Novavax Management Discusses Q4 2012 Results - Earnings Call Transcript

Mar. 1.13 | About: Novavax, Inc. (NVAX)

Novavax (NASDAQ:NVAX)

Q4 2012 Earnings Call

March 01, 2013 10:00 am ET

Executives

John A. Herrmann - Vice President, General Counsel and Corporate Secretary

Stanley C. Erck - Chief Executive Officer, President , Director and Member of Finance Committee

Frederick W. Driscoll - Chief Financial Officer, Principal Accounting Officer, Vice President and Treasurer

Gregory M. Glenn - Chief Medical Officer and Senior Vice President

Louis Fries - Vice President of Clinical and Medical Affairs

Analysts

Kevin DeGeeter - Ladenburg Thalmann & Co. Inc., Research Division

Gregory R. Wade - Wedbush Securities Inc., Research Division

Edward A. Tenthoff - Piper Jaffray Companies, Research Division

George B. Zavoico - MLV & Co LLC, Research Division

Vernon T. Bernardino - Brinson Patrick Securities Corporation, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Novavax Fourth Quarter and Year-End 2012 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded for replay purposes. I would now like turn the conference over to your host for today, Mr. John Herrmann. Sir, you may begin.

John A. Herrmann

Thank you. Good morning, everyone. This is John Herrmann, Vice President and General Counsel of Novavax. I thank you for joining us on today's fourth quarter and year 2012 financial results conference call. Both the earnings release from this morning and an archive of this earnings call are available on the company's website, which is www.novavax.com.

On today's call are Novavax's President and Chief Executive Officer; Stan Erck; our Chief Financial Officer, Fred Driscoll; Dr. Greg Glenn, our Chief Medical Officer; and Dr. Louis Fries, Vice President of Vaccine Development.

Before we begin our prepared remarks, I need to remind you that we will be making forward-looking statements during the teleconference and that those statements could include financial, clinical or commercial projections. Statements relating to future financial or business performance, conditions or strategies and other financial and business matters, including expectations regarding revenue, operating expense for cash, cash usage, as well as clinical developments and anticipated milestones, are all forward-looking statements within the meaning of the Private Securities Litigation Reform Act.

We caution that these forward-looking statements are subject to numerous assumptions, risks and uncertainties, which change over time. Further information on the risk factors that could affect Novavax's business, financial condition and results of operations are contained in Novavax's filings with the SEC, available at www.sec.gov. These forward-looking statements speak only as of the date of this call, and Novavax assumes no duty to update such statements.

With that over, I will now turn the call over to Stan.

Stanley C. Erck

Thanks, John, and good morning, everyone. Thanks for joining us this morning.

As usual, I will first discuss our recent accomplishments and expectations for 2013, and then I'll turn the call over to Fred to summarize the quarterly and year-end financial results. And after that, we will take questions.

Over the last year, Novavax has made significant progress across our entire business. We have generated positive clinical data for our key programs, we've entered into important partnerships, which strengthened the company's balance sheet, distributing our cash all the way to 2015. Building on this success, we have significant momentum entering into 2013, and we're in the strongest position ever to realize the clinical and commercial potential of our pipeline programs with vaccine technology platforms.

Turning to specific programs. I'll start with our RSV program. We have 2 clinical trials underway now. We expect to report top line clinical data in April for our Phase II dose-ranging study of women at childbearing age. We have made significant progress in this program during 2012. In the past year, we've presented clinical and pre-clinical data at several meetings, including the 8th Annual International Respiratory Virus Symposium and the International Society for Respiratory Vaccines. Importantly, we were able to show that the levels of neutralizing the antibodies, which is the benchmark of the vaccines immunogenicity, were up to 8-fold higher with our vaccine candidate than those levels identified as being protective. We also demonstrated that the immune response to the RSV-F vaccine target the clinically validated palivizumab bindings side. These palivizumab antibody levels induced by our vaccine appear to be well in excess of the levels of those shown to prevent hospitalizations in high-risk, premature infants. As a reminder, palivizumab is the [indiscernible] antibody marketed by MedImmune's Synagis, which is effective in the prevention of RSV. The demonstration of this combination of immunomeasures is the first for a clinical stage RSV vaccine and provides a strong rationale moving forward into more advanced clinical trials. In July, we entered into a research collaboration with PATH, an international nonprofit organization, whose goal is to transform global health with sponsorship of innovative technologies. PATH is committed to the development of an RSV vaccine, which will be given to the mother to protect the very vulnerable infants from RSV during the first few months of life, an approach better known as maternal immunization. Maternal immunization is standard in health care and parent health care practice to protect both the mother and/or infant from influenza, pertussis, and tetanus. Our collaboration with PATH, provided approximately $2 million of nondilutive initial funding to support our Phase II dose-ranging clinical trial on women of childbearing age. The study was initiated in early October and was fully enrolled in less than 2 weeks. Trial was randomized, blinded, placebo-controlled Phase II clinical trial designed to evaluate the safety and immunogenicity of 2 dose-levels of our RSV vaccine candidate, with and without aluminum phosphate as an adjuvant. The study enrolled 330 nonpregnant women of childbearing age who received either 1 or 2 intramuscular injections at each dose-level of vaccine or placebo at Day 028. Safety and immunogenicity will be evaluated over a 6-month period. On this day, we expect to determine the appropriate dose to be used in our vaccine. We anticipate reporting the results from the trial through Day 56 observations in April.

Although PATH's initial funding was just for this trial, our expectation is that PATH will continue to support the ongoing development of our RSV vaccine candidate for maternal immunization. As part of our agreement, PATH can elect to continue to collaborate on additional phases to develop the vaccine for maternal immunization, potentially funding 50% of Novavax's external clinical development cost through to licensure.

We had also initiated a Phase I dose-ranging clinical trial of our RSV vaccine in elderly patients, and this study is also fully enrolled as well. This trial is randomized, blinded, placebo-controlled study where we will evaluate the immunogenicity and safety of 2 dose levels of our RSV candidate, with or without aluminum phosphate as an adjuvant. The study enrolled 220 adults, 60 years of age or older, will receive a single intramuscular injection of RSV vaccine or placebo, plus a single dose of licensed influenza vaccine or placebo at Day 028. Safety and immunogenicity will be evaluated for up to 1 year, and we expect to report top line results with the study next quarter, the second quarter of 2013.

We would also like to highlight 2 recent peer-review publications. First, in December, based from our Phase I clinical trial, we're published in the journal, Vaccine. This publication had a more in-depth look at the data we have presented in September at the RSV 2012 meeting I mentioned previously. Also, the journal PLOS ONE recently published data from pre-clinical studies, which indicated that immunization with [indiscernible] RSV nanoparticle vaccine induced high levels of specific palivizumab and neutralizing antibodies to provide protection in this [indiscernible].

As you can probably tell, there is tremendous excitement, both internally and externally, around our RSV program. We believe that we're ahead of all other companies in the development of a vaccine that will address this major unmet medical need.

Moving now to our pandemic influenza program. The highlight of the fourth quarter was the positive top line results from the 2 Phase I clinical trials conducted under our contract with BARDA. These 2 trials were identical, other than using 2 different adjuvants. A total of 666 healthy adults, 18 to 49 years, were enrolled in the 2 trials. So these studies provided statistically significant data results. Although these are Phase I trials, it's important to note that they were large Phase I trials, which improved our confidence about the results. We were able to demonstrate a number of characteristics about our pandemic influenza vaccine candidate that we believe to be very important. First, we met our primary objectives, which were to demonstrate that all vaccine adjuvant combinations and unadjuvanted vaccines have a suitable safety profile that generated robust immune responses. Importantly, the unadjuvanted vaccines have 45 micrograms per dose induced immune responses that exceeded the FDA criteria for approval after 2 doses, an unprecedented result compared to the other unadjuvanted H5N1 vaccines. In addition, the administration of the unadjuvanted VLP vaccine formulations resulted in high antivirus responses in significant antigen dose parity, down even to the lowest dose of 3.75 micrograms, at which over 90% of the subjects developed immune responses considered likely to be protected. We also saw activity which suggests that our vaccine may be protected even when the vaccine's strain did not perfectly match the pandemic virus strain, which is an important consideration in the emerging response to an antidote.

So in summary, with these trials, we have demonstrated that we can produce antigens from candidate pandemic influenza strains that are at least as or more immunogenic, as Amy described in the medical literature today. We believe the results will sufficiently foster to allow us to advance our pandemic influenza vaccine program into later-stage clinical testing and we're now working with BARDA on developing that clinical pathway forward.

So moving from our pandemic to our seasonal vaccine program. In July, we announced positive top line results from the Phase II dose-ranging clinical trial for a quadrivalent vaccine. We reviewed these results in detail on our last call, so I'll just remind you that our quadrivalent vaccine met the FDA's 0 protection requirements for all 4 viral strains, with 0 conversion levels of 3 out of 4 strains with a good safety profile. Prior to entering into late-stage clinical trials, we're taking the time to optimize our upstream and downstream manufacturing processes and to optimize our portfolio of [indiscernible]. We're going to continue to work with BARDA to provide our clinical pathway for licensure and begin GMP manufacturing of the quadrivalent vaccine, with the expectation that we will return to clinical as we will improve the B strain immunogenicity. Importantly, BARDA recently completed an In-Process Review or IPR of Novavax' s contract covering our seasonal and pandemic programs, which, as you know, is a $179 million contract. A team of U.S. government experts including representatives from BARDA, the FDA, NIH and CDC reviewed the program. Based on the results of the IPR, a milestone decision has been made to continue the contract for both the seasonal and pandemic influenza programs. This was an expected decision, but it's always nice to have a positive feedback on the progress we've made today.

Now looking forward in 2013, we expect to achieve several key milestones. First, as I've discussed previously, we will announce top line results for our ongoing Phase II trial of our RSV vaccine in women of childbearing age in April. This will be followed by top line results of the vaccine in the Phase I study in the elderly later in the second quarter. Based on these 2 clinical trials, we'll determine the future path of both of these programs.

As a result of the January 2013 IPR with BARDA, we will advance our clinical -- our research activities and move our seasonal, influenza and pandemic vaccine candidates into later-stage clinical trials. The timing of these trials will be based on the data generated over the next couple of months. These data will help us to find the timing and pathway that our product candidates will take toward licensure. We expect to report on these results and time line at midyear.

I am pleased to report that CPLB, our joint venture partner in India, is expected to initiate a clinical trial for a recombinant nanoparticle rabies vaccine candidate in India. The vaccine candidate has passed toxicology parameters, and we're now awaiting final regulatory approval for trial initiation. Rabies is a huge problem in India, China and other countries where it's not common practice to vaccinate pets. Our hope and expectation is that our recombinant vaccine candidate may add significant benefit over current treatments. Beyond that, we expect to continue our research collaboration with CPLB in India, LG Life Sciences in Korea, and we expect to complete our expansion into our manufacturing and office facilities in Gaithersburg, Maryland.

So before I turn the call over to Fred, let me leave you with the following key takeaway points. First, we believe our RSV vaccine candidate is in the lead clinical development position in the industry today. And with the clinical data to be soon released, we plan to maintain that lead throughout 2013. Second, we're confident that we will complete our manufacturing optimization and improve the B strain in immunogenicity for a seasonal influenza candidate by midyear and be prepared to advance it into later-stage clinical trials. And finally, and most importantly, we believe that we've made dramatic advances in the development of our team. Over the last 2 years, we've assembled a highly-proficient scientific medical and operational team. It's hard to overstate the importance of our new human infrastructure. We are now poised to advance and broaden the product pipeline and thereby, enhance shareholder value.

With that, I'll turn the call over to Fred to review the fourth quarter and year end 2012 financial results.

Frederick W. Driscoll

Thank you, Stan. For the fourth quarter of 2012, we reported a net loss of $8 million or $0.06 per share compared to a net loss of $3.7 million or $0.03 per share for the fourth quarter of 2011. For the full year 2012, we reported a net loss of $28.5 million or $0.22 per share compared to a net loss of $19.4 million or $0.17 per share in 2011. The primary reason for the increased net loss in the full year 2012 was primarily a result of higher R&D spending, increased cost relating to our RSV clinical trials, higher related employee costs and expenses associated with our new manufacturing facility.

Revenue in the fourth quarter of 2012 was $4.6 million compared to $5.8 million in the fourth quarter of 2011. And for the full year, revenue increased by 50% to $22.1 million, primarily as a result of the BARDA contract.

Fourth quarter operating expenses were $14.1 million as compared to $10.1 million in the fourth quarter of 2011. For the full year 2012, operating expenses increased to $51.7 million compared to $36.3 million in 2011. The increase in operating expenses for the full year was primarily due to increased costs related to our BARDA-related clinical trial costs, our 2 RSV clinical trials that Stan mentioned earlier, higher related employee cost and expenses associated with our new manufacturing facility, as we previously mentioned.

As of December 31, 2012, the company had $50.3 million in cash, cash equivalents and investments compared to $18.3 million as of December 31, 2011. The increase in our cash position in 2012 primarily resulted from the successful completion of 2 equity offerings and the use of our ATM during the year, which generated approximately $54 million in net proceeds. With the BARDA contract in place for the full year in 2012, as well as the non-dilutive funds we received from PATH and the tenant improvement allowance on our new facility, we were able to continue our efficient use of cash. To highlight that point, cash used in operating activities, a key financial metric that we closely monitor, dropped from $23.6 million in 2011 to $18.2 million in 2012, or a 23% reduction. Overall, from a liquidity perspective, we have entered into fiscal 2000 (sic) [2013]

in the strongest financial position ever with the available resources to move our programs forward into 2015.

That concludes our prepared remarks and the operator will now open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Kevin DeGeeter from Ladenburg.

Kevin DeGeeter - Ladenburg Thalmann & Co. Inc., Research Division

A couple of things here. Could you kind of characterize for us some of the parameters that you would evaluate when determining whether or not the Phase II RSV data is insufficient to move forward with a single dose in the Phase IIb dosing immunogenicity? And just -- can you kind of put some numbers on how we should sort of frame expectations as we look for those 2 studies to read out?

Gregory M. Glenn

This is Greg Glenn, Chief Medical Officer. So as you know, in December, we probably start our Phase I results in vaccine. And I think they provide a very good benchmark for a target in terms of immunogenicity. And in those measures, we took, I think, 2 important derivatives from the sera that would be considered important for protection. One was the neutralizing antibody, and secondly, the palivizumab-like activity. So in those studies, I think we defined a rate level of immunity that would be sufficient for going forward with maturing the immunization program. And so the current trial, as you may know, we have taken the dose that gave us a very good response, 60 micrograms with alum and without alum and -- into this trial. And then we also did a 1- and 2-dose regimen, and we also increased the amount of antigen in the regimen. Our expectations are that we'll reproduce the data and review these different aspects that is 1- or 2-dose immunization, increasing the dose out of no dose to see where we stand with reference to that data. So those will be -- that will be, I think, in terms of our reference point, judging what we take forward in terms of these different questions we've asked in this trial. We think that immunogenicity we showed in Phase I was very good, and we're really expecting to reproduce that and possibly improve on that.

Kevin DeGeeter - Ladenburg Thalmann & Co. Inc., Research Division

And sort of as a related follow-on, could you give us an update on your thinking with regard to business developing and potential partnering with regard to RSV? Do you envision potentially looking for at least a regional partner prior to a IIb study? Yes, just kind of an update on your thinking there is -- would be helpful.

Stanley C. Erck

Yes, this is Stan. And so as we have done for the last year, we've taken the inquiries from companies interested in the program. And as you suggest, we've taken both -- we are -- let's back up a second. All companies interested in vaccines have an interest in RSV vaccine, either they have an internal program or they're looking to license up ahead. They've all come to talk to us. I think, that it's fair to say that we've talked to the global partners and we've talked to regional partners. We are -- we will make the decision to partner when we find the right deal and the right partner. We are not expecting to partner until we have the right opportunity. We're prepared to take the program through to, perhaps to licensure, but at least through proof-of-concept trials next year. And we think that, that allows us to control our own timelines and manage the program most efficiently. We raised money last year so that we could keep control of this project, and that's our game plan.

Kevin DeGeeter - Ladenburg Thalmann & Co. Inc., Research Division

Terrific. And maybe just one housekeeping question here on the quarterly financials, Fred. Fred, your gross margin in the quarter looked pretty good. Were there any sort of onetime catch-up items from BARDA in terms of payment for work done in earlier periods? And how should we think about the relative flow through on some of the catch-up, specifically I'm thinking of some of the Phase II expenses for which the company was not immediately reimbursed for.

Frederick W. Driscoll

Okay. So as I think we've reported in our public documents, in our notes that our S205 trial, the company has borne the cost of those -- of that trial, and once we move back into the clinic with our quadrivalent -- with a quadrivalent IND, then BARDA will relinquish the fund that we spent in that trial. So that is still outstanding. That has not happened. And again, the expectation in, I think, what you should be thinking about there is that, that would be -- that those monies would come back on -- into the revenue line once the IND has been filed. And as Stan mentioned earlier, we expect to have results on the pre-clinical work we're doing midyear, and then we'll make a call from there. So I think, that's the best guidance I can give you on that.

Operator

Our next question comes from Greg Wade from Wedbush.

Gregory R. Wade - Wedbush Securities Inc., Research Division

Greg, with respect to the pandemic flu program, I guess you haven't disclosed the adjuvants that are being explored here. There's been some recent reports on squalene in narcolepsy, and I was wondering if you could confirm for us that you're not using squalene in that program? And also, along that line, with respect to 2 versus 1 injection, obviously the government is concerned about people returning for their second injection. They would prefer a single administration schedule. Is there any chance you could give both injections at the same time on opposite arms in order to potentially list the protective immunity that you're seeking? And then I'll just ask my next question after that.

Stanley C. Erck

Greg, I'm going to pass this on to Dr. Fries, who's the expert in flu in our company.

Louis Fries

Let me first start with the adjuvant question. I'm not prepared to discuss the adjuvants that we've evaluated yet. The business discussions are still ongoing. And so I'm not really at liberty to discuss the contents of the adjuvants at this time. The narcolepsy question that you've referred to is an exceedingly complex one, which has undergone a lot of investigation to this day. And I would only note that there are layers and layers of potential causal effects involved in that investigation in which the implicated vaccine is only one. So I would caution you about leaping to any conclusions about squalene, one way or another. Now as regards 1 dose versus 2, there have been trials in which double doses of influenza -- of pandemic influenza vaccines, not ours, but other sponsors, have been given together. And while you can have some improvement of the immune response by doing that, you have to realize that the recent pandemic influenza's problem is that humans are profoundly naïve to the avian virus antigens. And so humans are really unprimed, and giving almost any amount of drug at the first dose won't reverse that. It is possible to give time-compressed regimens down to about 10 or 14 days, but at time intervals below that, they're just not effective no matter -- well, they're effective, but no more effective than 1 standard dose, no matter how much antigen and adjuvant you give. It's been the experience of most pandemic programs, including ours, that to get a really robust response, you need 2 doses. You do get some response after 1 dose, and in many of our treatment groups, we certainly cleared the 0 conversion criteria, and we're closing in on the 0 protection criteria after 1 dose. But to fully satisfy the criteria that the FDA has articulated, most vaccines are going to -- well, all vaccines that I'm aware of, are going to continue to meet 2 doses.

Gregory R. Wade - Wedbush Securities Inc., Research Division

And just a follow-up question, Fred. Can you just remind us what your cash burn guidance is for 2013?

Frederick W. Driscoll

Greg, we've, as a policy of the company, have not provided guidance, future guidance on burn rates. And so what I would say is, what we've -- what you will see disclosed in our filings, and what we've said on this call, is that there will be a substantial increase in our research and development costs year-over-year in 2013. So -- and that's, again, to support primarily the RSV programs we have moving forward. So I think that's the best guidance I could give you as far as the cash burn rate for next year.

Gregory R. Wade - Wedbush Securities Inc., Research Division

Maybe you can help us back and just let us know what you think cash revenues and cash expenses to be there.

Stanley C. Erck

I'm sorry?

Gregory R. Wade - Wedbush Securities Inc., Research Division

I'm kidding.

Operator

Our next question comes from Ted Tenthoff from Piper Jaffray.

Edward A. Tenthoff - Piper Jaffray Companies, Research Division

My question has to do a little bit more on kind of the BARDA funds that have been held up as we're awaiting IND filing. Is there any way you can share with us sort of what this -- and I'm going to use the term "at risk," although I kind of use that lightly. But what is the sort of receivable to BARDA right now regarding the quad program?

Frederick W. Driscoll

Yes. Ted, this is Fred. So first, let me say the company does not view the repayment of those costs as a risk. BARDA has clearly indicated to us that, upon the filing of the IND quadravalent for the dose confirmatory trial, that those funds will be released. And I share that the relationship with BARDA is very, very good. So we don't view this as a risk at all, and neither have we booked any form of a reserve on the books for it. We would expect that, that number is around $3 million. That's what we'd probably disclosed in our documents once -- again, once we stop the quadrivalent trial.

Edward A. Tenthoff - Piper Jaffray Companies, Research Division

So I'm trying to get a better sense, because as I try to model this, I know that the first phase of the BARDA contract is worth $97 million or so. And that probably, to date, and again, I mean, I'm trying to pull this together, but you've probably maybe received, I don't know, like, maybe $30 million, probably not even that much. So how should we be thinking about these dollars? It sounds like it's not going to be that much different than the first half of 2013, so this can be very back-end-loaded in 2014 or the first half of 2014? Because my understanding is that the 3-year time frame is kind of in the middle of 2014. So we're really down to about 18 months and probably $50-some million to receive. So how should we be thinking of that, especially if the first half of this year is probably going to be still relatively modest in terms of monies received from the contract?

Frederick W. Driscoll

Yes. So you're right. The amount of revenue that we have booked is in between $30 million and $40 million in revenue since the inception of the contract award. We -- what I would say is -- you're also correct, is that until we have identified and moved forward with the optimization of the lineage and then move back to the clinic, the spending is clearly, going to be back-loaded. And clearly, the real big funding starts when we launch the Phase III. So you are correct in that.

Edward A. Tenthoff - Piper Jaffray Companies, Research Division

Okay, cool. That's really helpful. And I do appreciate you clarifying the company's view that this really isn't at-risk, that it is not at-risk funding. I appreciate that clarification as well.

Operator

Our next question comes from George Zavoico from MLV.

George B. Zavoico - MLV & Co LLC, Research Division

First question to Fred. You mentioned that your operating expenses have gone up since '12 -- from '11 to '12. And your net cash used, however, has gone down a lot. Is -- I mean, that's sort of opposite of what one would expect. Is that because of the 1 quarter payment in arrears for the BARDA or is there any other reason for that?

Frederick W. Driscoll

I think, one of the things you have to note is that we also have received a substantial amount of cash from, of course, from the BARDA contract, but secondly -- that offsets those expenses. But secondly, we have a tenant improvement allowance on many of the improvements that we're making on our new facilities, have also, from a non-diluted perspective, have improved the cash flow. I also would add to that, we've -- as Dan mentioned earlier, we have been funded 2 -- almost $2 million from PATH for the Phase II clinical trial in the women of childbearing age, again, a non-diluted funding. That also has offset the cash situation. So that's really what's driven it, George.

George B. Zavoico - MLV & Co LLC, Research Division

Okay. What's the magnitude of that tenant improvement allowance? And is that coming from the state of Maryland?

Frederick W. Driscoll

No. It's about $4 million and it is actually a part of the deal we negotiated here on the lease of the new facilities. So that's -- those costs are being borne by the landlord, and the cost of the lease doesn't really start until April of 2014. So net-net, it is actually a cash benefit to the company.

George B. Zavoico - MLV & Co LLC, Research Division

It's a great lease.

Frederick W. Driscoll

That's a great appreciation.

George B. Zavoico - MLV & Co LLC, Research Division

Yes. The -- so as Ted was just speaking of, the first part of the BARDA allowance, the first 3 years is up next year. So this IPR that just happened is not part of the first -- that's sort of the interim look. When you get to the same point next year, is there going to be another similar sort of analysis on your progress?

Frederick W. Driscoll

No. So that's a really good question. And the IPR was actually in the actual contract award, which is on the public domain. And it stipulated that in 18 months that the government -- and I should note that this was a panel, a very large meeting that was held with our scientific experts from the CDC, from the NIH, from the FDA and from BARDA, so there's a full panel, that reviewed our program. It was an 18-month and in essence, George, it's a go/no-go decision based upon the progress the company has made, and we were very pleased to get the go. So -- but there will not be a second one. It was a one-time event, and that, again, was in the contract.

George B. Zavoico - MLV & Co LLC, Research Division

So you'll go seamlessly from the first 3-year period into the second -- and into the second 2-year period then next year, presumably?

Stanley C. Erck

No. George, this is Stan. What the [indiscernible] does is it's a mid period for the first 3 years. It takes us through that 3-period, and that 3-year period is probably going to be extended by some point of time, some months to eat up the full $97 million. And then after the end of that $97 million period, after the end of a Phase II -- in the Phase II meeting with the FDA and as we look at Phase III, that will then kick in the decision to go into the option period. So that is -- there is another decision to make based on going into the option period. But the only decisions on going forward now for the base period are the decisions of what we and BARDA see based on the project going forward, what the FDA says about moving into later-stage phase trials.

George B. Zavoico - MLV & Co LLC, Research Division

Okay. So in other words, the base period is not time-warranted. It's limited by the $97 million. You got to spend that, then you move into the option period. And the base period could then be 3 years or 4 years or 4.5 years, whatever it takes to get to that Phase III.

Stanley C. Erck

Yes. And so with the details, that's basically right.

George B. Zavoico - MLV & Co LLC, Research Division

Okay, okay. That's good. So you have a little bit more run rate with that $97 million then, I guess, whatever time you need, you have it. And in that regard, I guess, this is a question for Lou. I mean, last quarter, you said there were a lot of things you're going to be doing to try and improve and optimize the B strain. You've been -- in this call, it sounds like everything is pretty much on track, and until you have the data -- I think, we have to wait until you get the data before we get an update then, is that fair to say?

Louis Fries

Yes, I think, that's fair to say. We've done a lot of preliminary analytical work and we focused on 3 or 4 potential hypotheses and things that we can do to either manipulate the genetic construct to the B strains. In fact, for all strains. Any change we would make, we would homogenize across all strains so that there would be one regulatory package supporting all the strains. But the changes that could involve how we manipulate the generic construct, the changes that might involve the exact timing and concentration of reagents we use to inactivate baculovirus, the changes that might involve different excipients or different formulations and potential changes in the process that might free up excess lipids that would block some of the antigens. So we focused on those areas because we have preliminary data pointing us in some of those directions, and now we're just completing those experiments until we have a definitive answer that suggests we should go forward with one or more of those, and we don't rule out the possibility that we could use several of them. But we will determine that they benefit us with the B strain and will determine also that they're not deleterious to any of the other strains, so that we have a new uniform process.

George B. Zavoico - MLV & Co LLC, Research Division

I don't recall whether the CDC changed any of the strains this past month. And if so, do you have to make those adjustments as well going forward?

Louis Fries

Well the U.S. recommendations, in point of fact, aren't published yet. The WHO recommendations are, and I suspect the U.S. recommendations will be closely similar. The B -- one of the B strains will carryover from the PATH. There's a new B strain that has been recommended for the Yamagata lineage and we will be working on the master virus seed for that. There has been an adjustment in the H3 and 2 strain, but one of the very nice things about our system is that we can pick and choose whether we use cell-derived virus or whether he we use egg-derived virus sequences to produce our antigens. And so we're comparing the sequences for the new H3N2 antigen that has been recommended by WHO, and will probably be recommended by CBER with the materials we already have. And it may well be that we do not need to change. But if we do, we'll pursue making a master virus seed for that one as well.

Operator

Our next question comes from Vernon Bernardino from Brinson Patrick.

Vernon T. Bernardino - Brinson Patrick Securities Corporation, Research Division

Just a few housekeeping questions. It looks like if not for the higher-than-anticipated R&D expenses, the q would have come in line. Can you comment on whether it was RSV or manufacturing that was the driver? And if it was manufacturing, can you comment on what the drivers of those costs were and what else needs to be done with the new facility?

Frederick W. Driscoll

Hi Vernon, this is Fred. No. It was clearly clinical-trial related costs, specifically with RSV, that drove that increase.

Vernon T. Bernardino - Brinson Patrick Securities Corporation, Research Division

Okay. Great. And if I -- so then, I know your practice is not to comment on burn before, but lastly, if then it was driven by RSV and you had already mentioned that clinical trial costs would increase in 2013, what kind of a run rate do you think we could anticipate for R&D expense going forward?

Frederick W. Driscoll

That sounds like you're asking me for a projection, Vernon, and we're not going to give guidance. As I said, we do expect a significant increase year-over-year in our R&D, but we're going to be moving forward. As you've heard today, we still have the 2 ongoing trials that moved from the fourth quarter of 2012 into 2013. So those costs are still coming in. But that's really as far as I want to go.

Vernon T. Bernardino - Brinson Patrick Securities Corporation, Research Division

Okay. Just an out-of-the-focus then, are most of the new facility costs are passed?

Frederick W. Driscoll

Well, the facility costs will really be flat year-over-year. As I said, we really don't, from a cash perspective, we don't really start to bear those costs until 2014. But rent and facility costs, which we have to actually, on an accounting basis are straight-lined over the term over the lease. There will be no change year-over-year in that.

Vernon T. Bernardino - Brinson Patrick Securities Corporation, Research Division

Okay. And this is actually going back to a comment, I believe, if I remember correctly, that Stan had made, then perhaps Lou could also comment. If I recall correctly from previous calls, there were a few things that still needs to be ironed out regarding RSV vaccine, sort of a go-slow R&D approach going at your own pace because you have some financial flexibility, and the reason is because you want to advance those candidates and generate the best data possible. Are there any update on those efforts as well as the RSV program? And for example, any work needed to be done as far as discussions with the FDA on use of the [indiscernible] as an assay for RSV going forward?

Stanley C. Erck

Yes, This is Stan, Vernon. So let me put some color on this because it's important. So 2012, we conducted -- we initiated 5 clinical trials. We've got a lot of data, we're getting more data in the next quarter. We are a data drive company. We take that data and then we sat down -- and I think we reported this probably 6 months ago, we decided that we would we look at all the approaches that we could do to optimize our process -- our manufacturing process that will give us a product that we can use, take the late-stage clinical trials and through to commercializations as well as RSV and for our flu programs. And it's a great place to be because we've identified the matrix of dozens of the different experiments that we attempt to conduct over the following 6 to 9 months. We're 6 months into it. I think we have taken those dozens of potential pathways of optimization, narrow them down to the final probably 2 or 3 approaches where we think have the most potential, and we're getting data from those experiments over the coming couple of months. And at that time, we'll be in a position, both with the data from RS2 -- RSV clinical trials, the data from 9 months worth of work of optimizing our process both for flu and for RSV so we can have the later-stage manufacturing process. And that'll allow us to design, plan and execute on clinical manufacture for clinical trials, and then ultimately, for -- going back into the clinic on both programs. That's where we are. It's a good place to be.

Vernon T. Bernardino - Brinson Patrick Securities Corporation, Research Division

Okay. Can you comment or provide any color on discussions with the FDA regarding -- on palivizumab as part of the assay for RSV?

Louis Fries

This is an exploratory assay at this point, and they're not going to be commenting specifically on this. We see it as an important, potential pathway through helping us understand that the vaccine could work because it's related to a licensed product with the same kind of activity. But in terms of CBER, et cetera, we expect, in the long run, to do an efficacy trial. And this is an assay that allows us to think about how to derisk the final effficacy trial. So we won't have -- unlike flu, this won't be the immune correlate in advance of doing an efficacy trial. But what it does indicate very strongly, is the vaccine is likely to work. And so it gives us guidance on designing the trial, designing the program, making sure we preserve that activity and know how to measure it.

Operator

Our next question is a follow up from Ted Tenthoff from Piper Jaffray.

Edward A. Tenthoff - Piper Jaffray Companies, Research Division

I just -- since the K hasn't been filed yet, I just wanted to ask where were year-end shares or where are current shares?

Frederick W. Driscoll

Yes, Ted. Total shares outstanding will be about $148 million total. Fully diluted, about $160 million.

Operator

And our next question is a follow-up from George Zavoico from MLV.

George B. Zavoico - MLV & Co LLC, Research Division

Fred or Stan, one quick question that occurred to me. It's March 1 and the sequester begins, and you do have government funding. Is there going to be any adjustments from BARDA with regard to that? Do you know or -- do you know yet?

Frederick W. Driscoll

Yes, George. That's another good question you've asked today. The -- we had a BARDA -- a recent BARDA quarterly site. As you know, we do that once a quarter. It's an in-person meeting, and they were here. And I actually asked that question, and they said that because of the monies due to this contract they basically committed, they are not expecting any kind of a problem with sequestration. So we did ask that question, and their answer was, "no major effect."

Operator

[Operator Instructions] Okay. I would like to turn the conference back to Mr. Stand Erck for closing remarks.

Stanley C. Erck

Okay. Thanks a lot, and thanks, Fred. So let me take the opportunity. For those who are interested, we'll be at the Roth Capital Partners 25th Annual Growth Stock Conference on March 19. We thank you for your time and attention this morning, and look forward to the next call.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may all disconnect at this time.

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