NOVAVAX INC - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Edgar Glimpses Via Acquire Media NewsEdge) Certain statements contained or incorporated by reference herein constitute forward-looking statements. In some cases, these statements can be identified by the use of forward-looking terminology such as "expect(s)," "intends," "plans," "seeks," "estimates," "could," "should," "feel(s)," "believe(s)," "will," "would," "may," "can," "anticipate(s)," "potential" and similar expressions or the negative of these terms. Such forward-looking statements are subject to risks and uncertainties that may cause the actual results, performance or achievements of the Company, or industry results, to be materially different from those expressed or implied by such forward-looking statements.

Forward-looking statements in this Annual Report include, without limitation, statements regarding: · potential benefits, regulatory approval and commercialization of our vaccine candidates; · our expectation that we will have adequate capital resources available to operate at planned levels for approximately the next 24 months; · our expected 2013 capital expenditures; 35 · our expectations for future revenue under the contract with HHS BARDA, funding requirements and capital raising activity, including possible proceeds from our At Market Issuance Sales Agreement entered into in October 2012, and funding under the Improvement Allowance and Loan Agreement; · our expectations on financial or business performance, conditions or strategies and other financial and business matters, including expectations regarding operating expenses, use of cash, and the fluctuations in expenses and capital requirements associated with pre-clinical studies, clinical trials and other research and development activities; · our expectations on clinical development and anticipated milestones, including contracts with HHS BARDA, LGLS and PATH, our planned clinical trials and regulatory filings, including receipt of accelerated approval status from the FDA, as necessary for our vaccine candidates; · our expectations that our vaccine candidates will prove to be safe and effective; · our expectations that our multivalent seasonal influenza VLP vaccine could potentially address an unmet medical need in two vulnerable populations - the pediatric and elderly; · our expectation that our pandemic (H5N1) influenza vaccine could potentially be developed without an adjuvant for population segments that are sensitive to adjuvant use; · our expectations that our RSV vaccine could potentially address unmet medical needs; · our expectations regarding the development by the JV, in India, of a rabies vaccine, including a planned Phase I clinical trial in 2013; · our expectation that we will utilize the amount of services that is required to be provided by Cadila under the master services agreement; · our expectations regarding payments to Wyeth; · our expectations concerning payments under existing license agreements; and · other factors referenced herein.

Any or all of our forward-looking statements in this Annual Report may turn out to be inaccurate. These forward-looking statements may be affected by inaccurate assumptions or by known or unknown risks and uncertainties, including the risks, uncertainties and assumptions identified under the heading "Risk Factors" in this Annual Report. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this Annual Report may not occur as contemplated, and actual results could differ materially from those anticipated or implied by the forward-looking statements.

The Company assumes no obligation to update any such forward-looking statements, except as specifically required by law. We caution readers not to place considerable reliance on the forward-looking statements contained in this Annual Report.

Overview - Introduction Novavax, Inc., a Delaware corporation (Novavax, the Company, we, or us), is a clinical-stage biopharmaceutical company focused on developing recombinant protein nanoparticle vaccines to address a broad range of infectious diseases.

Our technology platform is based on proprietary recombinant vaccine technology that includes VLPs and recombinant protein micelle vaccines combined with a single-use bioprocessing production system. Our vaccine candidates are genetically engineered three-dimensional nanostructures that incorporate immunologically important recombinant proteins. Our product pipeline targets a variety of infectious diseases and our vaccine candidates are currently in or have completed clinical trials that target seasonal influenza, pandemic (H5N1) influenza and RSV.

36 CPL Biologicals Private Limited (the JV), which is owned 20% by us and 80% by Cadila, was established to develop and manufacture certain vaccine candidates, biogeneric products and diagnostic products for the territory of India. The JV operates a state-of-the-art manufacturing facility for the production of influenza vaccine and other vaccine candidates. The JV is actively developing a number of vaccine candidates that were genetically engineered by Novavax. The JV's seasonal influenza and pandemic influenza candidates began Phase I clinical trials in 2012. Also in 2012, the JV formed a new collaboration to develop a novel malaria vaccine in India with the International Centre for Genetic Engineering and Biotechnology. The JV's rabies vaccine candidate is expected to begin a Phase I clinical trial in India in 2013. We continue to account for our investment in the JV using the equity method. Since the carrying value of our initial investment was nominal and there is no guarantee or commitment to provide future funding, we have not recorded nor do we expect to record losses related to this investment in the future.

A current summary of our significant research and development programs and status of development follows: Program Development Phase Collaborator Seasonal Quadrivalent Influenza Phase II HHS BARDA/LGLS Pandemic (H5N1) Influenza Phase I HHS BARDA/LGLS RSV Phase II PATH1 Seasonal Trivalent Influenza Phase I JV Pandemic (H1N1) Influenza Phase I JV Rabies Pre-clinical JV 1PATH is collaborating with us on a Phase II clinical trial to develop our RSV vaccine to protect newborn infants in low-resource countries from RSV through maternal immunization.

Influenza The FDA has published criteria for granting accelerated approval of a BLA for a new seasonal influenza vaccine. Under this guidance, developers that can demonstrate results that meet or exceed certain specified endpoint criteria in their clinical trials may, at the FDA's decision, be granted a license to market prior to conducting a traditional efficacy clinical trial. In adult populations under 65 years of age, these criteria are based on demonstration of seroconversion rates (the proportion of subjects with a four-fold rise in HAI titers or attaining titers of 1:40 from a negative baseline) and seroprotection rates (the proportion of subjects with HAI titers 1:40 post-vaccination) that are 40% and 70%, respectively, at the lower bound of the 95% confidence interval. Accelerated approval may be available as long as there is a shortage of seasonal influenza vaccine relative to the total population recommended to receive the vaccine, a situation that persists. The FDA expects that developers seeking accelerated approval of a BLA will diligently conduct postmarketing efficacy studies. Novavax continues to use and reference these accelerated approval seroconversion and seroprotection endpoints in developing its influenza vaccine candidates. The FDA has articulated the same immunogenicity criteria for accelerated approval of vaccines that address potential pandemic influenza strains. Because a controlled efficacy clinical trial of a pandemic vaccine candidate is not logistically or ethically possible, vaccine developers seeking accelerated approval will be required to provide evidence that a seasonal vaccine made by the same manufacturing process is efficacious. Thus, the demonstration of efficacy with a seasonal vaccine product provides a key link between the seasonal and pandemic programs.

Seasonal Influenza Vaccine The CDC recommends that all persons aged six months and older should be vaccinated annually against seasonal influenza. In conjunction with these universal recommendations, attention from the 2009 influenza H1N1 pandemic has increased public health awareness of the importance of seasonal influenza vaccination, the market for which is expected to continue to grow worldwide in both developed and developing global markets.

In the coming years, many seasonal influenza vaccines are expected to be produced in a quadrivalent formulation (four influenza strains, two influenza A strains and two influenza B strains), as opposed to the current trivalent formulation (two influenza A strains and one influenza B strain). With two distinct lineages of influenza B viruses circulating, governmental health authorities have advocated for the addition of a second influenza B strain to provide added coverage. Current estimates for seasonal influenza vaccines growth in the top seven markets (U.S., Japan, France, Germany, Italy, Spain and UK), show potential growth from the current market of approximately $3.6 billion to $4.7 billion over the next ten years. Recombinant seasonal influenza vaccines, like the candidate we are developing, have an important advantage; once licensed for commercial sale, large quantities of vaccine can be quickly and cost-effectively manufactured without the use of either the live influenzavirus or eggs.

37 Top-line data from our most recent Phase II clinical trial for our quadrivalent influenza vaccine candidate were announced in July 2012. In that clinical trial, our quadrivalent VLP vaccine candidate demonstrated immunogenicity against all four viral strains based on HAI responses at day 21, and was also well-tolerated with no vaccine-related serious adverse events observed and had acceptable reactogenicity. Our vaccine candidate met the FDA accelerated approval seroprotection rates criterion for all four viral strains. The potential to fulfill the seroconversion rates criterion was demonstrated for three of the four viral strains. The fourth strain, B/Brisbane/60/08, despite fulfilling the seroprotection criterion, failed to demonstrate a satisfactory seroconversion rate. Our activities with respect to our seasonal influenza vaccine candidate have been, and are, focused on identifying the manufacturing process to ensure consistent and enhanced immune responses in all strains. Over the last six months we've made significant progress and expect to finalize our manufacturing process by mid-year 2013. During the second half of 2013, we expect to begin manufacturing product for our next Phase II clinical trial.

Pandemic (H5N1) Influenza Vaccine In the aftermath of the 2009 H1N1 influenza pandemic, recognition 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 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 is driving development of vaccines that can be quickly manufactured against a potentially threatening influenza strain. Industry and health experts have focused attention on developing a monovalent H5N1 influenza vaccine as a potential key defense of the next pandemic threat.

During 2012, we made significant progress in the development of our pandemic (H5N1) influenza vaccine candidate. In May 2012, we launched two Phase I clinical trials of our pandemic (H5N1) vaccine candidate in combination with two different adjuvants, both of which are designed to improve the immunogenicity of vaccines at lower doses and thus provide antigen dose-sparing. These clinical trials evaluated the safety and tolerability of the vaccines and the ability of VLP vaccine antigens with and without adjuvants to generate antibody levels that we believe fulfill the FDA's criteria for accelerated approval, and the ability of these vaccines to provide an expanded number of doses, with possible cross-protection against other virus strains to the U.S. population. In October 2012, we reported positive results from these clinical trials with top-line data demonstrating safety and immunogenicity of varying dose-levels of the vaccine, with and without adjuvant, and further demonstrating statistically significant robust adjuvant effects on immune response. Notably, our unadjuvanted vaccine candidate elicited HAI titers 40 in >82% of subjects at a dose of 45µg. This response would fulfill the FDA's influenza criteria for accelerated approval of a BLA as further described under the heading "Influenza" above.

HHS BARDA Contract for Recombinant Influenza Vaccines HHS BARDA awarded us a contract in February 2011, which funds the development of both our seasonal and pandemic (H5N1) influenza vaccine candidates. The contract, valued at $97 million for the first three-year base-period and $82 million for an HHS BARDA optional two-year period, is a cost-plus-fixed-fee contract in which HHS BARDA 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 multivalent seasonal and monovalent pandemic (H5N1) influenza vaccines. We recognized revenue of approximately $20.1 million in 2012, and have recognized approximately $34.8 million in revenue since the inception of the contract in 2011.

In December 2012, HHS BARDA completed a contractually-defined IPR of our contract. This IPR was conducted by an inter-governmental-agency panel of experts from government agencies including HHS BARDA, FDA, CDC and the National Institutes of Health, who provided input on our progress during the contract base-period and plans for further development, including both near-term process development and manufacturing activities and longer-term clinical efforts. HHS BARDA subsequently notified us in January 2013 that the milestone decision has been made to continue to support our vaccine advanced development contract.

Under certain circumstances, HHS BARDA reimbursements may be delayed or even potentially withheld. In March 2012, we decided to conduct a Phase II clinical trial of our quadrivalent influenza vaccine candidate (the 205 Trial) under our existing U.S. investigational new drug application (IND) for our trivalent seasonal influenza vaccine candidate as opposed to waiting to conduct this clinical trial under a new IND for our quadrivalent vaccine candidate (Quadrivalent IND). Based on our discussions with HHS BARDA in 2012, the outside clinical trial costs for the 205 Trial may only be submitted for reimbursement to HHS BARDA and recorded as revenue by us after we submit the clinical trial data in a future Quadrivalent IND. The filing of the Quadrivalent IND is expected shortly before we initiate the next Phase II dose-confirmatory clinical trial, which has been delayed due to the development activity associated with improving the seroconversion response of one of the four strains. The outside clinical trial costs of the 205 Trial are approximately $3.1 million in total, of which $3.0 million was incurred through December 31, 2012. These costs have been recorded as an expense and are included in cost of government contracts revenue.

38 LGLS License Agreement In February 2011, we entered into a license agreement with LGLS that allows LGLS to use our technology to develop and commercially sell our influenza vaccines in South Korea and certain other emerging-market countries. LGLS received an exclusive license to our influenza VLP technology in South Korea and a non-exclusive license in the other specified countries. At its own cost, LGLS is responsible for funding its clinical development of the influenza VLP vaccines and completing a manufacturing facility in South Korea. We received an upfront payment and may receive reimbursements of certain development and product costs, payments related to the achievement of certain milestones and royalty payments at a rate of 10% from LGLS's future commercial sales of influenza VLP vaccines, which royalty rate is subject to reduction if certain timelines for regulatory licensure are not met.

Respiratory Syncytial Virus (RSV) RSV is a widespread disease that causes infections of the lower respiratory tract. While RSV affects persons of all ages, it acutely impacts infants, young children, the elderly, and others with compromised immune systems. Current estimates indicate that RSV is responsible for over 30 million new acute lower respiratory infection episodes and between 150,000 and 200,000 deaths in children under five years old. In the U.S., nearly all children become infected with RSV before they are two years old; it has been associated with 20% of hospitalizations and 15% of office visits for acute respiratory infection in young children. WHO estimates that the global disease burden for RSV is 64 million cases. Because there is no approved prophylactic vaccine, the unmet need of an RSV vaccine has the potential to protect millions of patients from this far-reaching disease.

We are developing a vaccine candidate to prevent RSV and are looking at susceptible target populations that include the elderly, young children and newborns who may receive protection through antibodies transferred from their mothers who may be immunized during the last trimester of pregnancy. In October 2011, we announced the results of our first Phase I clinical trial to assess the safety and tolerability of our RSV vaccine candidate, and to evaluate total and neutralizing anti-RSV antibody responses and the impact of an aluminum phosphate adjuvant. Along with positive safety results, the antibody response to the RSV F protein was significantly increased compared to placebo (p<0.001) in all dose groups and increased by 19-fold in the highest-dose adjuvant group at day 60. A significant dose-response pattern was observed with high rates of seroconversion at all doses including a rate of 100% at the highest-dose adjuvant group. In October 2012, we initiated two separate dose-ranging clinical trials, one in women of child bearing age, which initiates our goal of developing a vaccine for maternal immunization of pregnant women, and the other in elderly adults, which initiates our goal of developing a vaccine for the elderly. The first clinical trial is a randomized, blinded, placebo-controlled Phase II clinical trial that will evaluate the safety and immunogenicity of two dose levels of our RSV vaccine candidate with and without an aluminum phosphate adjuvant, enrolling 330 women of childbearing age. The second clinical trial is a randomized, blinded, placebo-controlled Phase I clinical trial that will evaluate the safety and immunogenicity results of 220 enrolled adults, 60 years of age and older, who received a single intramuscular injection of our RSV vaccine candidate (with and without an aluminum phosphate adjuvant) or placebo plus a single dose of licensed influenza vaccine or placebo at days 0 and 28. Top-line results from both clinical trials are expected to be reported in the first half of 2013. The design and timing of subsequent clinical trials will be determined after these data are analyzed. Our expected path forward in maternal immunization would include a dose-confirmation clinical trial in women of child-bearing age. In parallel, and in consultation with the FDA, we would expect to initiate a reproductive toxicology study to confirm the safety of our proposed formulation in advance of vaccinating pregnant women. For the elderly, the path forward would likely be to design a Phase II clinical trial.

39 PATH Clinical Development Agreement In July 2012, we entered into a clinical development agreement with PATH to develop our vaccine candidate to protect against RSV through maternal immunization in low-resource countries (the "RSV Collaboration Program"). We were awarded approximately $2.0 million by PATH for initial funding under the agreement to partially support our Phase II dose-ranging clinical trial in women of childbearing age as described above. The agreement expires July 31, 2013, unless we and PATH decide to continue the RSV Collaboration Program. We retain global rights to commercialize the product and have made a commitment to make the vaccine affordable and available in low-resource countries. To the extent PATH has continued to fund 50% of our external clinical development costs for the RSV Collaboration Program, but we do not continue development, we would then grant PATH a fully-paid license to our RSV vaccine technology for use in pregnant women in such low-resource countries.

Rabies Rabies is a disease that causes acute encephalitis, or swelling of the brain, in warm-blooded animals including humans. The disease can be transmitted from one species of animal to another, such as from dogs to humans, most commonly by a bite from an infected animal. For humans, rabies left untreated is almost invariably fatal. WHO has estimated that the highest public health financial expenditure in any country is the cost of rabies post-exposure prophylaxis. In Asia and Africa, estimates show a combined 55,000 annual human deaths from endemic canine rabies, with annual treatment costs approaching $600 million, although human deaths from rabies are likely to be grossly underreported in a number of countries, particularly in the youngest age groups. In India alone, 20,000 deaths are estimated to occur annually. Internal market data of vaccine manufacturers suggest that at the global level, 15 million people receive rabies prophylaxis annually, the majority of whom live in China and India. It is estimated that in the absence of post-exposure prophylaxis, about 327,000 persons would die from rabies in Africa and Asia each year. Marketed rabies vaccine is mostly used for post-exposure prophylaxis that requires generally between four and five administrations of vaccine. Pre-exposure prophylaxis is recommended for anyone who will be at increased risk to the rabies virus, including travelers with extensive outdoor exposure in rural high-risk areas.

The JV is currently developing a rabies vaccine candidate that we genetically engineered. The JV expects to initiate Phase I clinical trial in India in 2013.

Our objective is to develop a recombinant vaccine that can be administered as a pre-exposure prophylaxis for residents of certain higher-risk geographies, as well as travelers to such locations, and with the potential to provide post-exposure prophylaxis with fewer doses. Preliminary pre-clinical results have demonstrated that this vaccine candidate successfully prevents the rabies virus from entering the central nervous system, thus preventing death.

Sales of Common Stock In 2012, we completed two separate offerings to sell over 12 million and 10 million shares of common stock. In October 2012, we sold 12,385,321 shares of its common stock to RA Capital Management, LLC (RA Capital), Camber Capital Management LLC and Ayer Capital Management LLC at a price of $2.18 per share, resulting in approximately $27 million in net proceeds. In May 2012, we sold 10,000,000 shares of our common stock to RA Capital at a price of $1.22 per share, resulting in approximately $12.2 million in net proceeds. In both cases, the shares were offered under an effective shelf registration statement previously filed with the SEC.

The Board of Directors of the Company (the "Board") has appointed a standing Finance Committee (the "Committee") to assist the Board with its responsibilities to monitor, provide advice to senior management of the Company and approve all capital raising activities. The Committee has been authorized by the Board to approve all At Market Issuance sales transactions. In doing so, the Committee sets the amount of shares to be sold, the period of time during which such sales may occur and the minimum sales price per share. In October 2012, the Company entered into an At Market Issuance Sales Agreement (2012 Sales Agreement), under which the Company may sell an aggregate of $50 million in gross proceeds of its common stock. This agreement replaces the previous and terminated At Market Issuance Sales Agreement entered in March 2010 (2010 Sales Agreement), which also allowed for the sale of an aggregate of $50 million in gross proceeds of its common stock, but had recently met its limitation of sales of shares. The shares of common stock are being offered pursuant to a shelf registration statement filed with the SEC. During 2012, the Company sold 8.4 million shares at an average sales price of $1.70 per share, resulting in $14.0 million in net proceeds; this amount excludes $0.8 million received in early 2012 for 0.7 million shares traded in late December 2011. The Company sold a total 24,957,715 shares of its common stock and received gross proceeds of $49.9 million under the 2010 Sales Agreement.

40 Critical Accounting Policies and Use of Estimates The discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States.

The preparation of our financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities and equity and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. These estimates, particularly estimates relating to accounting for revenue, the valuation of our investments, stock-based compensation, long-lived assets, goodwill and estimated recovery of our net deferred tax assets have a material impact on our financial statements and are discussed in detail throughout our analysis of the results of operations discussed below.

We base our estimates on historical experience and various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets, liabilities and equity that are not readily apparent from other sources. Actual results and outcomes could differ from these estimates and assumptions.

Revenue We primarily derive revenue from a cost-plus-fixed-fee contract in which HHS BARDA will reimburse us for allowable direct contract costs incurred plus allowable indirect costs and a fee earned in the further development of our seasonal and pandemic (H5N1) influenza vaccines. Revenue on this cost-plus-fixed-fee contract is recognized as such costs are incurred plus a portion of the fixed-fee earned. Billings under the contract are based on approved provisional indirect billing rates, which permit recovery of fringe benefits, overhead and general and administrative expenses not exceeding certain limits. Payments to the Company under cost reimbursable contracts with agencies of the U.S. Government, including our contract with HHS BARDA, are provisional payments subject to adjustment upon annual audit by the government. An audit by the government of fiscal year 2011 has been initiated, but has not been completed as of the date of this filing; however, management believes that revenue for periods subject to audit 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.

Investments Our investments are classified as available-for-sale securities and are carried at fair value. Unrealized gains and losses on these securities, if determined to be "other-than-temporary," are included in accumulated other comprehensive income (loss) in stockholders' equity. Investments are evaluated periodically to determine whether a decline in value is other-than-temporary. 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 in the statements of operations. For investments carried at fair value, we disclose the level within the fair value hierarchy as prescribed by Accounting Standard Codification (ASC) 820, Fair Value Measurements and Disclosures. We evaluate the types of securities in our investment portfolio to determine the proper classification in the fair value hierarchy based on trading activity and market inputs. We generally obtain information from an independent third-party to help us determine the fair value of securities in Level 2 of the fair value hierarchy. Investment income is recorded when earned and included in interest income.

41 Stock-Based Compensation We account for our stock-based compensation in accordance with ASC 718, Compensation-Stock Compensation. This standard requires us to measure the cost of employee services received in exchange for equity share options granted based on the grant-date fair value of the options. Employee stock-based compensation is estimated at the date of grant based on the award's fair value using the Black-Scholes option-pricing model and is recognized as an expense on a straight-line basis over the requisite service period for those awards expected to vest. The Black-Scholes option-pricing model requires the use of certain assumptions, the most significant of which are our estimates of the expected volatility of the market price of our common stock and the expected term of the award. Our estimate of the expected volatility is based on historical volatility over the look-back period corresponding to the expected term. The expected term represents the period during which our stock-based awards are expected to be outstanding. We estimate this amount based on historical experience of similar awards, giving consideration to the contractual terms of the awards, vesting requirements, and expectation of future employee behavior, including post-vesting exercise and forfeiture history. We review our valuation assumptions at each grant date and, as a result, our assumptions in future periods may change. Also, the accounting estimate of stock-based compensation expense is reasonably likely to change from period to period as further stock options are granted and adjustments are made for stock option cancellations.

Impairments of Long-Lived Assets We account for the impairment of long-lived assets by performing a periodic evaluation of the recoverability of the carrying value of long-lived assets and whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. Examples of events or changes in circumstances that indicate that the recoverability of the carrying value of an asset should be assessed include, but are not limited to, the following: a significant decrease in the market value of an asset, a significant change in the extent or manner in which an asset is used, a significant physical change in an asset, a significant adverse change in legal factors or in the business climate that could affect the value of an asset, an adverse action or assessment by a regulator, an accumulation of costs significantly in excess of the amount originally expected to acquire or construct an asset, a current period operating or cash flow loss combined with a history of operating or cash flow losses and/or a projection or forecast that demonstrates continuing losses associated with an asset used for the purpose of producing revenue. We consider historical performance and anticipated future results in our evaluation of potential impairment. Accordingly, when indicators of impairment are present, we evaluate the carrying value of these assets in relation to the operating performance of the business and future undiscounted cash flows expected to result from the use of these assets. Impairment losses are recognized when the sum of expected future cash flows is less than the assets' carrying value.

Goodwill Our goodwill is not amortized, but is subject to impairment tests annually, or more frequently should indicators of impairment arise. We have determined since the Company's only business is the development of recombinant vaccines that the Company operates as a single operating segment and reporting unit. We utilize the market approach and, if considered necessary, the income approach to determine if we have an impairment of our goodwill. The market approach serves as the primary approach and is based on market value of invested capital. The concluded fair value significantly exceeded the carrying value of our goodwill at December 31, 2012 and 2011. The income approach is used as a confirming look to the market approach. Goodwill impairment is deemed to exist if the carrying value of a reporting unit exceeds its estimated fair value, which we test annually at December 31.

Given the current economic conditions and the uncertainties regarding their impact on us, there can be no assurance that the estimates and assumptions made for purposes of our goodwill impairment testing will prove to be accurate predictions of the future, or that any change in the assumptions or the current economic conditions will not trigger more frequently than on an annual basis. If our assumptions are not achieved or economic conditions deteriorate further, we may be required to record goodwill impairment charges in future periods.

Income Taxes We recognize deferred tax assets and liabilities for expected future tax consequences of temporary differences between the carrying amounts and tax basis of assets and liabilities. Income tax receivables and liabilities, and deferred tax assets and liabilities, are recognized based on the amounts that more likely than not would be sustained upon ultimate settlement with taxing authorities.

42 Developing our provision for income taxes and analyzing our tax position requires significant judgment and knowledge of federal and state income tax laws, regulations and strategies, including the determination of deferred tax assets and liabilities and any valuation allowances that may be required for deferred tax assets.

We assess the likelihood of realizing our deferred tax assets to determine whether an income tax valuation allowance is required. Based on such evidence that can be objectively verified, we determine whether it is more likely than not that all or a portion of the deferred tax assets will be realized. The main factors that we consider include: cumulative losses in recent years; income/losses expected in future years; the applicable statute of limitations; and potential limitations on available net operating loss and tax credit carryforwards.

Tax benefits associated with uncertain tax positions are recognized in the period in which one of the following conditions is satisfied: (1) the more likely than not recognition threshold is satisfied; (2) the position is ultimately settled through negotiation or litigation; or (3) the statute of limitations for the taxing authority to examine and challenge the position has expired. Tax benefits associated with an uncertain tax position are reversed in the period in which the more likely than not recognition threshold is no longer satisfied.

A valuation allowance is established when necessary to reduce net deferred tax assets to the amount expected to be realized. We concluded that the realization of deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. Accordingly, our net deferred tax assets have been fully offset by a valuation allowance.

Recent Accounting Guidance Not Yet Adopted We have considered the applicability and impact of all Financial Accounting Standards Board's Accounting Standards Updates (ASUs). Recently issued ASUs were evaluated and determined to be not applicable in this Annual Report.

Results of Operations for Fiscal Years 2012, 2011 and 2010 (amounts in tables are presented in thousands, except per share information) The following is a discussion of the historical financial condition and results of operations of Novavax, Inc. and should be read in conjunction with the financial statements and notes thereto set forth in this Annual Report.

Additional information concerning factors that could cause actual results to differ materially from those in our forward-looking statements is described under Item 1A. Risk Factors of this Annual Report.

Revenue: Change Change 2011 to 2010 to 2012 2011 2010 2012 2011 Revenue: Total revenue $ 22,076 $ 14,688 $ 343 $ 7,388 $ 14,345 Revenue for 2012 was $22.1 million as compared to $14.7 million for 2011, an increase of $7.4 million, or 50%. Revenue for 2012 and 2011 is primarily comprised of services performed under the HHS BARDA contract that was awarded in February 2011 and, to a much lesser extent in 2012, the PATH clinical development agreement. The increase in revenue is primarily due to the pandemic (H5N1) influenza clinical trials and product development activities that occurred during 2012 under the HHS BARDA contract (see below regarding the205 Trial).

Revenue for 2011 was $14.7 million as compared to $0.3 million for 2010, an increase of $14.3 million. Revenue for 2011 is comprised of services performed under the HHS BARDA contract and revenue for 2010 resulted from work underother government contracts.

43 Revenue for 2012 was negatively impacted due to the Company electing to conduct the 205 Trial without immediate HHS BARDA reimbursement of its outside clinical trial costs, which are expected to total approximately $3.1 million, of which $2.8 million was incurred during 2012 (see discussion of the 205 Trial in Management's Discussion and Analysis of Financial Condition and Results of Operations-Overview on page 38). For 2013, we expect a slight increase in revenue associated with our increased product development activities under the HHS BARDA contract to support the initiation of later-stage clinical trials of our seasonal influenza and pandemic (H5N1) influenza vaccine candidates.

Costs and Expenses: Change Change 2011 to 2010 to 2012 2011 2010 2012 2011 Costs and Expenses: Cost of government contracts revenue $ 14,692 $ 7,003 $ - $ 7,689 $ 7,003 Research and development 26,061 17,885 28,032 8,176 (10,147 ) General and administrative 10,988 11,379 10,805 (391 ) 574 Total costs and expenses $ 51,741 $ 36,267 $ 38,837 $ 15,474 $ (2,570 ) Cost of Government Contracts Revenue Cost of government contracts revenue includes direct costs of salaries, laboratory supplies, consultants and subcontractors and other direct costs associated with our process development, manufacturing, clinical, regulatory and quality assurance activities under research contracts. Cost of government contracts revenue increased to $14.7 million for 2012 from $7.0 million for 2011, an increase of $7.7 million, or 110%. The increase in cost of government contracts revenue is primarily due to the seasonal influenza and pandemic (H5N1) influenza clinical trials and product development activities that occurred during 2012 under the HHS BARDA contract.

Cost of government contracts revenue increased to $7.0 million for 2011 due to the development work performed under the HHS BARDA contract that was awarded in February 2011.

Cost of government contracts revenue for 2012 includes $2.8 million of direct clinical trial costs of our 205 Trial. For 2013, we expect the cost of government contracts revenue to remain flat due to fewer clinical trials in 2013 as compared to 2012, offset by increased product development activities under the HHS BARDA contract.

Research and Development Expenses Research and development expenses include salaries, laboratory supplies, consultants and subcontractors and other expenses associated with our process development, manufacturing, clinical, regulatory and quality assurance activities for internally funded programs. In addition, indirect costs such as, fringe benefits and overhead expenses, are also included in research and development expenses. Research and development expenses increased to $26.1 million for 2012 from $17.9 million for 2011, an increase of $8.2 million, or 46%. The increase in research and development expenses was primarily due to increased costs relating to our RSV clinical trials (an internally funded program at this time), higher employee-related costs and expenses associated with our new manufacturing facility. For 2013, we expect a significant increase in research and development expenses primarily due to additional employee-related costs to support product development of RSV and other potential vaccine candidates.

Research and development expenses decreased to $17.9 million for 2011 from $28.0 million for 2010, a decrease of $10.1 million, or 36%. The decrease in research and development expenses was primarily due to work performed under the HHS BARDA contract and as such, is being recorded as cost of government contracts revenue, and, to a lesser extent, lower outside-testing costs (including outsourced clinical trial costs, sponsored research and consulting agreements) as a result of fewer clinical trials in 2011.

44 Costs and Expenses by Functional Area We track our cost of government contracts revenue and research and development expenses by the type of costs incurred in identifying, developing, manufacturing and testing vaccine candidates. We evaluate and prioritize our activities according to functional area and therefore believe that project-by-project information would not form a reasonable basis for disclosure to our investors.

At December 31, 2012, we had 102 employees dedicated to our research and development programs versus 88 employees as of December 31, 2011. Historically, we did not account for internal research and development expenses by project, since our employees work time is spread across multiple programs and our internal manufacturing clean-room facility produces multiple vaccine candidates.

The following summarizes our cost of government contracts revenue and research and development expenses by functional area for the year ended December 31(in millions).

2012 2011 Manufacturing $ 18.6 $ 14.7 Vaccine Discovery 3.5 3.2 Clinical and Regulatory 18.7 7.0 Total cost of government contracts revenue and research and development expenses $ 40.8 $ 24.9 We do not provide forward-looking estimates of costs and time to complete our research programs due to the many uncertainties associated with vaccine development. As we obtain data from pre-clinical studies and clinical trials, we may elect to discontinue or delay clinical trials in order to focus our resources on more promising vaccine candidates. Completion of clinical trials may take several years or more, but the length of time can vary substantially depending upon the phase, size of clinical trial, primary and secondary endpoints and the intended use of the vaccine candidate. The cost of clinical trials may vary significantly over the life of a project as a result of a variety of factors, including: · the number of patients who participate in the clinical trials; · the number of sites included in the clinical trials; · if 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 decreased to $11.0 million in 2012 from $11.4 million for 2011, a decrease of $0.4 million, or 3%. The decrease in expenses was primarily due to lower employee-related costs, including severance expenses, and lower professional fees, partially offset by higher expenses associated with our new office facility. For 2013, we expect general and administrative expenses to remain relatively flat.

General and administrative expenses increased to $11.4 million in 2011 from $10.8 million for 2010, an increase of $0.6 million, or 5%. The increase in expenses was primarily due to higher employee-related costs, including severance expenses, partially offset by lower professional fees.

45 Other Income (Expense): Change Change 2011 to 2010 to 2012 2011 2010 2012 2011 Other Income (Expense): Interest income $ 165 $ 136 $ 189 $ 29 $ (53 ) Interest expense (32 ) (9 ) (9 ) (23 ) - Other income 45 26 485 19 (459 ) Realized gains on short-term investments 879 - - 879 - Change in fair value of warrant liability 101 2,474 1,671 (2,373 ) 803 Total other income (expense) $ 1,158 $ 2,627 $ 2,336 $ (1,469 ) $ 291 We had total other income of $1.2 million for 2012 compared to total other income of $2.6 million for 2011, a decrease of $1.5 million. In 2012, two of our auction rate securities were redeemed at approximately par value and resulted in $0.9 million in realized gains as we had recorded other than temporary impairments on these securities in previous periods. Additionally, we are required to calculate the fair value of our warrant liability at each reporting period. For 2012, the change in fair value of the warrant liability resulted in a $2.4 million decrease in total other income as compared to 2011. We will continue to mark the warrant liability to fair value at each reporting period until the warrants are either exercised or otherwise expire on July 31, 2013.

We had total other income of $2.6 million for 2011 compared to total other income of $2.3 million for 2010, an increase of $0.3 million. Other income decreased to less than $0.1 million for 2011 primarily resulting from the receipt of grants under our application of qualifying therapeutic discovery project credits in 2010. For 2011, the change in fair value of the warrant liability resulted in a $0.8 million increase in total other income as compared to 2010.

Income Tax: Change Change 2011 to 2010 to 2012 2011 2010 2012 2011 Income Tax: Income tax expense (benefit) $ - $ 412 $ (450 ) $ (412 ) $ 862 In 2011, we incurred a $0.4 million foreign withholding tax related to a payment received in accordance with a license agreement. In 2010, we recorded a deferred income tax benefit of $0.5 million related to a refundable income tax credit received and grants received as a result of qualifying therapeutic discovery projects under Internal Revenue Code Section 48D.

Net Loss: Change Change 2011 to 2010 to 2012 2011 2010 2012 2011 Net Loss: Net loss $ (28,507 ) $ (19,364 ) $ (35,708 ) $ (9,143 ) $ 16,344 Net loss per share $ (0.22 ) $ (0.17 ) $ (0.34 ) $ (0.05 ) $ 0.17 Weighted average shares outstanding 131,726 113,610 104,768 18,116 8,842 Net loss for 2012 was $28.5 million, or $0.22 per share, as compared to $19.4 million, or $0.17 per share, for 2011, an increased net loss of $9.1 million.

The increased net loss was primarily due to higher research and development spending, including increased costs relating to our RSV clinical trials, higher employee-related costs and expenses associated with our new manufacturing facility.

Net loss for 2011 was $19.4 million, or $0.17 per share, as compared to $35.7 million, or $0.34 per share, for 2010, a decreased net loss of $16.3 million.

The decreased net loss was primarily due to revenue recognized under the HHS BARDA agreement, as well as lower research and development spending as a result of fewer clinical trials in 2011.

46 The increase in weighted average shares outstanding for 2012 and 2011 is primarily a result of sales of our common stock in the aggregate of 30,827,346 shares in 2012, 6,001,841 shares in 2011 and 10,513,849 shares in 2010.

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 pre-clinical and clinical testing, the time and costs involved in obtaining regulatory approvals, the costs of filing, prosecuting, defending and enforcing patent claims and other intellectual property rights and manufacturing costs. We plan to continue to have multiple vaccines and products in various stages of development, and we believe our operating expenses and capital requirements will fluctuate depending upon the timing of certain events, such as the scope, initiation, rate and progress of our pre-clinical studies and clinical trials and other research and development activities.

As of December 31, 2012, we had $50.3 million in cash and cash equivalents and investments as compared to $18.3 million as of December 31, 2011. These amounts consisted of $17.4 million in cash and cash equivalents and $32.9 million in investments as of December 31, 2012 as compared to $14.1 million in cash and cash equivalents and $4.2 million in investments at December 31, 2011.

The following table summarizes cash flows for the years ended December 31, 2012 and 2011 (in thousands): Change 2011 2012 2011 to 2012 Summary of Cash Flows: Net cash (used in) provided by: Operating activities $ (18,229 ) $ (23,629 ) $ 5,400 Investing activities (32,262 ) 18,543 (50,805 ) Financing activities 53,786 11,129 42,657Net increase (decrease) in cash and cash equivalents 3,295 6,043 (2,748 ) Cash and cash equivalents at beginning of year 14,104 8,061 6,043 Cash and cash equivalents at end of year $ 17,399 $ 14,104 $ 3,295 Net cash used in operating activities decreased to $18.2 million for 2012 as compared to $23.6 million for 2011, a reduction of 23%. The decrease in cash usage was primarily due to funds received under our Improvement Allowance (as described below) and the timing of our customer and vendor payments, partially offset by our increased net loss in 2012.

During 2012 and 2011, our investing activities primarily included purchases and maturities of investments and capital expenditures. In 2012, we purchased investments to increase our rate of return on available cash. In 2011, we utilized our investments to fund operations and increase our cash balances.

Capital expenditures for 2012 and 2011 were $4.3 million and $0.6 million, respectively. The increase in capital expenditures was primarily due to the purchase of laboratory equipment and tenant improvements necessary to modify our new manufacturing facility. For 2013, we expect our level of capital expenditures to decrease due to the scale-up work performed in 2012 on ournew manufacturing facility.

The increase in our financing activities consists primarily of increased sales of our common stock. We received net proceeds of $54.0 million from the direct sale of our common stock and through our 2010 Sales Agreement, as comparedto $11.0 million in 2011.

In November 2011, we entered into lease agreements, under which we lease our new manufacturing, laboratory and office space in Gaithersburg, Maryland. The lease agreements provide that, among other things, as of January 1, 2012, we sublease from the previous tenant, and subsequently lease directly from the landlord, approximately 74,000 total square feet, with rent payments for such space to the landlord commencing April 1, 2014. Under the terms of the arrangement, the landlord provided us with a tenant improvement allowance of $2.5 million and an additional tenant improvement allowance of $3 million (collectively, the Improvement Allowance). The additional tenant improvement allowance is to be paid back to the landlord over the remaining term of the lease agreement through additional rent payments. During 2012, we were funded $4.3 million under the Improvement Allowance.

47 In September 2012, we entered into a master security agreement, whereby we can borrow up to $2.0 million to finance the purchases of equipment (Equipment Loan). During 2012, we financed $0.5 million under the Equipment Loan.

We have entered into agreements with outside providers to support our clinical development. As of December 31, 2012, $6.2 million remains unpaid on certain of these agreements in the event our outside providers complete their services in 2013. However, under the terms of the agreements, we have the option to terminate for convenience pursuant to notification, but we would be obligated to pay the provider for all costs incurred through the effective date of termination.

We have licensed certain rights from Wyeth. The Wyeth license, which provides for an upfront payment (previously made), ongoing annual license fees, milestone payments and royalties on any product sales, is a non-exclusive, worldwide license to a family of patent applications covering VLP technology for use in human vaccines in certain fields, with expected patent expiration in early 2022; the license may be terminated by Wyeth only for cause and may be terminated by us only after we have provided ninety (90) days notice that we have 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. Payments under the agreement to Wyeth from 2007 through 2012 totaled $5.7 million, of which $0.6 million was paid in 2012. We do not expect to make a milestone payment to Wyeth in the next 12 months.

In connection with our JV with Cadila, we entered into a master services agreement, which we and Cadila amended first in July 2011, and subsequently in March 2013, in each case to extend the term by one year for which services can be provided by Cadila under this agreement. Under the revised terms, if, by March 2014, the amount of services provided by Cadila under the master services agreement is less than $7.5 million, we will pay Cadila the portion of the shortfall amount that is less than or equal to $2.0 million and 50% of the portion of the shortfall amount that exceeds $2.0 million. Through December 31, 2012, we have purchased $0.6 million in services from Cadila pursuant to this agreement.

Based on our current cash and cash equivalents and investments, including our recent private equity offerings, anticipated revenue under the contract with HHS BARDA, possible proceeds from the sales of our common stock under our 2012 Sales Agreement and our current business operations, we believe we have adequate capital resources available to operate at planned levels for approximately the next 24 months. Additional capital will be required in the future to develop our vaccine candidates through clinical development, manufacturing and commercialization. Our ability to obtain such additional capital is subjectto various factors: · generating revenue under the HHS BARDA contract is subject to our performance under the contract, including our ability to collect on delayed reimbursement situations, such as the 205 Trial costs; and · raising funds under our 2012 Sales Agreement is subject to both our business performance and market conditions.

Further, we may seek additional capital through further public or private equity offerings, debt financing, additional strategic alliance and licensing arrangements, non-dilutive government contracts, collaborative arrangements or some combination of these financing alternatives. Any capital raised by an equity offering will likely be substantially dilutive to the existing stockholders and any licensing or development arrangement may require us to give up rights to a product or technology at less than its full potential value.

Other than our 2012 Sales Agreement, Improvement Allowance and Equipment Loan, we have not secured any additional commitments for new financing nor can we provide any assurance that new financing will be available on commercially acceptable terms, if at all. If we are unable to perform under the HHS BARDA contract or obtain additional capital, we will assess our capital resources and will likely be required to delay, reduce the scope of, or eliminate one or more of our product research and development programs, and/or downsize our organization, including our general and administrative infrastructure.

48 Contractual Obligations The following table summarizes our contractual obligations as of December 31, 2012 (in thousands): Less than 1 - 3 3 - 5 More than Contractual Obligations: Total One Year Years Years 5 Years Operating leases $ 31,629 $ 2,431 $ 7,968 $ 6,713 $ 14,517 Capital lease 341 69 152 120 - Notes payable 910 357 514 39 - Purchase obligations 6,900 3,000 3,900 - -Total contractual obligations $ 39,780 $ 5,857 $ 12,534 $ 6,872 $ 14,517 Our purchase obligations include our anticipated timing of future purchases for services pursuant to the master services agreement with Cadila. We are required to purchase from Cadila, through March 2014, services for biologic research, pre-clinical development, clinical development, process development, manufacturing scale-up and general manufacturing related services. As of December 31, 2012, our remaining obligation to Cadila under the master services agreement was $6.9 million.

Off-Balance Sheet Arrangements We are not involved in any off-balance sheet agreements that have or are reasonably likely to have a material future effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources.

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