Valneva SE (INRLF) CEO Thomas Lingelbach on Q3 2018 Results - Earnings Call Transcript

About: Valneva SE (INRLF)
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Valneva SE (OTC:INRLF) Q3 2018 Results Conference Call November 8, 2018 8:00 AM ET


Thomas Lingelbach - President and Chief Executive Officer

David Lawrence - Chief Financial Officer

Franck Grimaud - President and Chief Business Officer


Thomas Guillot - Kepler Cheuvreux

Max Herrmann - Stifel Nicolaus

Samir Devani - Rx Securities

Simon Scholes - First Berlin

Thomas Lingelbach

Thanks a lot. Welcome, good day. It's a pleasure to present you our Nine Months Financial Results and a general business update in a year that has been marked to date by quite substantial achievements around our key business and R&D milestones. And in a year, that is still expected to deliver a few substantial milestones and achievements till year-end.

Slide 4 of the presentation summarizes the key activities and milestones that we have achieved to date. I think it is unprecedented that we had been able in the company's history to raise 50 million at lowest discount possible, bringing in leading blue-chip U.S. investor, which we see as a key enabling step to further strategically develop the company. And David is going to talk more about that during his part of the report.

Our Lyme program, the key value driver in our R&D pipeline is progressing very nicely, following very good Phase I data. We have worked on the preparation of the Phase II. We have gone through very comprehensive alignment processes with the 2 regulatory agencies in Europe and United States. And we're ready to initiate our Phase II as planned by the end of this year.

Lyme, just a reminder, is and will be the key infectious disease challenge in the northern hemisphere going forward. Chikungunya, a very interesting program, which we're going to present more in detail is currently closing out its final Phase I data set, up to the middle data point. With data that we still expect at the end of this year, so it would be very late this year according to the current timeline but still a very, very important milestone ahead of us. So the same true for Zika. Our Phase I results are currently in the data analysis phase. And hence, we expect data within the next few weeks.

We had also some important achievements around our commercial products, especially IXIARO, got approved another scheduled for United States, accelerated vaccination schedule with the two vaccinations day zero and seven instead of day zero and day 28. An important point for the adoption of a travel vaccines in any travel vaccine market as previously seen in markets where the accelerated schedule was approved before Europe or Canada. We still expect a new IXIARO supply contract with the U.S. Department of Defense. And as in prior years, we expected in the fourth quarter. Sometimes it's a bit early in the fourth quarter, sometimes it comes a bit later. So we expect this in the coming weeks.

Yes, with that more general business overview, I would like to hand over to David to give you our financial report.

David Lawrence

Thanks, Thomas. Everyone, I'm pleased to introduce Valneva's financial results for the nine months ended September 30, 2018. Before we're going to do that and firstly, I'd like to pick up on Thomas' point about recent financing. So if I could take you to Slide 6, please. There are some key attributes of this financing that we are extremely pride and extremely pleased about. The fundraise was oversubscribed. It had a very low discount of just over 2.5%, which is phenomenal. The quality of investors is extremely high and I'll come back to that on a second and also a quantum of €50 million. That combination of attributes makes us feel extremely pleased with what we've achieved.

And we previously communicated our listing strategies under review and we've discussed the funding Lyme Phase III, might well have a significant capital requirement. So when you think around 98% of the financing excluding Grimaud and MVM who are existing major investors. We raised 98% of the funds from U.S. life science investors, who are blue-chip, high-quality, and these names include Deerfield, Heights, New Leaf, Armistice and Abingworth and indeed one other extremely renowned investor, whose name we cannot disclose.

So you can see on this chart that we've now got a significant chunk of blue-chip U.S. investors in our shareholder base. And as Thomas said, this financing is very much a strategic enabler for Valneva. And it's very much strengthens our position going forward. Not only as we look towards Lyme Phase III, but also should we be successful in advancing any opportunities that we can find to our commercial products to our business. The other point is very much component of this that we see the U.S. capital markets as being important, not just important, in fact, but pivotal to Valneva's future.

One final point before I move on to the nine months results. The financing completed in week one of October, and therefore, the proceeds are not included in these results, and we'll come back to talk more about cash and debt during the call.

So next slide please, Slide 7, and this will be one that many of you be familiar with. So this gets into the progress in the objectives that we're delivering on and just a quick point before I go into the numbers. And it's not appropriate that Valneva does quarterly guidance or delivers quarterly guidance with the seasonality of our products and the type of company that we are. We focus very much on the years' progress, and we focus only on annual guidance just to make that clear up front.

So on that, I'm happy to report product sales revenue of €71.1 million, which represents a growth for the nine months compared to last year of 10% on a constant exchange rate basis. As many people are aware our revenue profile has a high degree of seasonality, influenced by both the traveler market in Canada for DUKORAL, for example, but also the timing of orders from U.S. Military.

The 10% CER growth is in line with our guidance of double-digit growth for product sales revenues for the -- clearly, as I will discuss in more detail in a minute. IXIARO is a main growth driver, but we also saw double-digit growth in the third-party product sales. And as most of you know, we then reinvest the proceeds from our commercial business into high-value R&D programs, notably the Lyme, as Thomas mentioned, but also Chikungunya.

So next slide, please. I'd now like to spend a couple of minutes explaining the overall revenue breakdown, noting that we've reclassified certain components of the top line during this year of 2018. This also allows to focus on the key guidance components. So product sales revenue. Here we've guided that we plan to break through the €100 million level for the first time in the year of 2018, that's the full year of 2018. And we'd like to reiterate and confirm this guidance, noting the seasonality in phasing of our revenues.

We expect a strong fourth quarter including fully overcoming in the few years out to decline in DUKORAL revenue that we noted in half 1 and also at the nine months. So just to be absolutely clear in that, we now expect DUKORAL sales for the full year 2018 to match the 2017 level. And confirm again that there half 2 2018 sales for DUKORAL will exceed the half 1 2018 sales. And that's very much what we said at the half year results.

IXIARO, as mentioned already, growing nicely enough to moderately driven by penetration in U.S. and Canada, which gives us increasing volumes and in turn of course with the U.S. being well priced. We do see some impact of growth and increase in global annual -- average selling price as the U.S. private market, in particular, comes on stream with IXIARO. And as Thomas mentioned, we suspect further growth will be supported by the rapid immunization, seven days schedule that was recently announced in U.S., which comes in addition to the existing 28 days schedule. And we've already seen that schedule in some of our territories including Canada earlier in 2018 having a positive impact. So we see, for the nine months, that on a CER basis, IXIARO grew by just over 14% year-on-year for the nine -month period.

On DUKORAL. In the half 1 results we reported that DUKORAL have encountered some supply constraints reflected a decline in DUKORAL sales for the 6 months in 2018 compared to the same period in '17. For the nine months to date, in 2018, we reported 18.6 million of DUKORAL sales, which is just under 1% lower than 2017 on a CER basis. Now half 1 that decline was just over 1%. So what you can see is the decline reported in H1 has been somewhat arrested in the nine months. And of course, we anticipate a strong Q4. And that indicates that we have been dealing with the supply constraint effectively.

Third-party product sales. Although, these are small components, the context of 100 million or so, we continue to see a positive contribution biding in mind that these products fits nicely with our existing portfolio. And indeed the nine -month performance was somewhat affected by the late supply of flu vaccines in some markets, where we distributed on behalf of manufacturers. Nonetheless, we've grown third-party product sales 16% year-on-year in the nine -month period.

In terms of other revenues, a couple of comments here. The year-on-year decline comes from the clinical trial manufacturing business in Sweden and that's because J&J have basically cut back their requirement and that's an agreement dated back to DUKORAL acquisition, and we're looking to replace that business.

So there are many components but top line are largely out with our control such as the CTM business, and therefore, we see -- we do see volatility. Lastly company is affected by partners, notably relating to their own portfolios and technology and pipeline progressing where, for example, a cell line such as CB66 is only one component of a product. Service income is similarly out with our control. So while we do expect to see an ongoing positive contribution from other revenue, we don't see this Lyme is a key growth driver.

Further down the page, we are showing, in order just to get a bit of clarity, this has evolved with reclassification. You can see that we are getting positive contributions from grants and R&D tax credits. So we are very much welcome those, but we don't predicate our business model on this income. And that's one of the reasons why we elected to reclassify these items for our 2018. So we will provide the same revenue bids for our full year results, but for 2019 and beyond, we have been providing absolute focus on product sales revenue.

So to wrap up the slide, as I confirm the full year guidance for products sales over 100 million and overall revenue including grants on a like-for-like basis, and 2017 will be in the range of 110 million to 120 million.

Next slide please. So this picture that we're giving you on Slide 9 is one that shows you the breakdown within IXIARO and DUKORAL. And how we're growing year-on-year. You can see that we're confirming the double-digit growth will be delivered on IXIARO in particular and indeed across their product sales. And in DUKORAL, we expected a strong fourth quarter will lead us to match full year 2017 sales. And it is not impossible that we'll beat the 2017 sales, although, we do look very carefully at the dynamics of demand in Canada, for example, where our Q4 is typically a very big quarter for us. And where we undertake significant A&P and indeed direct-to-consumer activity.

So next slide. So on to the P&L, on to profit and loss report. And now the figures herein -- are in actually same rates. So we've talked about product sales, we've talked about revenues. So moving down into cost of goods and services. A 32.3 million that gave us gross margin of just shy of 59% for the 9 months. IXIARO's gross margin is running over 63%. And DUKORAL again and still is about 50%, which is great. Those are both in line with our targets and in line with overall gross margin guidance of 60% for the full year.

Now importantly they're coming down into R&D. Thomas reported already that we're making significant progress with our R&D milestones. And we've previously talked about the need to increase the investment level into R&D as the projects advance. So 18.2 million for the nine months to date compared to 15 million in 2017. That's a growth over 20% year-on-year.

We're absolutely committed to investing -- increasing amounts in R&D and also progress our key clinical vaccine candidates in particular Lyme, but also Chikungunya. And if anything, we might indeed to have expected to see the level of investment growth to be high at this stage of the year.

We have, however, been taking great care to steward our results carefully, and the phasing of external costs has been a little late than what we expected. So the rate of growth, while 20% may not seem of the high to some observers, is in fact, as a result of good stewardship and nothing to do with the progress of the products. Those are going exactly to plan.

Now as a result of this strong stewardship of the resources in the activities. We now anticipate that the R&D cost for 2018 will be in the range of €25 million to €30 million. And just to say that R&D investments in 2019 will be higher than that level, but we'll give more specific guidance with our full year 2018 results.

And the next point going to be marketing distribution, again, we plan to invest more in marketing distribution. That largely reflect the establishment of our own commercial operations for the U.S. private market, which is our primary top line growth driver for this year. The full profitability of this investment withdrew within the coming months and years as penetration increases on the back of the additional sales and marketing investments, including the rapid immunization schedule as previously mentioned.

In addition, and just to be clear for the rest of this year, and as I just mentioned, we undertake direct-to-consumer advertising in Canada and for DUKORAL in key seasons, which are notably quarter 4 and quarter 1, and therefore, we do plan further marketing and distribution investment in quarter 4 to continue to drive that topline. So I just flip down to EBITDA for a second. EBITDA for the nine months for 2018 year-to-date, €6.1 million, which compares to 12 -- just over €12 million in 2017; the 6 million difference is largely explained by the additional R&D and marketing distribution investments as you can see.

Couple of other points before I move on. The year-on-year reduction in amortization impairment. If you remember back, we saw C. difficile right off in Q3 2017 as a one-off charge. So that describes the chunk of that change, but then secondly, I'd also like to remind you all that we have a reduced level amortization and following the extension of our IXIARO patent, which we announced earlier this year.

So as a result of all of these factors, we're reporting an operating profit of €0.9 million for the first 9 months of the year. And we also see a reduction in the level of net loss to €3.3 million in the 9 months for 2018. And finance cost at €3.1 million in year, were also lower than 2017 and that's driven through a combination of increased treasury activity and lower interest costs as we pay down loans, which will come on to in a second.

So next slide please. And that's just to get everyone aligned at Slide 11. I'd like to spend a few minutes on cash and debt. And while we can go into the detail and sense the information, I think it's important to outline our position strategy, particularly noting the recent financing. And again, just as a reminder of, the financing proceeds from the recent pipe are not included in the 9 months or Q3 numbers.

So our 9-month cash position was at €33 million. And we generate to almost €12 million from operating activities. You can see that the €9 million proceeds from operating activities was slightly lower than the half 1 level, and that's of course, due to the increasing investment in R&D and marketing and distribution. So we're also about 5 million lower than we were at the end of 2017. And bear in your mind, of course, as we headed to the proceeds of the financing, but I'd like to confirm that the level of draw down from the EIB that facility remains unchanged at €10 million.

Notably though, we've been making repayments of the Pharmakon facility that many of you be aware of. And as plan to that facility will be freely paid off in early January '19, and that will result in some reduction in our cost of debt obviously. Following the recent financing, we also note that if you can drawdown schedule of the remaining €15 million of capacity with the EIB, and we're very grateful to them for the continued support, including the recent extension of the drawdown period. We've also announced that. So all of that debt repayments that you can see in year, so if you look at the difference between 60 million at the end of 2017 and the 49 million at the end of September 2018, most of that 11 million change is Pharmakon repayments.

So earlier in the year in response to Q&A, I indicated that we'd like to keep our cash position above 35 million. And clearly, we're going to exceed that position, having just on the financing at the end of the year, but we're not going to give any specific guidance on that in order not to prejudice any discussions that we're having with our third parties or indeed to two prejudice our strong relationship with the EIB.

So to wrap up, I'd like to reiterate we're very pleased with our business performance in the nine months, including recent financing. And I think the discount that was provided to allow in that financing just over 2.5% is an indicator of confidence in the company from the capital markets.

We're confirming our guidance for top line and EBITDA and guiding for slightly low level of R&D expenditures that originally outlined by progress in key clinical vaccine candidates is in line with guidance, and clearly, we expect to be in a strong cash position at the end of the year. So we are absolutely looking forward to a strong fourth quarter and to further progress within around our deep pipeline.

And with that, I'd like to hand back to Thomas for some comments on the R&D business and also for closing remarks. Thank you.

Thomas Lingelbach

Thank you, David for this comprehensive and high-quality summary of the financial analysis. I would like to talk a little bit about the R&D pipeline. And as you all know, Valneva's business model is based on the two-key pillar, a good growing commercial business in which we continue to invest, be it on sales and marketing infrastructures and programs, be it also in product lifecycle management as you can see on Slide 13.

But on the other hand, in R&D portfolio, that we classify and determine by a few clear words. One word if we like to use its focus. We don't see ourselves as a company working on 20 R&D programs at different stages of its development. Our objective is to focus on key programs for which we see a high unmet medical need, where we can play an innovation play and where we can be in the front line towards market. As such, we continue to focus on our Lyme program, followed primarily by Chikungunya and the other things more opportunistically like Zika and our C. diff candidate that is still ready for partnering.

So when we talked about Lyme, I mentioned many, many times before, Lyme is clearly the most common vector-borne illness in the Northern hemisphere, steadily growing, and we all know that it is the most emerging infectious disease in the Northern hemisphere. And Lyme disease in its different clinical manifestation can be very, very devastating. And delayed or inadequate treatment can lead to long, long term disabling sequelae. We have developed a pretty unique vaccine candidate. And we're also pretty unique in that there is no other company right now with any Lyme vaccine candidate in clinical development.

Our candidate is marked by a couple of key features. One, is that we, from the beginning, have designed the vaccine candidate in a way that the product could be used on both sides of the Atlantic. This means that we need to have hexavalent vaccine with six different serotypes included. We call it a multivalent vaccine. The second point is that we wanted to build our vaccine candidate on the back of a well understood scientific fundament. And this scientific fundament is the antibodies against the outer surface protein A of Lyme borreliosis. And we know that the antibodies have the ability to downregulate the spherocytes in the mid gut of the tick and hence allow to prevent for infections.

The third element is essentially that we wanted to apply lessons learned from prior Lyme activities and Lyme vaccine program. And hence, we created a stock units based vaccine with different so called heterodimers, different constructs that do include some epitope for the proteins that we're in prior vaccines, but also to include many epitopes that we're not part of prior vaccines, or if they considered in prior vaccine candidate as this is also for potential clinical negative effect.

We've taken all those into consideration, develop the program, nicely develop the throughput clinical all the way through -- to Phase I. We successfully completed the end of Phase I meeting with the FDA earlier this year, in summer essentially. On the back of the positive Phase I data that shows a very nice and favorable safety profile and very encouraging immunogenicity data. This allowed us to plan then for the Phase II. And the Phase II has basically a couple of key objectives, which are outlined on Page 15 in the presentation. The first one is of course dose optimization. We need to identify the final dosage. We know that the immunogenicity results and the level of antibodies generated in the Phase I are good, but not perfect. And that's why we have to work further on defining the optimal dosage, which is a key objective for Phase II.

And we still wanted to evaluate whether the initial vaccination schedule with the three vaccinations that we have planned right now is the optimal schedule or whether we can even test longer Phase II schedule or have already the necessary level of antibodies already after two shorts. All that will be subject to the Phase II, which means that the primary endpoint will be immunogenicity. We will evaluate geometric mean titer against the IgG antibodies, serotype one to six, individually, at one month after completion of the primary immunization schedule.

The total Phase II will include 800 subjects. Like for the Phase I, we will conduct the Phase II in U.S. and Europe. We're still working on the detail split on sites, which we still have to determine, but it will be more than 10 sites overall. And some of them will be based in endemic areas so this be can include Lyme 0 positive, attractive subject at the point of inclusion.

Our extended and expected age range will be 18 to 65 years of age for the Phase II. We have a few milestones coming up also next year while the Phase II is ongoing. You may recall that we amended our Phase I protocol to include a booster vaccination. This will give us early indication of booster ability and general antibody kinetics and response kinetics. And this data will come in the first half of 2019. Since we are testing higher dosage in the Phase II compared to the one that we had in Phase I, we need to go through a so-called running phase, during this running phase the safety of the increased dosage will be determined by independent DSMB. And this one in phase completion we expect in the first half of 2019.

Overall, then the Phase II from start to end will last about two years. And we expect data mid-2020. Then, this will allow us roughly a year later to commence the Phase III. This may support a first filing for life insurance in the second half of 2023. There are, of course, a lot of assumptions behind it, but this is our currently best guess and best-educated guess around further development on Phase II.

When we talk about Chikungunya, I think the environment around Chikungunya has changed quite drastically over the last 12 to 18 months. There are many companies working on different vaccine candidates against Chikungunya. Chikungunya is a mosquito born viral disease and hence fits nicely into our sweet spot and in -- within our capability and capacity set up. It's clearly a disease that we have seen in numerous outbreaks at very high attack rate. And it is considered a vaccine-preventable disease,

And it is considered a vaccine-preventable disease, based on classical mode of action, namely neutralizing antibodies against the Chikungunya virus.

We have a vaccine candidate that is currently in Phase I. And we see our vaccine candidate as quite a differentiated vaccine candidate compared to all other Chikungunya vaccine candidates currently in development. Why is that? We believe that our Chikungunya vaccine candidate has the potential to be a true single short vaccine against this severe and common threat endemic areas but also in areas, which may become endemic since the vector is spreading quite significantly.

I talked about the differentiation before, the -- our vaccine candidate, the live attenuated vaccine candidate with a novel technology that we in license from the Karolinska Institute in Sweden, where an infectious clone was attenuated by deleting a large part of the so called gene coding, alphavirus replicates gene. This is a novel technology that has shown a non-human primate, a very, very good and long-term protection. So a long-term antibody persistence after a single immunization. And of course, we try to show this in our setting for the Phase I right now.

And the phase I has a quite smart design. We vaccinate classically with a single shot and measure immunogenicity and safety. And this data, we comment at very end of this year, as I mentioned at the beginning of the call. We have, in the meantime as announced, started the so-called second phase or stage of this trial, which is marked by revaccination with the highest dose, so we over vaccinate. And this vaccination may act as a so-called intrinsic human challenge. So we see where the people develop erwinia or not, and if they don't, it is an indicator for protection or efficacy. And this is a very interesting and quite unique design. And those data will also come of course next year or mid of the year.

The Chikungunya market dynamic. The -- first of all, the Chikungunya vaccine programs or Chikungunya vaccine activities are now eligible for the FDA priority review voucher. And hence the race is on. And many companies do accelerate their activities as much as they can. But still we believe that we have a very, very unique and differentiated vaccine candidates that may give us a huge commercial advantage post life insurer for a vaccine that target population very similar to what we do, for example, in JE namely travelers, military personnel and people living in endemic regions. Necessarily, there a single shot and in outside situation single shorts are absolutely important and pivotal.

With that, I would like to hand back to David to talk about the financial outlook for the full year and our exciting upcoming news.

David Lawrence

Thanks again, Thomas. So to summarize before we stop for Q&A. On Slide 18, again, just to reiterate the guidance so we're confirming our product sales revenue goal of over 100 million, and total revenues including grants of 110 million, 120 million. We are giving indeed investment guidance at a level of 25 million to 30 million. And we're confirming the EBITDA of 5 million to 10 million.

Slide 19. I think this is a very important reminder. As Thomas just said, we've got a lot of activity ongoing in R&D, but not just in R&D, so we expect to be making a number of PRs between now and the end of the year, including relating to the U.S. Department of Defense contract, including the final sales numbers, including progress on Chikungunya and Zika and also on the new commencement of Lyme Phase II. So we have a very rich and useful pipeline coming forward.

And with that, I'd like to thank everyone for listening. And Thomas and I would support from colleagues if and as needed, we'll be happy to take your Q&A. Back to you operator.

Question-and-Answer Session


[Operator Instructions] We will now take our first question from Mr. Thomas Guillot from Kepler Cheuvreux. Please go ahead sir.

Thomas Guillot

Three, if I may, first on business development. Could you share with us recent developments in terms of M&A? And also, could you share with us on your 50 million recent proceed, I mean, how much will be dedicated to the business development part? What is the size of this, the target you are seeking at this point? And maybe could we have an update on the long-term guidance following your decrease in your 220, '20 long-term guidance? You passed from 2000, €50 million, I think if I'm correct, it was €200 million. Could you give an update on this long-term target and how much will come from the business development part? That was my first question. My second question was on the R&D part. You lowered your guidance. Was it because you were lower than anticipated because of the Phase II Lyme disease or because of lower-than-expected cost for other programs, Chikungunya or Zika? And my last question was on IXIARO. You had a pretty weak Q3 sales on IXIARO. How can we be confident on the recovery in the Q4?

Thomas Lingelbach

So let me start, Thomas. Let's talk from Thomas to Thomas, I suggest. First of all, I think since you raised it a couple of times, I would like to come back to the midterm guidance because I feel that there is a misunderstanding and there's maybe some inconsistency about what is going on. So let's go back to 2016, which is the year where we, for the very first time, said, where does Valneva want to go? And feel free to go back to the 2016 slide. Otherwise, I'm going to share with you again.

We said we will -- we expect that organically for the next five years, we're going to grow double digit on proprietary products. And this is what we said in 2016. And this is what we are delivering again and where we will deliver again. Will this be -- can we measure a product that has a full seasonality effect on a quarterly performance? No, we cannot. And no one in the world can. We can look at products for full year. We can look at products from year-on-year. But for travelers' vaccines, to talk about month phase or quarter phase or whatsoever, it's just mission impossible.

The other point is when you do this math about the double-digit growth, you come to a level of, let's say, somewhere around €130 million to €150 million by 2021. This is still the number that we are aiming for and that we are striving for. And we have said we complement this by looking for products that we may acquire in the same way as we have acquired DUKORAL. Here, we changed our guidance if you like. Initially, in 2016, we said we are aiming to acquire, let's say, around two products or so to reach, by 2021, 2022, €250 million. But we have seen how difficult it is to acquire products. And we have said look, ultimately, for us, the strategic objective was to diversify revenue, to diversify scale and to increase scale of the business as a whole.

And we have indeed corrected last year from the €250 million long-term target or midterm target to €200 million. But we have not, and I reiterate that, we have not changed any guidance on our own commercial products. So when it comes to the M&A, and the point that you raised rightly, we are -- if you do the math again, let's say, we're going to look for €50 million to €100 million phased Lyme byproduct acquisition. And we will be very happy with the €50 million product acquisition. And we have, for the last two years, ongoing dialogue with companies who may potentially divest vaccines thus far.

We have to admit that we have not been successful, but we are trying very hard. And I'm personally convinced that there will be a moment in time where we can be able to acquire such a product. Historically, vaccine -- and you can go back over the last three to four years or five years essentially, the vaccines have been sold. You may see that the acquisition prices were in the reach of 3x revenue. So revenue and this is basically what we can say. So a part of the proceeds that we have, we may certainly use if a product acquisition opportunity comes. But it will require, of course, a more comprehensive financing strategy, which we expect, to a very large extent, to be also non-dilutive. Yes, that may be a long story around the M&A and around all audit product sale components.

Before I hand back to David for a few of the other components, I want to make one comment on the R&D that you made. The R&D expenditure, as David mentioned it during his report, the R&D cost below our initial expectation and guidance has three reasons. Number one, as you have seen in our H1 report, we discontinued our early R&D activities in H1 this year and redirected resources so that we have, with the same resources, more focus on clinical development.

So this, of course, gives us one kind of efficiency aspect and lower R&D cost to progress. The second point is that so we can do more internally that we could have done externally before. Second point is some of our key milestones for the R&D come in pretty late this year. This means data points like Zika or Chikungunya or also the Phase II start for Lyme.

And of course, we work in the clinical development and the execution of clinical trials with CROs. CROs are typically being paid by certain flat amount on a monthly basis or on a basis of enrollment pace but also on milestones when certain activities are being achieved. And so it is extremely difficult, since we had the milestones around year-end, to predict when those payments will actually -- or would actually happen. And this is why we see as another component the shift from 2018 into 2019 in terms of R&D expenditure. And again, this is not an indication around our program progression. We are on all three clinical stage programs according to guidance right now. And I think with that, I hand over to David for the other questions.

David Lawrence

So Thomas, just to be clear, when we talked about timing and phasing of orders and seasonality, so one piece of data I can give you is that we had a U.S. Military order of $5 million, which we shift in very early October.


We will now take our next question from Max Herrmann from Stifel. Please go ahead, sir. Your line is now open.

Max Herrmann

Three questions, firstly, just understand a little bit on the Lyme disease program and your interplay with GSK. I think you mentioned in the past that, I mean, they have obviously an option in the Phase II, but there may be a potential for that. Discussions would mean there be an earlier decision point. I just wonder whether that's still the case. Secondly, just in terms of your Chikungunya program. You're obviously going to be presenting data with the first vaccination. And I just wonder, what sort of seroconversion do you think you need to get to have a single-course vaccination? And then finally, just again on the Chikungunya program, just in terms of what are the next development steps. I wasn't quite sure of the challenge with the second dose, whether that was all 120 patients or just the high dose of being challenged with the high dose. So just trying to understand that program in a little bit more detail.

Thomas Lingelbach

Max, this is Thomas speaking. Excellent questions by the way. So let me start with the first one on GSK. GSK and Valneva both inherited the strategic alliance agreement that was initially executed in between Novartis Vaccines and Intercell. You know that. Under the terms of this agreement, I think it's fair to say that both companies today, GSK and Valneva, would have not executed the similar agreement because there are some ups but also major downsides to this agreement.

The current agreement provides the opt-in at the end of Phase II, meaning on the back of end of Phase II data, GSK has a certain period of time to assess and evaluate the program, its data and then to declare an opt-in. And on the declaration of the opt-in, Valneva would have the opportunity to decide to give it away based on milestone royalties or to decide for co-development, which basically means sharing of the Phase III and later development costs and sharing of the future profits.

This structure is enforced today, but we have stated many, many times before that it's in neither parties' interest to wait for the end of Phase II before going to a decision process that has a lot of implications. So when you think about time to market, it is in both companies' interest to bring the decision process forward and to basically predefine a pathway forward. And this is still a major, major objective for Valneva. And we will try everything, everything possible to reach such an agreement in the interest of patients and in the interest of the program itself to have such an agreement reached.

I would say next year at the very latest so that we are very, very well ahead because in reality, as look at the way Phase I, Phase II transition right now, we started already the Phase II transition in basically March. So we need 9 months or so. So 9 months before you actually stop the Phase II or finish the Phase II. In reality, you need to kickstart all activities around the Phase III if you don't want to lose time.

So I think that's a very important one on Chikungunya. So Chikungunya, so first of all, our primary objective is as usual, Phase I safety. We will look at immunogenicity, and we will look at GMT. We will look at titers that are basically measured by some sort of PRNT or neutralizing assay. Since there are many, many other companies that have already reported Phase I data, we have to see how our data compared to the data that the other Phase I trials have reported. We we would like to see here a clear non-inferiority.

And secondly, we expect for a live vaccine at this level, clearly north of 90% seroconversion after a single shot at the time point. This would be our expectation. When it comes to the intrinsic challenge, we got to vaccinate all groups but with a different time point with a second dose. But they have already six months behind them before the first group gets the first revaccination dose. So we will have antibody persistence data after a single shot already at six months. And we want to see only a very moderate drop in antibody titer, similar to other vaccines that are in the space of live-attenuated vaccines where antibody persistence data over time are available.

Then the other -- and we will, of course -- yes, and as Wolfgang, who's sitting next to me right now just mentioned, we have seen in nonhuman primate that antibody persistence, what's over 80% across a 365 day period. Ideally, we would like to see the same for our vaccine. And the challenge is clear. It provides an intrinsic indication for protection.

Next step, well, to be discussed. I mean, on the back of data, we will discuss with the agency. And I mean, the point is provided that our single shot safety data is clean, provided that our antibody data is clean, while it's hard to imagine what kind of objective Phase II may have, so probably we don't discuss even Phase II anymore. And this is something that needs to be discussed and evaluated with the authorities on the back of data, of course. So one of our key objectives is really that in spring, we're going to have this dialogue.

Max Herrmann

Just a quick follow-up. And I have to say today with the GSK option agreement, would that then be triggered post the end of Phase I? And then the second question is, do you have the seroconversion rates now given that you've finished the first element of that study? Have you got the data from the first dosage?

Thomas Lingelbach

Not yet. It's in the data evaluation phase and then the serology is still ongoing and data management is ongoing. We have no data yet. And on the GSK, good question. It's something that if you had a development program with no Phase II, well, we have to evaluate what this means from a legal standpoint. We haven't done that yet. And on the GSK, good question. It's something that if you had a development program with no Phase II, well, we have to evaluate what this means from a legal standpoint. We haven't done that yet.


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

Samir Devani

I've got a couple or maybe three just really for David, just from the numbers. I just want to confirm that you said you're going to gross margin of 60% for the full year. So that's question one. Question two, just on Pharmakon, if you could just remind us how much is left of that loan that should be paid down this year. And then maybe just to help us with a bit more on the longer term, I just wanted to confirm or not whether you expect the business to be cash burning next year.

David Lawrence

Okay, I'm just writing down your questions, let's deal with them in order. So the full year guidance for the gross margin is 60%. Yes, that remains our target. Okay. So we're about 59% -- I think just under 59% on the nine months. So you can see we're pretty close to that. So if we have a strong fourth quarter, we've got confidence that we should get there. And secondly, regarding Pharmakon, just to be clear, we have already made a number of payments and we pay quarterly. And I'm not going to go into specific commercial terms, but the last payment is in the very first days of 2019.

So at the end of this year, at December 31st, we will not pay down every dollar or cent of the Pharmakon repayment. And the outstanding balance is about €16 million. Okay. That's as much as I can give you there. And clearly, what we do is a matter of good practice. As we generate dollars from our U.S. Military and private business, then obviously, we prepare those dollars and build them up to make the repayments quarterly and indeed the final bullet. So that's another aspect of treasury management. Regarding cash burn in 2019, we're at the final stages, just now putting together our long-range plan and our budget. And it would be premature for me to say anything without having gone through a process with our board.

What I'm happy to say is that we expect we will see further top line growth in 2019. But we also expect, in particular, R&D expenditure growth. There are a number of moving parts. And just to add something to what Thomas said because GSK came up a couple of times in the discussion, we believe that the values that we have are shared with GSK. So we believe that we have a model imperative to get vaccines to market where there is an important and growing unmet medical need. We believe that GSK lives those values in the same way that we do. And therefore, that should help expedite discussions with GSK. And we will have those discussions with them.

We do have them on an ongoing basis with Lyme, and we would expect to have them quickly with Chikungunya. So what I can say is that the 50 million, and this goes back to something else that was mentioned, the 50 million that we raised, that's a gross number by the way. The use of proceeds are primarily to fund around the programs. They are not for product acquisitions. The strategic enablement component, in other words, having investors on board who can potentially help finance such M&A or product acquisition, is absolutely vital. But the 50 million is very much intended for R&D purposes. That helps, Samir?


[Operator Instructions] We will now take our next question from Mr. Simon Scholes from First Berlin. Please go ahead.

Simon Scholes

I just have two questions. First of all, on DUKORAL in Q4, do you expect restocking after the shortage -- supply shortage to play a role in the current quarter? And secondly, I was wondering if you could give us an indication of how significant the Canadian market is now for IXIARO. And also in marketing, you were talking about marketing expansion in Canada. Will you be spending marketing dollars on both IXIARO and DUKORAL in Canada?

Thomas Lingelbach

I suggest that this -- maybe it's a question for Franck. Franck, do you want to answer this question?

Franck Grimaud

Yes. So on your first question on DUKORAL, when we talk about supply constraints, it was more related to manufacturing limitation. So that means we do expect and say strong Q4, including with Canada. We don't see inventory impact at our distributor. And as stated already, we confirm that on DUKORAL, we expect to reach the 2017 budget and hopefully a bit more. For Canada on IXIARO and DUKORAL, so Canada is now obviously the most important market.

Canada is the most important market for DUKORAL, a bit over 50%. And IXIARO is developing, is growing fast in Canada, but still the biggest market is U.S. by far. And regarding the sales and marketing investment for IXIARO, I would say we do continue to invest significantly in U.S. but in all markets where -- and we see high double-digit growth but not only in Canada. Overall in new markets in U.S. as well. So it's really spread through several territories.


[Operator Instructions] There are no further questions in the telephone at this time.

Thomas Lingelbach

Okay. So then I would like to close out by thanking all of you for your attendance today, for following us closely, for your support, for your confidence. And we are looking forward to our different interactions in the coming months. Thank you so much, and still have a good day. Bye-bye.