle technology does not utilize either a live influenza virus or eggs, but rather a recombinant
baculovirus and insect cells, which allows for the product to potentially be rapidly manufactured and quickly adapted to changing
influenza strains. Further, we are developing a quadrivalent seasonal vaccine candidate, which we expect to elicit broader protection
from circulating influenza strains. We are also exploring the development of novel influenza nanoparticle vaccine candidates.
There are currently four quadrivalent seasonal influenza vaccines licensed in the U.S., although additional quadrivalent seasonal
influenza vaccines are expected to be licensed over the next several years.
10
U.S. Census. www.census.go/population/international/data/idb/informationGateway.php
11
Stockman, L.J. et al (2012) Pediatr Infect Dis J. 31: 5-9
12
CDC update May 5, 2015. http://www.cdc.gov/rsv/research/us-surveillance.html
13
Boyce, T.G. et al (2000) Pediatrics; 137: 865-870
14
Hall, C.B. et al (2009) NEJM; 360(6): 588-98
15
Hall, C.B. et al (2013) Pediatrics; 132(2): E341-8
16
Influenza Vaccines Forecasts. Datamonitor (2013)
Quadrivalent
Seasonal Influenza Vaccine
Burden
of Disease
The Advisory Committee
for Immunization Practices of the Center for Disease Control and Prevention (“CDC”) recommends that all persons aged
six months and older be vaccinated annually against seasonal influenza. Influenza is a major burden on public health worldwide:
an estimated one million deaths each year are attributed to influenza.
17
It is further estimated that, each year,
influenza attacks between 5% and 10% of adults and 20% to 30% of children, causing significant levels of illness, hospitalization
and death.
18
Recombinant seasonal influenza vaccines, like the candidate we are developing, have an important
advantage: once licensed for commercial sale, large quantities of vaccines can potentially be manufactured quickly and in a cost-effective
manner, without the use of either the live influenza virus or eggs.
Clinical
Trial Update
In July 2015, we reported
positive data from our Phase 2 clinical trial of our quadrivalent seasonal influenza virus-like-particle (“VLP”) vaccine
candidate in 400 healthy adults that we initiated in November 2014. These data show that our quadrivalent seasonal influenza VLP
vaccine candidate is well-tolerated, and can induce influenza antibody responses that met the immunogenicity targets. These results
demonstrate the potential for our quadrivalent seasonal influenza VLP vaccine candidate to meet the FDA criteria for accelerated
approval.
We were awarded a
contract by HHS BARDA in 2011 to fund the development of both our quadrivalent seasonal influenza and pandemic influenza VLP vaccine
candidates. This is a cost-plus-fixed-fee contract, which reimburses us for allowable direct contract costs incurred plus allowable
indirect costs and a fixed-fee earned in the ongoing clinical development and product scale-up of our vaccine candidates. We announced
that HHS BARDA had exercised and initiated a two-year option to our contract in September 2014, which not only extended the expected
term of the contract until September 2016, but also added scope to support our development activities leading up to planned Phase
3 clinical trials and $70 million of funding on top of the remainder of the $97 million base period funding. In June 2015, the
contract was amended to increase the funding by $7.7 million to allow for the recovery of additional costs under the contract
relating to the settlement of indirect rates for fiscal years 2011 and 2012. This additional amount was received and recorded
as revenue in the second quarter of 2015. During the three months ended March 31, 2016, we recognized revenue of $1.9 million
and have recognized approximately $113 million in revenue since the inception of the contract. In recent meetings with HHS BARDA,
we have been discussing the next steps in both our seasonal influenza VLP vaccine program and our pandemic influenza VLP vaccine
program, as well as some of the delays associated with our development of both vaccine candidates. We have also discussed with
HHS BARDA our preliminary efforts at developing influenza nanoparticle vaccine candidates. We expect to continue discussions with
HHS BARDA during 2016 and to present plans for continued clinical and product development, although there can be no guarantee
that the HHS BARDA contract will not be terminated early or will be extended beyond September 2016.
Pandemic H7N9 Influenza Vaccine
Burden
of Disease
Prevention of the
potential devastation of 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 influenza 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.
Industry and health experts have focused attention on developing a monovalent influenza vaccine against either the H5N1 strain
or the H7N9 strain as potential key defenses against future pandemic disease threats.
17
Resolution of the World Health Assembly. (2003) WHA56.19. 28
18
WHO position paper (2012) Weekly Epidemiol Record;87(47):461–76
Clinical
Trial Update
We have developed
and delivered compelling safety and immunogenicity data on two pandemic vaccine candidates, H5N1 and H7N9. In September 2014,
we announced positive results from a Phase 1/2 clinical trial of our H7N9 influenza VLP vaccine candidate adjuvanted with Matrix-M
in 610 healthy adults. The Phase 1/2 clinical trial was designed as a dose-ranging, randomized, observer-blinded, placebo-controlled
clinical trial, to determine the contribution of Matrix-M to potential antigen dose sparing regimens. Our H7N9 influenza vaccine
candidate, with and without Matrix-M, was highly immunogenic and well-tolerated. Matrix-M adjuvanted formulations demonstrated
immunogenicity and dose-sparing benefits relative to unadjuvanted antigen. Hemagglutination-inhibiting antibody titers were comparable
to those reported in prior clinical trials, and the vaccine elicited significant anti-neuraminidase antibodies. In October 2014,
the FDA granted Fast Track designation to our H7N9 influenza vaccine candidate with Matrix-M.
Our pandemic influenza
vaccine program is supported by our HHS BARDA contract. Like our seasonal influenza vaccine program, we expect to continue discussions
with HHS BARDA during 2016 and to present plans for continued clinical and product development of our pandemic influenza vaccine
candidate, although there can be no guarantee that the HHS BARDA contract will not be terminated early or will be extended beyond
September 2016.
Combination Respiratory (Influenza
and RSV)
Given the ongoing
development of our seasonal influenza vaccine candidate and our RSV F Vaccine, we see an important opportunity to develop a combination
respiratory vaccine candidate. Early preclinical development efforts have given us confidence that such a combination vaccine
is viable, and in animal models, provides acceptable immunogenicity. We expect to initiate a Phase 1 clinical trial of a combination
respiratory vaccine in the first half of 2017.
Ebola Virus (EBOV)
EBOV, formerly known
as Ebola hemorrhagic fever, is a severe, often fatal illness in humans. Multiple strains of EBOV have been identified, the most
recent of which, the Makona EBOV strain, is associated with a case fatality rate of 50% to 90%.
19
There are currently
no licensed treatments proven to neutralize the virus, but a range of blood, immunological and drug therapies are under development.
Despite the development of such therapies, current vaccine approaches target either a previous strain of the virus or were initially
developed to be delivered by genetic vectors. In contrast, our EBOV glycoprotein vaccine candidate (“Ebola GP Vaccine”)
was developed using the Makona EBOV strain.
In July 2015, we announced
data from our Phase 1 clinical trial of our Ebola GP Vaccine in ascending doses, with and without our Matrix-M adjuvant, in 230
healthy adults. Participants received either one or two intramuscular injections ranging from 6.5µg to 50µg of antigen,
with or without adjuvant, or placebo. Immunogenicity was assessed at multiple time points, including days 28 and 35. These Phase
1 data demonstrated that our Ebola GP Vaccine is highly immunogenic, well-tolerated and, in conjunction with our proprietary Matrix-M
adjuvant, resulted in significant antigen dose-sparing. Although the adjuvanted Ebola GP Vaccine was highly immunogenic at all
dose levels, the adjuvanted two-dose regimens induced Ebola anti-GP antibody geometric mean responses between 45,000 and 70,000
ELISA units, representing a 500 to 750-fold rise over baseline at day 35. In 2015, we also announced successful data from two
separate non-human primate challenge studies of our Ebola GP Vaccine in which, in both cases, the challenge was lethal for
the control animal, whereas 100% of the immunized animals were protected.
19
WHO.
http://www.who.int/mediacentre/factsheets/fs103/en/
CPLB Programs (India)
CPL Biologicals Private
Limited (“CPLB”), our joint venture company with Cadila Pharmaceuticals Limited (“Cadila”) in India, is
actively developing a number of vaccine candidates that were genetically engineered by us. CPLB is owned 20% by us and 80% by
Cadila. CPLB operates a manufacturing facility in India for the production of vaccines.
Seasonal Influenza
CPLB received marketing
authorization, the Indian equivalent of approval of a Biologics License Application (“BLA”), for its recombinant trivalent
seasonal VLP influenza vaccine in 2015. Because the market for seasonal influenza in India is limited and highly competitive,
CPLB is currently evaluating its marketing strategy for this vaccine.
Rabies
CPLB successfully
completed Stage II of its 2-stage Phase 1/2 clinical trial in India of a rabies G protein vaccine candidate that we genetically
engineered. The objective was to select a dose and regimen for a recombinant vaccine that can be administered both as a pre-exposure
prophylaxis for residents of certain higher-risk geographies and travelers to such locations, and as a post-exposure prophylaxis
using fewer doses than the current standard of care. In October 2014, CPLB presented clinical results from Stage I of the Phase
1/2 clinical trial, demonstrating that the vaccine candidate was well-tolerated and vaccine recipients, at various doses levels
and schedules, showed seroprotective antibody levels at day 14 that were sustained through day 180. CPLB is seeking permission
to conduct a Phase 3 clinical trial, currently expected to initiate in 2016.
Discovery Programs
Our vaccine platform
technology provides an efficient system that has the potential to rapidly develop antigens to selected targets, refine manufacturing
processes and optimize development across multiple vaccine candidates. In conjunction with government and/or global health authorities,
we believe we can address emerging disease threats with pandemic potential. In addition to our response to the H7N9 influenza
strain, we have developed a vaccine candidate to Middle East respiratory syndrome (“MERS”), caused by a novel coronavirus
first identified in 2012. MERS emerged as a disease threat in 2013, and is currently being monitored by global health agencies,
with the WHO reporting significant confirmed cases of infection and deaths. The MERS virus is a part of the coronavirus family
that includes the severe acute respiratory syndrome coronavirus (“SARS”). Within weeks of obtaining the sequence of
the circulating MERS strain, we successfully produced a vaccine candidate designed to provide protection. This vaccine candidate
is based on the major surface spike protein, which we had previously identified as the antigen of choice in our work with a SARS
vaccine candidate. In 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 preclinical program, we believe that our MERS vaccine candidate offers a viable
option to interested global public health authorities. We continue to pursue funding opportunities to move these programs into
the next steps of development.
Convertible
Senior Notes
In the first quarter
of 2016, we issued $325 million aggregate principal amount of convertible senior unsecured notes that will mature on February
1, 2023 (the “Notes”). The Notes bear cash interest at a rate of 3.75%, payable on February 1 and August 1 of each
year, beginning on August 1, 2016. The Notes are not redeemable prior to maturity and are convertible into shares of the Company’s
common stock. The initial conversion rate for the Notes is 146.8213 shares of the Company’s common stock per $1,000 principal
amount of the Notes, which is equivalent to an initial conversion price of approximately $6.81 per share of the Company’s
common stock, representing an approximate 22.5% conversion premium based on the last reported sale price of the Company’s
common stock of $5.56 per share on January 25, 2016.
In connection
with the issuance of the Notes, we paid $38.5 million, including expenses, to enter into privately negotiated capped call
transactions with certain financial institutions (the “capped call transactions”). The capped call transactions
are expected generally to reduce the potential dilution upon conversion of the Notes in the event that the market price per
share of our common stock, as measured under the terms of the capped call transactions, is greater than the strike price of
the capped call transactions, which initially corresponds to the conversion price of the Notes, and is subject to
anti-dilution adjustments generally similar to those applicable to the conversion rate of the Notes. The cap price of the
capped call transactions will initially be $9.73 per share, which represents a premium of approximately 75% based on the last
reported sale price of our common stock of $5.56 per share on January 25, 2016, and is subject to certain adjustments under
the terms of the capped call transactions. If, however, the market price per share of the Company’s common stock, as
measured under the terms of the capped call transactions, exceeds the cap price of the capped call transactions, there would
nevertheless be dilution upon conversion of the Notes to the extent that such market price exceeds the cap price of the
capped call transactions.
Sales of Common Stock
In March 2015, we
completed a public offering of 27,758,620 shares of our common stock, including 3,620,689 shares of common stock that were issued
upon the exercise in full of the option to purchase additional shares granted to the underwriters, at a price of $7.25 per share
resulting in net proceeds of approximately $190 million.
In 2012, we entered
into an At Market Issuance Sales Agreement (“Sales Agreement”), under which we sold an aggregate of $50 million in
gross proceeds of our common stock. During 2015, we sold 1.4 million shares at an average sales price of $10.63 per share, resulting
in approximately $15 million in net proceeds. The Sales Agreement was fully utilized at that time.
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, 2015, as filed with the SEC.
Recent Accounting
Pronouncements Not Yet Adopted
In February 2016,
the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02,
Leases (Topic 842)
(“ASU
2016-02”) that increases transparency and comparability among organizations by requiring the recognition of lease assets
and lease liabilities on the balance sheet and disclosure of key information about leasing arrangements for both lessees and lessors.
The standard will be effective January 1, 2019 for us, with early adoption permitted. The standard will be applied using a modified
retrospective approach to the beginning of the earliest period presented in the financial statements. We are currently evaluating
when we will adopt the standard and the expected impact to our consolidated financial statements and related disclosures.
In March 2016, the
FASB issued ASU 2016-09,
Compensation - Stock Compensation (Topic 718)
(“ASU 2016-09”) that simplifies
the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either
equity or liabilities, and classification on the statement of cash flows. The standard will be effective January 1, 2017 for us,
with early adoption permitted. We are currently evaluating when we will adopt the standard and the expected impact to our
consolidated financial statements and related disclosures.
In May 2014, the FASB
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 price to the performance obligations in the contract and recognizing revenue when (or as) the entity satisfies
the performance obligations. In July 2015, the FASB approved a one-year deferral of the effective date of the new standard to
2018 for public companies, with an option that would permit companies to adopt the new standard as early as the original effective
date of 2017. Early adoption prior to the original effective date is not permitted. ASU 2014-09 allows for either full retrospective
or modified retrospective adoption. We are evaluating the potential impact that ASU 2014-09 will have on our consolidated financial
position and results of operations.
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 March 31, 2016 and
2015
(amounts in tables are presented in thousands, except per share information)
Revenue:
|
|
Three Months Ended
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
Change
2015 to
2016
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
4,218
|
|
|
$
|
9,877
|
|
|
$
|
(5,659
|
)
|
Revenue for the
three months ended March 31, 2016 was $4.2 million as compared to $9.9 million for the same period in 2015, a decrease of
$5.7 million or 57%. Revenue for the three months ended March 31, 2016 and 2015 is primarily comprised of services
performed under the HHS BARDA contract, and to a lesser extent, the Grant Agreement. The decrease in revenue under the HHS
BARDA contract of $7.3 million is primarily due to a lower level of activity in the three months ended March 31, 2016 as
compared to the same period in 2015, which also included revenue of $3.1 million associated with our quadrivalent seasonal
influenza VLP vaccine (“205 Trial”). This decrease in revenue was partially offset by $1.6 million in revenue
recorded under the Grant Agreement relating to our ongoing RSV F Vaccine Phase 3 clinical trial for the protection of infants
via maternal immunization (Prepare).
For 2016, we expect
our revenue, relative to 2015, to be driven by the outcome of our ongoing discussions with HHS BARDA relating to the next steps
in the development of our quadrivalent seasonal and pandemic influenza vaccine candidates. In addition, we expect revenue in 2016
under the Grant Agreement to be significantly higher than in 2015.
Expenses:
|
|
Three Months Ended
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
Change
2015 to
2016
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
$
|
68,952
|
|
|
$
|
28,347
|
|
|
$
|
40,605
|
|
General and administrative
|
|
|
10,528
|
|
|
|
5,843
|
|
|
|
4,685
|
|
Total expenses
|
|
$
|
79,480
|
|
|
$
|
34,190
|
|
|
$
|
45,290
|
|
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 our 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 $69.0 million for the three months ended March 31, 2016 from $28.3 million for the same period in 2015,
an increase of $40.6 million, or 143%. The increase in research and development expenses was primarily due to increased costs
associated with the clinical trials and development activities of our RSV F Vaccine and higher employee-related costs, including
increased non-cash stock-based compensation of $2.2 million. For 2016, we expect a significant increase in research and development
expenses primarily due to our ongoing RSV F Vaccine candidate clinical trials and employee-related and facility costs to support
product development of our RSV F Vaccine candidate and other potential vaccine candidates.
Expenses by
Functional Area
We track our 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 March 31, 2016, we had 410 employees dedicated to our research
and development programs versus 287 employees as of March 31, 2015. 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 research and development expenses by functional area for the three months ended March 31 (in millions).
|
|
2016
|
|
|
2015
|
|
Manufacturing
|
|
$
|
28.6
|
|
|
$
|
17.3
|
|
Vaccine Discovery
|
|
|
1.5
|
|
|
|
1.6
|
|
Clinical and Regulatory
|
|
|
38.9
|
|
|
|
9.4
|
|
Total research and development expenses
|
|
$
|
69.0
|
|
|
$
|
28.3
|
|
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 preclinical 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.
General
and Administrative Expenses
General and administrative
expenses increased to $10.5 million for the three months ended March 31, 2016 from $5.8 million for the same period in 2015, an
increase of $4.7 million, or 80%. The increase was primarily due to higher employee-related costs, including increased non-cash
stock-based compensation of $0.8 million, and professional fees for pre-commercialization activities, as compared to the same
period in 2015. At March 31, 2016, we had 55 employees dedicated to general and administrative functions versus 38 employees as
of March 31, 2015. For 2016, we expect general and administrative expenses to continue to increase primarily due to increased
employee costs and activities related to the anticipated commercialization of our RSV F Vaccine.
Other Income (Expense):
|
|
Three Months Ended
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
Change
2015 to
2014
|
|
Other Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income
|
|
$
|
473
|
|
|
$
|
121
|
|
|
$
|
352
|
|
Interest expense
|
|
|
(2,430
|
)
|
|
|
(36
|
)
|
|
|
(2,394
|
)
|
Other expense
|
|
|
(33
|
)
|
|
|
(142
|
)
|
|
|
109
|
|
Total other income (expense)
|
|
$
|
(1,990
|
)
|
|
$
|
(57
|
)
|
|
$
|
(1,933
|
)
|
We had total other
expense of $2.0 million for the three months ended March 31, 2016 as compared to $0.1 million for the same period in 2015. Our
investment income increased in the three months ended March 31, 2016 as compared to the same period in 2015 due to higher cash,
cash equivalents and marketable securities balances. Our interest expense increased due to the issuance of the Notes in the
first quarter of 2016.
Net Loss:
|
|
Three Months Ended
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
Change
2015 to
2016
|
|
Net Loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(77,252
|
)
|
|
$
|
(24,370
|
)
|
|
$
|
(52,882
|
)
|
Net loss per share
|
|
$
|
(0.29
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.19
|
)
|
Weighted shares outstanding
|
|
|
270,179
|
|
|
|
241,223
|
|
|
|
28,956
|
|
Net loss for the three
months ended March 31, 2016 was $77.3 million, or $0.29 per share, as compared to $24.4 million, or $0.10 per share, for the same
period in 2015, an increased net loss of $52.9 million. The increased net loss was primarily due to higher research and development
spending, including increased costs relating to the clinical trials and development activities of our RSV F Vaccine and higher
employee-related costs, as compared to the same period in 2015.
Weighted average shares
outstanding for the three months ended March 31, 2016 increased by 12.0% as compared to the same period in 2015, primarily as
a result of sales of our common stock in 2015.
Liquidity Matters
and Capital Resources
Our future capital
requirements depend on numerous factors including, but not limited to, the commitments and progress of our research and development
programs, the progress of preclinical 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 preclinical studies and clinical trials and other research and development activities.
As of March 31, 2016,
we had $433.9 million in cash and cash equivalents and marketable securities as compared to $230.7 million as of December 31,
2015. These amounts consisted of $132.2 million in cash and cash equivalents and $301.6 million in marketable securities as of
March 31, 2016 as compared to $93.1 million in cash and cash equivalents and $137.5 million in marketable securities as of December
31, 2015.
The following table
summarizes cash flows for the three months ended March 31, 2016 and 2015 (in thousands):