Earnings Call Transcript - VALN Q1 2023

Joshua Drumm, Vice President of Global Investor Relations

Thank you, Sharon. Hello and thank you for joining us to discuss Valneva's first quarter 2023 results and corporate update. It's my pleasure to welcome you today. In addition to our press release and analyst presentation, you can find our consolidated financial results for the quarter, which were published earlier today, available within the Financial Report section of our investor website. I'm joined by Valneva's CEO, Thomas Lingelbach, and CFO, Peter Buhler, who will provide an overview and update on our business, as well as our key financial results for the quarter. There will be an analyst Q&A session at the conclusion of the prepared remarks. Before we begin, I'd like to remind listeners that during the presentation, we will be making forward-looking statements, which are subject to certain risks and uncertainties that could cause the actual results to differ materially from those expressed or implied by these forward-looking statements. You can find information about these risks and uncertainties in our periodic filings with the Securities and Exchange Commission and with the French market authority, which are listed on our company website. Please note that today's presentation includes information provided as of today, May 4th, 2023, and Valneva undertakes no obligation to revise or update forward-looking statements except as required by applicable securities laws. With that, it's my pleasure to introduce Thomas to begin today's presentation.

Thomas Lingelbach, CEO

Thank you so much, Josh, and good day to everyone. It's a great pleasure to present a couple of updates regarding our first quarter, and later, Peter will present the financial report. We have very good momentum right now, driven by our strong sales performance and increasing clarity on our key catalysts. Our product sales in the first quarter nearly doubled year-over-year, primarily driven by our proprietary product IXIARO and DUKORAL, which both more than quadrupled from the first quarter of 2022. We maintain a position of financial strength with more than $250 million in cash at the end of the first quarter, and we have reiterated our guidance regarding expected product sales reaching or exceeding pre-pandemic levels this year. We also have a clear pathway towards our key transformative catalysts. Our chikungunya vaccine, which we expect to become the world's first chikungunya vaccine if approved, has a stellar track for its PDUFA date confirmed for August 2023. We expect to commence additional ex-U.S. regulatory processes in 2023. For Lyme, we have decided, after careful evaluation of risks and benefits, to keep the Phase 3 design and the endpoints as previously agreed with regulators. Additional enrollment for primary immunization will begin in the second quarter, including the 2025 peak season, which means we expect to file in 2026. Pfizer will bear the current projected incremental cost due to the added enrollment, and I will provide more detail during the R&D update. Let's turn to Page 6 of the presentation regarding chikungunya. Our chikungunya vaccine is a live-attenuated vaccine candidate under FDA priority review; it is the first and only chikungunya vaccine candidate that reported positive Phase 3 data and was the first to submit a biologics license application to the FDA for potential approval. To remind everyone about the key benefits of a live-attenuated vaccine approach, it targets long-lasting protection, and thus far, we have seen excellent antibody persistence data over time. Overall, our results demonstrate not only long-lasting but also an excellent seroconversion rate after a single shot. We are now preparing for the launch of VLA1553, which fits perfectly within Valneva's existing infrastructure. In terms of target populations, we are looking at non-anemic countries, travelers, military personnel, as well as outbreak preparedness in key areas. Additionally, there is endemic use in low and medium-income countries, where we have partnered with Instituto Butantan for local manufacturing. Key dates to remember include the confirmed PDUFA date by the end of August 2023, and the first company to achieve BLA approval will be eligible for a PRV, which we estimate could sell for around $100 million. We currently have an adolescent trial ongoing because the initial approval will be for those aged 18 and older, and we expect top-line results mid-year to support some of the regulatory filings. We anticipate commencing additional regulatory processes for Canada, EMA, and the U.K. this year. Overall, we are very excited about our chikungunya program and look forward to launching this product in an area of very high unmet medical need. Regarding Lyme on Page 7 of the presentation, our Lyme disease vaccine candidate, VLA15, is currently the only one in clinical development worldwide. It is a multivalent recombinant protein-based vaccine candidate that has undergone several Phase 1 and 2 studies, and we initiated a Phase 3 study as planned last year. Unfortunately, we had to discontinue a significant number of study subjects due to GCP violations by a third-party operator. This program is partnered with Pfizer, the sponsor for the Phase 3 study, and we have received substantial milestones, including equity investments in June 2022. The vaccine is multivalent, fixed valent, covering the predominant serotypes in the Northern Hemisphere, and has an established mode of action. The fast-track designation granted for this program has also been mentioned. You are all interested in how we will move forward with the Phase 3 study, and Page 8 shows the current status of the Phase 3 efficacy study called VALOR. We plan to enroll around 9,000 participants aged five years and older who are at high risk for Lyme disease in the U.S., Canada, and Europe. There will be a one-to-one randomization between VLA15 and placebo and a roughly 2:1 randomization U.S. versus Europe. The primary endpoint is the rate of confirmed Lyme disease cases after two consecutive tick seasons and after completion of the three doses priming plus booster. The secondary endpoint is linked to the rate of confirmed Lyme disease cases after the first Lyme season, after three doses or the so-called priming. On the other part of the graph is the current participants, which we call cohort 1. These were enrolled last year, where we could not enroll the full necessary cohort due to the GCP issue. This cohort will soon receive the first booster. Then we have cohort 2, consisting of the incremental number of study subjects that will be recruited soon. In this cohort, we will start with three doses priming and an 18-month booster as well. Consequently, we aim to submit regulatory applications in the U.S. and Europe in 2026, compared to 2025, prior to the GCP issues. Looking at R&D as a whole and the pipeline, several interesting points arise. Besides chikungunya and Lyme, we are currently working on Zika, aiming to potentially re-enter the clinic at the end of 2023 or early 2024 due to the status and medical need surrounding Zika, especially as the WHO has expressed a clear preference for an inactivated or virus approach for women of childbearing age or pregnant women. We are also progressing on hMPV, having completed initial preclinical work. During the last call, we discussed how the overall respiratory environment is shifting toward a potential RSV and hMPV combination, making our asset an interesting candidate for potential partnering. Additionally, we have three other preclinical candidates with a clear priority on EBV, for which we expect to identify by the end of 2023, and Campylobacter and Parvo, where we are working on certain work packages to facilitate the respective gating reviews. With that overview of our R&D activities, I would like to hand over to Peter for the financial report.

Peter Buhler, CFO

Thank you, Thomas, and good morning or good afternoon to all of you. Let's discuss our first quarter 2023 financials. Total revenues reached EUR33.5 million, an increase of 53.4% compared to the first three months of 2022, while product sales increased by 98.6% to reach EUR32.1 million. This increase is driven by the continued recovery of the international travel market. Product sales, excluding the COVID-19 vaccine sales in the first quarter of last year, increased by 159.7% year-over-year. On the right side of the slide, you can see the composition of product sales, including some sales to U.S. military in the first quarter of 2023. Discussions with the U.S. Department of Defense are ongoing, and we expect to sign a new contract in the coming months. Direct sales reached 71.6%, which is lower than usual, compared to 91% for the full year of 2022. The decreased ratio of direct sales is a result of high sales to Bavarian Nordic for distribution in the German market. Moving on to Slide 12 to look at the details of our product sales, sales of IXIARO quadrupled versus prior year, and the same is true for DUKORAL, reflecting the strong recovery of the travel market that directly impacts the sales of our travel vaccines. We see solid year-over-year growth across all markets and managed to increase prices for IXIARO and DUKORAL in most markets. Third-party product sales decreased by almost 20% as a result of supply constraints of products sold under the distribution agreement with Bavarian Nordic. Foreign currencies had no significant impact on the product sales performance compared to the prior year. Moving on to Slide 13 and looking at the profit and loss statement. We already covered the over 50% growth in total revenues. Cost of goods and services increased by 48% year-over-year, and gross margin excluding COVID somewhat deteriorated to reach 48.4% compared to 68% in the first quarter of last year. However, the prior year's gross margin was positively affected by one-off effects. Research and development costs reached EUR14.1 million compared to EUR20.7 million, a decrease of 32% as our chikungunya vaccine candidate progresses toward licensure. Also, in Q1 of the prior year, we recorded more significant R&D expenses related to VLA2001, our COVID-19 vaccine. Sales and marketing expenses increased from EUR2 million in Q1 of 2022 to EUR9 million in Q1 of the current fiscal year. Costs related to the prelaunch activities of our chikungunya vaccine, including staff increases, are a major driver of the increase in sales and marketing costs. Sales and marketing costs in Q2 of last year were particularly low due to the impact of our share-based compensation. General and administrative costs in the first quarter increased significantly over the prior year to reach EUR10 million. In the first quarter of 2022, all expense lines were favorably impacted by an adjustment of EUR11.7 million related to the impact of the company's share price development on the employee share-based compensation. Without that favorable impact in the first quarter of last year, G&A costs would be roughly flat. Other income net of other expenses is reported at EUR3.5 million compared to EUR2.1 million in the first three months of 2022. This increase is driven by the revenue recognition of a grant in Scotland. The operating loss for the first quarter reached negative EUR16.6 million versus negative EUR18.4 million one year ago, while adjusted EBITDA reached negative EUR12.3 million versus negative EUR13.3 million one year ago. Before we move on to the guidance, a word about cash. Total cash and cash equivalents amounted to EUR254.5 million at the end of March compared to EUR289.4 million at the end of December. Moving on to the next slide on guidance, we reconfirm the guidance for the total fiscal year of 2023 with EUR130 million to EUR150 million in product sales and EUR90 million to EUR110 million in other income, representing the PRV mentioned by Thomas at the beginning of the call. R&D investments are still expected to be between EUR70 million and EUR90 million. With that, I would like to give the call back to Thomas.

Thomas Lingelbach, CEO

Thank you so much, Peter. To summarize where we see our key upcoming catalysts and news flow for the remainder of the year: chikungunya, as mentioned, has the first adolescent study result expected mid-2023, alongside the potential BLA approval and first launch of the product in the United States, as well as potential PRV sales immediately after the granting of the BLA. We have also mentioned three additional submission plans, namely for Canada, EMA, and the U.K., which will happen this year. For Lyme disease, VLA15, it is critical that we get the enrollment process right and ensure that the enrollment for the new second cohort for primary immunization begins in the latter part of the second quarter. Additionally, we will see further data regarding antibody persistence in the second half of this year. When it comes to news flow outside chikungunya and Lyme, we expect a potential DoD contract for IXIARO in the coming months. This is certainly something we should anticipate. We have talked in the past about the fact that we would evaluate and implement the clinical pipeline through acquisitions or partnerships, aiming to have more clinical and early clinical stage assets that could provide substantial catalysts in the future while accelerating our preclinical programs towards clinical entry. With that, I would like to proceed to Page 18 of the presentation to conclude. This slide illustrates how we expect growth over the coming years, with today’s main value driven by IXIARO, DUKORAL, and third-party products, adding chikungunya to our commercial part, and eventually coming up with VLA15 and the first monetization around the Lyme program in our partnership with Pfizer. Overall, Valneva is poised for potential growth in the years to come. With that, I would like to hand back to the operator to take your questions.

Operator, Operator

We will now go to your first question from Mauri Raycroft from Jefferies.

Kevin Strang, Analyst

This is Kevin on for Mauri. Just a couple on Lyme to start. Could you clarify what the ultimate size of each cohort is going to be? And then, just maybe if you could talk about what potential options you were considering and what ultimately led you to keep the current protocol? And then just finally, with filing now in 2026, does that change how you think at all about your overall strategy or anything with the competitive landscape?

Thomas Lingelbach, CEO

Let me try to answer your questions in this regard. First of all, we are not permitted at this point in time to disclose the exact numbers of the different cohorts, but as pre-GCP issue, we have said that 6,000 to 7,000 was the end. Pfizer reported that around 50% of the study subjects had to be abandoned. Now you see on the slide an end of 9,000, which answers your question. Regarding the strategy, it is unfortunate that we are facing a one-year delay for the Lyme program compared to where we were. However, the underlying science and strength of this product candidate remains unchanged. Even if someone started tomorrow with clinical development for a Lyme disease vaccine, it would still be the same clinical development program that is required, and we know how long it takes. Therefore, we don't foresee any change in strategy due to this delay. What were the other options? Primarily, when we consider what has happened, it was U.S.-focused. We evaluated going for a sub-cohort, for instance, Europe first and then the U.S. later and/or changing primary versus secondary endpoints. This was a long process with excellent collaboration and consultation between the two parties, supported by external experts. Ultimately, we decided to keep everything the same and just add an additional cohort.

Kevin Strang, Analyst

And on Chikungunya, for the mid-cycle review, you mentioned that there are no significant review or safety concerns. Just wondering if there are any other points that were discussed that you could comment on that have implications for the review process, label, or post-approval studies?

Thomas Lingelbach, CEO

Not at this point in time.

Operator, Operator

We will now go to our next question from Max Herrmann from Stifel.

Max Herrmann, Analyst

I just wanted to understand a little bit about the pre-commercial activities for the chik vaccine, what are you doing? What are your plans? And then also on chik, regarding the ACIP meeting in February, should we expect a few phases of ACIP review, or do you think you can get a clear decision with one meeting? That's the first question. Second, just on Lyme, I wanted to ensure the 9,000 is excluding the subjects that were impacted by the GCP issues. Finally, regarding commercial, I notice you usually have a strong fourth quarter and a strong first quarter with the travel vaccine business, but I noticed that IXIARO and other vaccine areas were down quarter-on-quarter, from fourth quarter to first quarter. I wanted to understand the cause of that given that we are still seeing a recovery in travel.

Thomas Lingelbach, CEO

Hi, so basically, let me address them as soon as I can. The 9,000 line excludes, of course, those executed from the study. For the chikungunya launch, we are investing heavily in people, processes, infrastructure, market access, and activities to ensure a successful launch and that we see a rapid uptake of the vaccine. Awareness is key and this requires resources, both human and logistical. We are seeing the increase in sales and marketing expenses, which will continue. Regarding the all ACIP process, the vote date is set for February; there have already been a few steps taken and additional steps are planned. We cannot predict at this point in time whether there will be further steps, but this is the current situation. On commercial dynamics, keep in mind that Q1 has still been impacted by supply shortages on our end and on third-party products. Thus, it is challenging to draw conclusions regarding the pattern we've seen this year compared to prior years. Therefore, we would like to reiterate our product sales guidance for this year to reach EUR130 million to EUR150 million.

Operator, Operator

We will now go to the next question from Edward White from H.C. Wainwright.

Edward White, Analyst

So just on hMPV, you mentioned today and before that you could partner on looking at an RSV combo. I'm just curious if you've seen any interest in that and if that's something we can expect to see this year, or is it something that will be more down the road? And just on chik, how should we be thinking about a potential DoD contract or the size of perhaps the stockpiling for outbreak preparedness? Is this going to be a material opportunity for the company?

Thomas Lingelbach, CEO

We are currently having active discussions around hMPV, but it's too early to promise a partnering deal. We clearly see, for example, that mRNA companies are trying for RSV and hMPV combos; we also recognize the medical needs for such combos. However, there are only a limited number of RSV companies that could have potential differentiation by adding an hMPV component to their vaccine. As for chik and the stockpiling opportunity, we are engaged in ongoing discussions, but we do not expect further studies beyond what we have planned. The real clarity will come once the final recommendations and approvals are available.

Edward White, Analyst

My last question is regarding the two different cohorts for the tick study now. Are you and Pfizer considering these cohorts as separate studies, or will they be treated as the same study? Can you release data from cohort 1 before cohort 2 is finished, or do you have to wait for both cohorts to complete to release the data?

Thomas Lingelbach, CEO

No, we are currently expecting to release all of it together. So first of all, this is one study.

Operator, Operator

We will now go to the next question from Boran Wang at Guggenheim Securities.

Boran Wang, Analyst

I have one on Lyme and one on chikungunya. With Lyme, will the additional cohorts being enrolled be entirely U.S. focused or predominantly U.S. focused due to the CRO patients? For chikungunya, in terms of the stockpiling opportunity, have early conversations provided any insights you could share regarding feedback and potential bottlenecks that may need to be addressed first?

Thomas Lingelbach, CEO

On Lyme, the additional cohorts will be primarily U.S. and Canada-focused, so no additional enrollment in Europe. Regarding chikungunya and stockpiling, we are in active discussions but do not expect further studies beyond those already planned. The clarity will come once final approvals and recommendations are in place.

Boran Wang, Analyst

If I can just squeeze in one more, in terms of potential business development or in-licensing opportunities, is 2023 realistic for that, or is that more of a longer-term goal?

Thomas Lingelbach, CEO

For us, it is a 2023 objective. But it depends on the opportunity, right? We have set this objective for the organization, for ourselves, and we hope to achieve that. At this point, we have multiple avenues that we are reviewing and evaluating. However, I want to emphasize that a deal is finalized when it is finalized. We cannot be sure it will materialize this year.

Operator, Operator

We will now go to the next question from Rajan Sharma at Goldman Sachs.

Rajan Sharma, Analyst

I had a couple of questions. Firstly, given the strong start for the travel vaccines in 2023 and considering the quarterly performance, how confident are you in reaching the upper end of your sales guidance? On Japanese encephalitis, given that there was a competitor vaccine, which was acquired by a private company that discussed expanding global registrations, could you share your thoughts on the market and how you are prepared to defend your position?

Thomas Lingelbach, CEO

Regarding your second question, at this time, we have not seen any competitor for JE initiating the necessary clinical studies for a registration in Europe and the U.S. There is no way a competitive product can register without proper clinical studies, which take time. For positioning, our vaccine has over 10 years' history marked by excellent effectiveness and safety and is a well-known, established brand. We feel strong about this product's prospects and will remain strong even in the face of potential competitor entries, which are not currently on the horizon. Peter, would you like to add something concerning the guidance?

Peter Buhler, CFO

Look, I think we're very optimistic about our sales. With a very strong first quarter aligning with pre-pandemic levels in euro terms, this bodes well for the rest of the year. As Thomas stated, we still face some supply constraints in Q1. Therefore, we are optimistic regarding our ability to reach our guidance of EUR130 million to EUR150 million.

Operator, Operator

We will now take the next question from Samir Devani, Rx Securities.

Samir Devani, Analyst

I have a couple. Going back to the successful mid-cycle review, I wanted to know if you received any more indications as to whether there would likely be a mid-cycle meeting or not? Secondly, regarding the Pfizer collaboration, there hasn't been any revenue booked in the P&L this quarter. Can you clarify if we should still expect any revenue recognition for the remainder of the year? If so, what magnitude? And also, last time, you mentioned R&D contributions coming out of refund liabilities. There doesn't seem to have been much change in your refund liabilities on the balance sheet. Could you confirm if there was a significant payment made during the quarter?

Thomas Lingelbach, CEO

Regarding the mid-cycle review, we have not mentioned anything about a potential VRBPAC meeting, which should give you the right answer. Concerning regulatory recognition and contribution liabilities, I will hand it over to Peter.

Peter Buhler, CFO

On revenue recognition, you're right; we have not recognized any revenue. There may be future revenue that we could recognize, which we have decided not to do so far as long as the Phase 3 trial remains ongoing at this early stage. However, we could potentially recognize some amounts going forward. As for refund liabilities, your observation is valid. There have been delays in issuing invoices regarding the Lyme situation, meaning we have not paid as much in Q1 as anticipated, leading to little movement in our refund liabilities. We anticipate catching up later this year, but this won't alter our overall cost base from earlier estimations.

Samir Devani, Analyst

Additionally, on your third-party product sales, they were significantly lower compared to Q4. Can you explain the situation and share what we should expect for the remainder of the year?

Peter Buhler, CFO

As I mentioned earlier, we are in line with pre-pandemic performance in euro terms. It's a strong quarter and aligns with our expectations. We remain optimistic about product sales within our guidance of EUR130 million to EUR150 million.

Operator, Operator

We will now go to the next question from Simon Scholes, First Berlin.

Simon Scholes, Analyst

I have two questions. Previously, you discussed that a more innovative solution with the FDA might have permitted an earlier submission in 2025 despite losing trial participants. Could you elaborate on what that innovative solution might have entailed? Additionally, can you provide a hint as to whether you expect the supply constraints impacting the travel vaccine business in Q1 to ease in the current quarter?

Thomas Lingelbach, CEO

Firstly, I'm not sure whether I said innovative, but we did evaluate the possibility of taking alternative strategies. However, upon careful risk-benefit evaluation, we decided it would not be in the interest of this program to increase its risk profile; that's why we decided to maintain the original protocol. Regarding supply constraints, yes, we have faced issues in the first half of the year due to demand exceeding our estimates. We initiated production to address the recovery in demand last year, but it takes time. We currently anticipate no further supply constraints going forward from where we stand today.

Operator, Operator

There are currently no further questions. I will hand the call back to you.

Thomas Lingelbach, CEO

I would like to thank you for your participation today. Thank you for your support and for following Valneva. It's been a pleasure to provide today's update. Enjoy the rest of the day. Goodbye.

Operator, Operator

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.