Novavax, Inc.

Good morning and welcome to Novavax second quarter 2022 financial results and operational highlights conference call. All participants will be in listen only mode. Should you need assistance, please signal a conference specialist by pressing the start key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch tone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Sylvia Taylor, Senior Vice President of Global Corporate Affairs and Investor Relations. Please go ahead.

Good afternoon, and thank you all for joining us today to discuss our second quarter of 2022 operational highlights and financial results. A press release announcing our results is currently available on our website at novavax.com. and an audio archive of this conference call will be available on our website later today. Before we begin with prepared remarks, I need to remind you that this presentation includes forward-looking statements, including information relating to the future of Novavax, its key strategic priorities, plans and prospects for 2022, and financial guidance, including revenue and gross margin, the ongoing development of our vaccine candidates, including anticipated timing of trials and results, the scope, timing, and outcome of future regulatory filings and actions, the efficacy, safety, and intended utilization of our vaccine candidates, the global market opportunities for our vaccine candidates, the future availability of our vaccine candidates, and key upcoming milestones. Each forward-looking statement contained in this presentation is subject to risks and uncertainties that could cause actual results to differ materially from those projected in such statements. Additional information regarding these factors appears under the heading Cautionary Note Regarding Forward-Looking Statements in the slide deck we issued this afternoon and under the heading Risk Factors in our most recent Form 10-K and our second quarter Form 10-Q filed with the Securities and Exchange Commission and available at sec.gov and on our website at novavax.com, as well as subsequent filings with the SEC. The forward-looking statements in this presentation speak only as of the original date of this and we undertake no obligation to update or revise any of these statements. Please turn to slide three. During this conference call, in order to provide greater transparency regarding our operating performance, we refer to certain non-GAAP financial measures that involve adjustments to GAAP results. Any non-GAAP financial measures presented should not be considered to be an alternative to financial measures required by GAAP. should not be considered measures of liquidity and are unlikely to be comparable to non-GAAP financial measures provided by other companies. Any non-GAAP financial measures referenced on this call are reconciled to the most directly comparable GAAP financial measure in a table available in the Investors section of our website at Novavax.com. Please turn to slide four. Joining me today is Stan Erck, President and CEO, who will provide an overview of recent achievements and our upcoming strategic priorities. Additionally, Dr. Philip Dubovsky, Chief Medical Officer, will discuss our clinical development updates across our pipeline, and John Trezino, Chief Commercial Officer and Chief Business Officer, will provide an update on the status of our global COVID-19 vaccine rollout, our recent progress in our label expansion, and our global commercial strategy. Finally, Jim Kelly, Chief Financial Officer and Treasurer, will provide an overview of our financial results. Dr. Greg Glenn, President of Research and Development, will also be available for the Q&A section at the end of today's call. I'd now like to hand the call over to Stan. Please turn to slide five.

Thanks, Sylvia, and thanks to everyone for joining us today to discuss Novavax's second quarter results. Once again, we have had a very significant quarter of achievements. We continue to make the transition into a commercial company, and we continue to see more and more evidence that our vaccine platform is second to none. In the next few minutes, I and my team will share with you some of the many achievements and breakthroughs that are transforming the company. While we do that, let me take a moment to address what is probably the most visible aspect of our earnings report. Our revenue for the quarter came in well below anyone's projections, and with respect to all of 2022, we're expecting to fall short of our earlier projections. For the quarter, revenue was $186 million, a significant shortfall from both the first quarter results and, as I said, from our expectations. The shortfall was a result of a couple of issues, one of which is short-term, the timing of our shipments to Europe. The other is a broader issue and will take some time to work through, and this is our changes in expectations from two major markets, the U.S. and the COVAX facilities. globally and particularly with respect to COVAX, there was a surge in supply and when coupled with challenges COVAX had with the distribution into low and middle income countries, this limited the need for them to order contracted product from us and other vaccine manufacturers. In the case of the US, I believe we were late to the market. And US vaccination was driven by what was available and shown to work MRNA vaccines. In addition, now that we are approved for primary vaccination, we are not yet approved for adolescence and boosting, which are critical indications, and we are making our way through this regulatory process. We are hopeful that we can get through this in days and weeks, but the absence of these indications slows the global rollout of our vaccine. Although there have been and will continue to be many ups and downs in these markets, we are now projecting that we will have no new revenues in 22 from the U.S. and from COVAX. Originally, we had planned to have revenue from these two markets arising from the sale of 110 and 350 million doses, respectively. In terms of where we go from here, I'm happy to say that just since July 1st, we have filled over 400 million in revenue. While we're talking about the second quarter today, this was such an extraordinary beginning to quarter three that I wanted to tell you what we have done through today. From an operational standpoint, we have, again, had one of the most productive and transformative quarters in our history. In the U.S., immunizations are currently underway with our COVID-19 vaccine, which is the first protein-based vaccine offered to Americans. This followed our emergency use authorization and unanimous recommendation from the FDA's Advisory Committee, VRBPAC, and the CDC's Advisory Committee on Immunization Practices. Globally, we continued the rollout of our COVID-19 vaccine. We have authorization in 43 countries, and as of today, we have delivered over 73 million doses around the world. We initiated new studies in adolescents and younger children. and we made progress in expanding our label. We have already received authorizations for boosting in adolescents and markets around the world with more to come. And this past quarter, we announced new data for a prototype vaccine showing that immune responses to our vaccines have proven to give broad protection against variants, which we think is a unique feature of our recombinant nanoparticle adjuvanted vaccines. We also showed data on our vaccines durability and breadth of response through 12 months. At the same time, we know the market is quickly evolving and during the quarter we advanced our Omicron strain vaccine program. I will say it one more time. This is a transformational year for the company and we're building on a great vaccine platform. And having said that, we are in a very dynamic environment. We have all the opportunities that having a great product gives us But as I've already said, we also have a number of uncertainties that we are constantly managing. It's important to note that while some of our delivery schedules have been shifted into 2023, total demand under most APAs remains unchanged. With all this in mind today, we are revising our 2022 full year revenue guidance to $2 to $2.3 billion, and we'll talk more about this during our call today. Through our commercial readiness efforts and global labor expansion to date, we believe we are laying the foundation for a successful transition to a commercial market in 2023 and are poised to play a significant role in the future COVID-19 landscape. With that, I'd now like to hand it over to Philip.

Thanks, Dan. Please skip slide six and jump to slide seven. Our clinical development program is collecting data to expand our label for additional indications and populations. Today, I'll discuss clinical updates for three key areas, homologous and heterologous boosting, expansion into younger pediatric populations, and the development of our Omicron variant vaccine. Okay, let's go to slide 8-9, please. This is data recently made available by the U.S. government and NIH scientists, identifying a quote of protection for our vaccine. This correlate of protection was identified in our US-Mexico phase 3 study, where a majority of the cases were caused by variants. The study concludes that while both pseudo-neutralization and IgG can serve as quotes of protection, the IgG seems to better predict protective responses. On the bottom of the slide are the antibody levels associated with various levels of protection. This study confirms that IgG is critical to understand the protective efficacy of our vaccine. Now let's move to slide 10, please. What's displayed here is the immune response kinetics from our U.S.-Australia study after a two-dose priming series, a boost at six months, and another boost at 12 months. You can see a peak following two doses, which decays over six months, is boosted with a single dose, followed by a slower decay over the subsequent six months, and finally, a very good boost with a fourth dose. Okay, give me a click. Here, I've highlighted the antibody levels after the six-month boost are completely remain over the level associated with protection in our Phase III study. This gives us confidence we maintain protective immune responses over time. Okay, let's go to slide 11, please. Displayed here is antibody kinetics from our U.S.-Mexico Phase III study. You can see a peak after two doses, which decays through month 11 with a high boost with a single dose achieving a 27-fold increase from the pre-boost levels. Okay, give me a click. And here, what we've done is overlay the protective thresholds derived from the U.S. government scientists over our vaccine response. You can see that at seven months, this data predicts approximately 88% efficacy, and importantly, after the boost, high immune responses are achieved that are associated with more than 95% protection. Okay, let's go to slide 12. Here, we've displayed the immune responses of our prototype vaccine, what our prototype vaccine induces against Omicron BA1 subvariants using our validated assay. You see a very similar pattern to what you saw on the previous slide, and importantly, after boosting at 11 months, the antibody levels are comparable to the prototype responses we saw on the previous slide. Okay, give me a build. And once again, we've applied the government cortisol protection thresholds. You can see that significant protection can be expected after two doses. And a 95 protective level is predicted after boosting dose that was delivered at 11 months. I remind you that the model is developed from our data in the Phase III study, in which the majority of cases were caused by variants, suggesting relevance for this analysis. Okay, let's go to slide 13. Here on the left side are the immune responses after two doses against prototype VA1, VA2, and VA5. You can see that 100% of the participants seroconverted after two doses. On the right-hand side, we display the responses after three doses. After boosting for all the variants, you can see we've achieved the levels comparable to those seen in the Phase III study that was associated with over 90% protection. Okay, let's go to slide 14. And here we see data in a multidimensional presentation of the immune responses from our U.S.-Mexico Phase III study called antigenic cartography. This method displays the ability of the vaccine-induced antibody to recognize variants by proteins. The prototype is indicated in dark blue, and the closer the variants appear to the dark blue circle, the better the immune responses recognize the variants. Each square in the grid represents a two-fold difference in antibody levels. Thus, two squares represents a four-fold difference. On the left-hand side, we show antibody binding after two doses in the priming series. While there was 100 percent seroconversion to all Omicron subvariants after two doses, The antigenic distance between the matched prototype strain and the Omicron cell variants range from 7.9 to 11.8-fold different. On the right-hand side, after single dose, the antigenic distance decreases for all of the Omicron variants, with BA.5 decreasing to just 2.9-fold difference, which could be considered a matched response in the influenza language. This analysis leads us to believe that as we immunize with additional doses of our recombinant spike protein vaccine, we minimize the antigen distance and begin to observe a more universal-like response against variants. Okay, let's turn to slide 15 for a quick summary. Clearly, we don't know what will emerge after BA.5, so forward drip will be a key issue to be addressed for all COVID vaccines. But boosting with our technology may be an attractive option as it provides both high levels of antibodies recognizing variants and a durable immune response. Although it's not certain a very specific vaccine will provide significant clinical benefit, we're evaluating a number of constructs in clinical studies, and I'll describe those studies in a couple of slides. But first, let's move through slide 16 to slide 17 and talk about our pediatric development. This is an ongoing placebo-controlled age de-escalation study that's evaluating the safety, immunologic effectiveness, and clinical efficacy in children 6 months to 11 years of age. We will evaluate our standard two-dose schedule with a six-month boost. The study has three age bands, six to 11, two to five, and six months to 23 months, and the vaccine will be evaluated in a stepwise approach. Sentinel cohort in six to 11-year-olds has already been enrolled, and after the safety is reviewed, vaccination will continue. The study is ongoing in the U.S., and we plan to expand the study to the countries indicated on the slide. Okay, let's go to slide 19, my last slide. And this is the ongoing study that will compare the performance of our prototype vaccine to a BA.1 variant vaccine and a BA.5 variant vaccine in adults who have received two or more previous doses of mRNA vaccine. Group 1 has been enrolled and will compare our prototype vaccine to a BA.1 vaccine as well as a BA.1 plus prototype format. We expect top line results toward the end of the third quarter and to initiate Group 2 in the fourth quarter. In this study, we will compare the variant-specific immune responses among the trial arms to support a data-driven decision about the utility of variant vaccines if it applies to our adjuvanted recombinant protein technology. If it continues to be deemed desirable, our goal is to have variant vaccines ready for regulatory evaluation in the fourth quarter. Okay, let me hand it over to John for the commercial perspective.

Thanks, Philip. Now let's discuss the status of our commercial rollout globally. Turning to the rollout, what I'd like to do is go to slide 21. Since the start of our commercial launch to date, we and our partners have delivered over 73 million doses of Nuvaxavit and Covax around the world. As Stan mentioned, this includes over 23 million doses delivered since the start of the third quarter, including 3.2 million doses delivered in the United States. We are pleased to report that our vaccine is now available in 47 states across the U.S., and vaccinations are underway. Our over 73 million doses delivered to date include deliveries by our partners into their licensed territories. Serum Institute of India, SK Bioscience and Takeda have all successfully delivered over 17 million doses to licensed territories since the start of our commercial launch, including in Japan, South Korea, India, Indonesia and Thailand. Receiving booster and adolescent label expansions globally. has taken longer than expected, and expanding our label is our core commercial priority. When coupled with global oversupply, this drove a shift in demand for our vaccine from the second quarter into the second half of the year and into 2023. It is important to note that our total contracted demand remains mostly unchanged, although after ongoing discussions with Gavi, we no longer expect to receive an order from the COVAX facility in 2022. In the UK, we recently amended our supply agreement, which now includes the purchase of a minimum of 1 million doses and up to an additional 15 million doses contingent upon receiving supportive policy recommendations from the UK's policy making body, JCVI. The agreement also includes an option to purchase up to an additional 44 million doses through 2024. And for Europe, we expect to deliver the remainder of our total order, which is currently 65 million doses from the previous 70 million doses in the second half of this year and into 2023. Next, label expansion. Please turn to slide 22. For boosting to date, we've received authorizations in Australia for homologous and heterologous boosting, authorization in New Zealand and approval in Japan in partnership with Takeda. Additionally, over a dozen policy-making bodies have issued guidance allowing for the use of Nuvaxavit as a homologous and heterologous booster dose in adults, including Australia, Canada, Germany, South Korea, and other markets. For boosting, we've also completed additional submissions for authorization for boosting in the EU, Great Britain, and Switzerland, and will submit in the US by the end of this month. For pediatric and adolescent label expansion, today we are expanding our label into adolescents ages 12 to 17, and we've already begun clinical development in pediatrics ages six months to 11 years of age to support additional expansions to our label in the months to come. For adolescents, we've received authorizations to date in the EU, Australia, India, and Thailand in partnership with Serum Institute, and in Japan in partnership with Takeda. Importantly, following the European Commission's adolescent authorization, at least two NITAGs in the EU have issued recommendations permitting use of Nuvaxavid as a third dose and or as a heterologous booster in adolescents 12 to 17. We've also completed adolescent submissions in the US, Great Britain, Canada, Switzerland and New Zealand, Taiwan, and the World Health Organization. As I mentioned, beyond adolescents, we also leverage data from our recently initiated Phase 2b3 Global Clinical Trial to pursue label expansion in younger children, six months to 11 years of age, positioning us to capture significant market share in 2023. Now please turn to slide 23. As we continue to supply our vaccine globally, we remain confident in our competitive product profile, including our vaccines efficacy, well tolerated safety profile, durability of protection, and ability to address both current and future variant strains. Recognizing our vaccines utility in the ongoing fight against COVID-19, our commercial efforts are also focused on driving uptake of our prototype vaccine. To that end, we've deployed branded and unbranded advertising campaigns in various markets to build awareness and promote broad market access. And finally, we are broadening our global commercial footprint and have established additional offices to execute locally in key markets around the world, including our new European regional office in Switzerland and expansion into Asia Pacific currently underway in Australia and Singapore. Looking ahead, we expect to see a transition from the pandemic phase to a more traditional commercial market in 2023 in the U.S. and other key high-income country markets. Now moving on to manufacturing. Regarding manufacturing over the past few years, we have rapidly built a global manufacturing and supply infrastructure to produce both antigen and adjuvant. Today, we are collaborating with our core partners and we are manufacturing at a consistent run rate that enables us to produce sufficient supply to meet global customer demand. Our partner, Serum, successfully passed multiple regulatory inspections in the quarter and is our primary manufacturing partner for most of our global supply. Our recent progress includes the addition of FK Bioscience to our EU manufacturing network and an expanded agreement with SK Bioscience to support Omicron manufacturing. SK Bioscience will also manufacture our vaccine in pre-filled syringes in addition to Serum Institute in 2023, therefore providing widespread availability of a pre-formulated single dose pre-filled syringe while maintaining two to eight C refrigerated stability and an expectation of up to 12 months of dating. Additionally, we continue to make progress to bring our Novavax CZ facility in the Czech Republic online. We remain on track to add Novavax CZ as a manufacturing node for our European supply, and we now expect to submit to EMA in the third quarter. The combination of Serum Institute, SKBIO, and our CZ facility provides for a robust manufacturing infrastructure for supply of COVID vaccine and others into the foreseeable future. We expect that in 2023, with indications achieved for boosting adolescents, children six months of age and older, a bivalent and or monovalent variant vaccine option, and our strong global manufacturing network, we will be poised for success in a commercial market. With that, I'd now like to turn it over to Jim to discuss our financial results.

All right. Thank you, John. Please turn to slides 24 and 25. I'll begin by providing an overview of our second quarter 2022 total revenue performance, net income, and cash position. Then I'll discuss our quarterly results in additional detail. and provide commentary on our revised full year 2022 revenue guidance. In the second quarter of 2022, we recorded $186 million in total revenue, a net loss of about $510 million, and we ended the period with $1.4 billion in cash. Please turn to slide 26 where I'll provide a comprehensive overview of our second quarter results. In the second quarter of 2022, we recorded total revenue of $186 million compared to $298 million in the second quarter of 2021. Total revenue for the second quarter included $55 million in product sales based on 3 million doses sold by Novavax, $23 million of royalties and other revenue, including the recognition of a $20 million milestone payment from Takeda, related to our first commercial sale in Japan. And 108 million in grants revenue from the US government. Grants revenue for the second quarter of 2022 was lower as expected, given the decrease in activities under our agreements with the US government and completion of the SEPI related activities in 2021. We entered 2022 with approximately 800 million of funding remaining under our $1.8 billion in U.S. government agreements and expect to record at least $400 million of this amount during 2022 with the remainder in 2023. Our cost of sales for the second quarter of 2022 were $271 million. I'll discuss this in a bit more detail on the next slide. R&D expenses for the second quarter of 2022 were $290 million compared to $571 million for the comparable period in 2021. The decrease in the current quarter was primarily the result of lower clinical development activities for our COVID-19 vaccine, the capitalization of manufacturing costs, and a net benefit from previously recognized embedded lease costs for manufacturing supply agreements. We expect our full year 2022 R&D expenses be lower than 2021. Additionally, we recorded selling general and administrative expenses of $108 million for the second quarter of 2022 compared to $73 million in the second quarter of 2021. The increased quarter-over-quarter was a result of commercial launch costs associated with our COVID-19 vaccine. We expect our full year 2022 SG&A cost to increase compared to 2021 as we continue to enhance our commercial capabilities for COVID-19 vaccine. For the second quarter of 2022, we recorded a net loss of $510 million compared to a net loss of $352 million in the second quarter of 2021. And finally, We continue to maintain a full tax valuation allowance, and we ended the second quarter of 2022 with $1.4 billion in cash. Please turn to slide 27, where I'll discuss our cost of sales in more detail. Cost of sales for the second quarter of 2022 were $271 million, and this includes $255 million related to excess, obsolete, or expired inventory and losses on firm purchase commitments under our third-party supply agreements. The recognition of these costs were driven by a substantial reduction of our expected deliveries to COVAX and a deferral of deliveries to other customers. As a reminder, during 2021 and prior to regulatory authorizations for our COVID-19 vaccine, certain manufacturing costs were expensed to research and development that would otherwise have been capitalized inventory. If not for the reduced cost inventory for the period, full cost of sales from the second quarter would have been approximately $280 million. We expect to utilize the majority of our reduced cost inventory during 2022. Based on our standard cost, our COVID-19 vaccine gross margins on sales to high income countries are expected to be between 75% of product sales. Please turn to slide 28 where we'll provide an overview of the financial guidance for 2022. As stated earlier, we are revising our full year 2022 total revenue guidance to 2 to 2.3 billion. As a reminder, Total revenue reflects all sources, including product sales by Novavax, grants revenue, royalties, and other revenue. Our revised guidance takes into account both the demand and market supply dynamics discussed on the call today. We look forward to sharing additional updates as we progress in coming quarters. With that, I'd like to turn it over to Stan to discuss our upcoming strategic priorities.

Thank you, Jim. In the coming months, we will remain focused on achieving our key strategic priorities for 22 and two that include continuing delivery of our vaccine globally, maximizing our label with the addition of boosting and adolescent populations. This is critical to access global demand, completing development of our Omicron containing vaccine and filing in the fourth quarter and progressing into phase two for COVID-19 influenza combination vaccines all to enable initiation of our phase three study in 2023. I believe that over time, we're going to show that our vaccine will demonstrate longer lasting protection than other platforms. It will show that used as a booster, our vaccine can protect against a broader range of virus variants. It will be easier to use. and it will be amenable to combinations of respiratory viruses, including influenza. If I'm right, these attributes should translate in the long term to our ability to build a significant share of the recurring COVID market. Thank you for your attention. I'll now turn it over to the operator for Q&A.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch-tone phone. If you're using a speakerphone, please pick up the handset before pressing the keys. To withdraw your question, please press star then two.

At this time, we will pause momentarily to assemble our roster. Our first question comes from with Cohen Co.

Please go ahead.

Hey, guys. Thank you so much for taking our questions. Maybe first, can you just help us understand exactly how the contract with the EU works? You had previously said that there were 27 million doses. There was scheduled to deliver in Q1, then 42 million doses for Q2. Does that, the current revenue looks like, basically, fail to deliver those doses? Like, can you just explain, like, how exactly we should expect the revenue to be flowing and why we're only 3 million doses delivered this quarter? And then I have a couple follow-up.

Yeah, so this is Stan. So actually, we delivered the doses in the first quarter, and then we delivered the doses in the second quarter. All those doses were actually in our warehouse, our distribution center in Europe. And the problem was is we had a It took longer to get through all of the internal and what I mean internal. I mean in in country processes that get the vaccine released and to the customer on time so that we could book it in the in by June 30th and unfortunately June 30th is a non movable master and we missed by a few weeks and so we had actually all those doses got got invoiced in July. As I mentioned, we have, I think since July 1st, over $400 million worth of revenue just in that period alone that belonged in the second quarter, but we missed June 30th.

Q2, the original agreement was for 42 million doses. Do you expect to realize or I guess invoice all of those 42 million doses in Q3 with the exception for the Q0?

So I think as John mentioned, all of these, so these orders, All the customers want to look and see whether they can get a delivery in the second quarter versus they're now moving to third or second or fourth. And we're trying to accommodate all of the customers' requests by moving doses around. So it's a bit of a moving target. We don't see, right now, we don't see them reducing their orders. What we see is them reducing, seeing them spreading it out over an extra quarter or two. And so that's what we're looking at right now. And so it's hard to say what's really going to happen there because it's hard to say what the surge in the fourth quarter will do to those orders and what the use of our vaccine as a booster will do and how quickly that will take up product. So it's moved, but we haven't lost orders yet.

Got it. Thank you. And then just as a follow up, I guess on what you just mentioned, the Q4, can you talk about clearly most jurisdictions are now expecting an Omicron adaptive vaccine in the fall? Can you talk about how do you see that regulatory process? Do you believe that you mentioned you don't expect any additional revenue in the US? Do you Do you believe that you will be able to actually deliver any Omicron-specific doses this year? And how does the regulatory process stand, just given the fact that you're not going to have immunogenicity data in time?

Yeah, again, complicated times, and I think that what we're going to see is we're having I guess probably daily discussions about the use of our Wuhan 2373 vaccine, which we have shown today a bit of the data that we've generated, which shows that our vaccine is a booster, actually is very effective in stimulating, neutralizing, and protective levels of antibodies against BA.5, BA.4, BA.1. So there's a discussion that we're having as to whether that should be used as a booster, not just in other parts of the world, who are also not convinced that maybe having a BA.5 valence is the way to go. It's not an answered question yet. And in the US, we're having a discussion as to whether they should be buying our 2373 for boosting in the United States. It's all up in the air. This is August. It's something that one would hope would be solved by now, resolved by now, but it's not. And so we're in the mix of that discussion. We have good data for 2373. We will have a PA5 vaccine, but as you point out, it'll be later in the quarter and I'm not sure it's needed.

Got it. Just to confirm, you don't expect that the Omicron-specific BA.5, you'll be able to deliver that this year?

No, I didn't say we won't be able to deliver it this year. It just will be later. It's not going to be for October usage.

Got it. Thank you.

Thank you so much.

Our next question comes from Roger Song with Jefferies. Please go ahead.

Great. Thank you for taking the question. Maybe just a couple clarification. Can you just provide the granularity for this $2 to $2.3 billion updated guidance, specifically how much this U.S. government grant will be included? Because last time I think you included $400 million. I see the 1Q and 2Q each quarter you deliver you recorded 100 million per quarter. Do we still expect another 200 million in the second half? Also, in terms of the product sales, understand you say you have EU industry Q delivery order, maybe the outstanding order of another 500, 5 million doses. But in terms of other countries, what is the breakdown between the product sales versus the other like royalty and government grant?

Yeah, I'll take care of the product sales to the US government in the second half. And that we decided we've sold the government 3.2 million doses that are currently being used. And we decided without more clarity from the US government that we're just not going to put in a forecast And I'm not sure that's my expectation, but that's all we know right now, and so we're being very conservative on that forecast. For the grant-related, I think Jim has that number in his mind.

Yeah, so the grant-related for the remaining of the year should be just over $200 million. When you look at the midpoint of guidance relative to our sales year-to-date, total revenue of $900 million would leave approximately $1.25 billion at the midpoint. So I just shared that the grant revenue would be over $200 million, and therefore the remaining billion would go towards APAs and royalty income.

Got it. Okay, thank you. And understanding this demand shift, and particularly for the Omicron containing vaccine availability. Maybe, Stan, if you can share with us the expectation for the 2023 and beyond. Particularly, you mentioned the commercial market in the high-income country, including the U.S. EU, and what do you think about the pricing versus the volume or the market share for Novavax? against other vaccines?

Yeah. So, well, that's a very big question, and I don't think we have a forecast for 23 that we can share. I do think that maybe John can talk. It will shift into a commercial market at different prices, a lot of different.

Yeah, I think we're expecting a shift out of the pandemic period into the commercial market in 23, but I think you're going to see that taking place at various times for various countries. A couple of things here, and it's all based upon our assessment of where the market is heading, which is a bit of a challenge, as you can imagine, but a couple of fundamental pieces that we're confident about. One is that this virus is not going away. There's going to be a need for at least some annual revaccination. We expect that that's probably going to look like something greater than the existing influenza market. could be from anywhere from 25% to 52% market size greater than what the current flu market is. We would also reasonably expect that pricing will vary, again, country by country, but would look a lot like, again, the premium-priced influenza market in the U.S. Proportionally, that will be different in Europe and other countries. You know, as we said in the presentation, there are a number of things that have been obstacles for us in 22, booster label, adolescent pediatric label, and access into the U.S. market. Therefore, all of those obstacles, I think, will be cleared as we head into 2023. I think as we get through 23 and get to peak non-pandemic but peak commercial revenue, we should expect to have, you know, an expectation in the 20 to 25% market share of that commercial market going forward. Again, all of this is very speculative in nature, but based upon our analysis of the market to date and what we expect the total COVID vaccine marketplace to look like going forward.

Great, thank you. Thank you, Stan, for the color.

Maybe just the last one related to the financial guidance. Can we get a sense of the cash flow and the EPS kind of this year, maybe beyond? Particularly, I think the moving piece may be related to OPEX. I think you had been saying the OPEX is lower this year versus last year. but to what extent and also how should we think about next year in the BL? Thank you.

Yeah. You know, likely best to leave the 2023 to a future conversation as we fully build out our commercial footprint. With respect to current year, You've got SG&A that came in at 108 for the quarter. We do expect that to continue to trend up as we build out our capabilities. R&D, we do expect R&D to be materially lower year over year than last year. Of course, that's linked to the factors I mentioned previously. Everything from capping of supply to inventory to at least for the first half of the year lower on clinical spend and then finally some favorability related to lease accounting and so you know when you think about our cash position at 630 which reflected 1.4 billion in cash and a receivable of 200 million you add to that the feedback we just shared that we have, call it orders in hand through today's call, in the range of $400 million, we feel good about our cash position as we continue to execute in the back half of 2022.

Great. Thank you. Thank you, Jim. Yeah, that's it. Thank you for taking the question. Our next question comes from .

Please go ahead.

Thanks for taking our questions and difficult numbers to digest here. So maybe just to follow up on the delivery versus invoicing process, can you just clarify, you know, how does that differ for EU versus ex-EU territories like Canada, Australia, and UK? if you are able to comment on, you know, where does the real-time inventory stand right now? And just going back to Jim's comment on, you know, how should we think about this, you know, write-down sort of going forward and if that needs to be modeled into cost of sales going forward. And then I have a couple of follow-ups.

Okay. I'm happy to take, of course, the RevRec piece, And glad to speak to the $255 million charge we took this quarter in COGS and what it means prospectively. So with respect to our revenue recognition, it's uniform globally. And in all cases, it is upon transfer of title to our customers, which is uniformly when a customer takes possession of our product at their location. So that's true in Europe and elsewhere. With respect to the $255 million charge, this is a function of both the COVAX omission of our expectation to deliver against an inventory bill that we had otherwise, an investment that we had otherwise been making. to supply COVAX for quite some time. In addition to that, as we watch the market dynamics play out with respect to global supply and demand, certain raw materials and semi-finished goods were subject to potential expiry. And so what you are seeing for us this quarter is a reflection of that, call it recalibration. And I'm not sure you're tracking the earnings for, call it COVID peers. It's a very similar story elsewhere as well.

Helpful clarification, thank you. And yes, that is the case for the peers also. And then on the... booster label with EU and also importantly with UK GCVI. Philip, if you could give some update on how far along we are and also on the UK shipments, what's the expectation for that to commence? Appreciate the update on the revised contract you have. And just maybe a higher level question, As you track market share country by country, where you do have the booster approval, are there any case studies, you know, one could reference to sort of think of Novavaxivir market share tracking versus, you know, the third or fourth booster shot of mRNA vaccine?

Right, so just as far as where we are with the booster indication in Europe and other territories, well, those are in process.

They have all the information. They have the same information that was evaluated by the regulators in Japan, Australia, and New Zealand where we received payroll approvals, and we're just working through their process. My expectation is that we'll be hearing news from those regulators in the next handful of days to weeks. We don't control that process, obviously they do. What we do know, where the data is available, where our vaccine is available alongside other vaccines, is that people are making a choice. We are seeing people ask for our vaccines in the booster indication, even when we don't have a label indication in certain territories, such as in Korea or Australia, let's say. certainly recently changed, but when we look at the historic data before we got the label indication there. So we know people are choosing to go there. The exact amount and how frequently they do that is really a function of the policy recommendations in each territory. So we know where we have relatively good recommendations, such as Korea, is happening at a very high rate compared to where we have more restricted recommendations, let's say in Germany.

Thank you. And my final question on the capital allocation, you know, given the dynamics you guys talked about for cash run and revenue recognition cadence, how might you be thinking of the convert that might be coming up in February? Could you provide some comments on that, please?

Yes, certainly, certainly. So for folks who are familiar with our balance sheet, there's a $325 million convert that matures in February of next year. To date, we have not stated a specific intent to do anything with respect to, for example, refinancing or perhaps just simply paying off. We continue to have confidence in our forward-looking ability to deliver on our sales and generate cash flow. And we'll evaluate our options in the coming months as we think it best serves shareholders and dependent, of course, on capital markets dynamics.

Thanks for taking our questions.

Our next question comes from Eric Joseph with JP Morgan. Please go ahead.

Good evening. Thanks for taking the questions. I just wanted to pick up on the COGS expectation in the second half, given the write-downs this quarter. If we're looking at third-party data, there's still seemingly a fair amount of inventory in the EU that's yet to be distributed. I guess, can you talk a little bit about shelf life expectations for Nuvaxivid? How much of the current inventory could roll over into 2023? Should we anticipate significant amount of inventory on hand being at risk in the second half? And then, just coming back to the U.S. revenue piece, if I heard correctly, you don't anticipate any additional chronic revenues from the U.S. this year. Nevertheless, I am curious to know whether if additional orders are made, whether they would count against the balance under the BARDA agreement of 110 million doses or whether you might look to move to a more traditional purchasing model sort of outside the existing contracts in earlier timeframe for 2023 and beyond. Thanks.

So, Eric, there's a couple of pieces to parse out there. So the revenue and the write-off of product are somewhat related, and so Jim could talk more to that. But any expectation that we would have inventory that would not be shipped, Jim has already reserved and made an adjustment for that. Any of the product that we expect to ship for the balance of the year will be on top of whatever inventories are sitting there. There are inventories that are our inventory that fall under what Jim's assessment would be. And then there are inventories that have already been invoiced to the customer. Shipments in Q3 and Q4 and shipments that have been pushed off into Q1 and Q2 of next year will remain unaffected by those inventory levels. You know we we we see this expected expected wave of additional vaccine boosters taking place in the fall. I think that'll help reduce some of the existing inventories of product that has been shipped and then we already have our planning out what those shipments would be. As I said for for Q3 and Q4 and then whatever pushed into into 2023 so. I think that captures that piece, Jim.

and then maybe shelf life. Currently we're at nine months in most markets.

We would expect as we get later on to the year that shelf life would extend into 11 months, but don't have that shelf life extension yet. Exactly.

You know, with respect to the charge in the period of $255 million, approximately $150 of that or $155 of that related to inventory in various stages. You know, you have raw materials, semi-finished and finished goods. The share of that, which we felt could be subject to expiry, we expensed. With respect to the remaining 100, this has to do with unavoidable fixed purchase commitments in future periods where we simply feel we no longer need to procure either manufacturing slots or certain raw materials, and so we took a charge for that as well. So that's the breakdown of the components. Now, in terms of forward-looking, well, If we felt like there was more, we would have, of course, reserved for it today. And therefore, when we speak about our expected margins on a go-forward basis and specifically to high-income markets, I shared that we expect gross margins in the range of 70% to 85% based upon our standard cost.

That certainly continues to be the case. Okay, great. Thanks for taking the questions.

Our next question comes from Alex Stranahan with Bank of America. Please go ahead.

Hey, guys. Thanks for taking our questions. Just two quick ones from us. First, could you talk a bit more about the phase three design for the combo vaccine? Have you reached an alignment with the FDA on endpoints at this point? How should we think about a ballpark for enrollment to reach a meaningful effect size given the expected attack rate for both viruses? And secondly, and apologies if this was already asked, but I'm curious whether your current APAs include optionality for strain-specific vaccines. Should they become available or whether this would trigger additional contracts? Thanks.

Oh, the first question is for me. So so we have not had our pre phase three meeting with the agency yet for and I'm assuming you're talking about the influenza COVID combination vaccine and we're going to do that after we get the results from our next study. We you know clearly their data driven and they're going to see that data before they can give us final opinions on it. Although people have been running phase three studies against flu for awhile, so we have a pretty good idea at least what we'd like to do. But we haven't commented on the specifics of what that design looks like.

As far as strain change provisions, there are some of the agreements that will allow for flexibility in strain change. And frankly, that is fine with us, given where we stand in our development activities. That provides for upside opportunity in the ability to ship varying strain product. there's not been a whole lot of clarity on a country-by-country basis as to what they want. Most specifically and definitively has been the U.S. market seeking at least the bivalent for the mRNA vaccines, but all the conversations we've been having with U.K., Europe, Australia, New Zealand, Canada, et cetera, there have not been absolute decisions made regarding a strain change product.

Thank you.

Our next question comes from Mayank Mamthani with B Reilly.

Hey, thanks for taking my follow-up. Just really quick, we get asked a lot about the, you know, the timelines for BA.1 specific vaccine, which you have in the clinic and sort of the CNC scale-up process, how that's kind of progressed. And, you know, if you are looking to build any inventory for that versus, you know, wanting to work on the BFI-specific vaccine. Could you just sort of comment a little bit on both data and then the CMC-specific activities for that vaccine?

Yeah, hey, how you doing? It's Greg here. So the clinical trial, as Philip noted, has been enrolled, and we're doing the assays. And so we expect toward the end of quarter three to provide the clinical result. And we're actively working on BA5, and our expectation is we can have a stockpile of material. However, we have to, of course, submit the regulatory package sometime in quarter four, and so after that, we're not sure what the timing will be, how long it will take the FDA to review that. So I would like to kind of recapitulate what Phillip said, however, and Stan as well, We're increasingly convinced that our current vaccine is suitable for deployment in the context of a boosting study. As you know, we provide very good data showing that our vaccine analyzes broadly recognized variants, including BA.5, very nicely. And I think there's a fair amount of discussion currently with many of the customers on exactly what to do. You know, there's a lot of merits in deploying our current, you know, Wuhan vaccine that is authorized and in many countries being used as a booster. And obviously, in our data, it is really strongly inducing this broad recognition of antibodies that broadly recognize new variants when we boost. And we think that's a very strong, there's a very strong case for deployment of that vaccine.

Got it. Appreciate you taking the follow-up.

Thank you very much. Thank you.

This concludes the question and answer session. I would like to turn the conference back over to Stan Erck for closing remarks.

Thank you. Thanks to everyone for joining today's call. I'll be closed by thanking all those who made possible the significant progress during the second quarter, including all of our employees, selfless contributions of our trial participants and the continued support from our partners around the world. And we look forward to reporting additional milestones in the coming months. So, thanks for being on the call.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.