Novavax Inc
NASDAQ:NVAX
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Novavax Inc
Earnings Call Analysis
Summary
Q3-2023
The company launched its updated seasonal COVID-19 vaccine, focusing on securing market share and fulfilling Advanced Purchase Agreements (APA). Despite a competitive market and lower-than-expected demand, the launch in the U.S. saw promising signs of interest, with a single-digit market share expected to improve. The vaccine is pending approval in other key markets, with plans to deliver all contracted doses for the season. Financially, a significant cost-cutting initiative reduced operating expenses by $950 million year-to-date and reduced liabilities. Revenue guidance was adjusted due to delayed U.S. season starts and lengthened season expectations, with approximately $1 billion forecasted for FY 2023 and $300 million for Q1 2024, totaling $1.3 billion.
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Ladies and gentlemen, thank you for standing by, and welcome to the Novavax Third Quarter 2023 Financial Results and Operational Highlights Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.
I would now like to hand the conference over to your speaker today, Erica Schultz. You may begin.
Good morning, and thank you all for joining us today to discuss our Third Quarter 2023 Operational Highlights and Financial Results. A press release announcing our results is currently available on our website at novavax.com, and an audio archive of this conference call will be available on our website later today.
Please turn to Slide 2. Before we begin with prepared remarks, I need to remind you that this presentation includes forward-looking statements, including information relating to the future of Novavax, its key strategic priorities, operating plans, objectives and prospects, full year 2023 and first quarter 2024 financial guidance, the amount and impact of Novavax' cost reduction plans, its future financial or business performance conditions or strategies, its partnerships, anticipated timing and outcome of future regulatory filings and actions, and the ongoing development marketing opportunities, manufacturing capacity, and future availability of our vaccine candidates, and key upcoming milestones.
Each forward-looking statement contained in this presentation is subject to risks and uncertainties, that could cause actual results to differ materially from those projected in such statements. Additional information regarding these factors appears under the heading Cautionary Note regarding forward-looking statements. In the slide deck we issued this morning and under the heading Risk Factors in our most recent Form 10-K and subsequent Form 10-Qs filed with the Securities and Exchange Commission and available at www.sec.gov and on our website at novavax.com as well as subsequent filings with the SEC. The forward-looking statements in this presentation speak only as of the original date of this presentation, and we undertake no obligation to update or revise any of these statements.
Please turn to Slide 3. Joining me today is John Jacobs, our President and CEO, who will provide an update on our progress during the quarter for our 3 key priorities. Additionally, John Trizzino, Chief Commercial Officer and Chief Business Officer, will provide an update on our commercial activities. And Dr. Filip Dubovsky, President of Research and Development, will discuss our clinical development and pipeline. Finally, Jim Kelly, Chief Financial Officer and Treasurer, will provide an overview of our financial results.
I would now like to hand over the call to John Jacobs. Please turn to Slide 4.
Thank you, Erika, and thank you, everyone, for joining us today. I'm pleased to be here today along with the members of our executive team to discuss our third quarter 2023 financial results and operating highlights, and the important progress we've made across our 3 priorities.
Let's begin with our first priority, delivering an updated product for the current fall vaccination season. Beginning with our launch in the U.S. and subsequent approval in the EU, we've demonstrated our ability to update our COVID-19 vaccine with seasonal strain changes, and we are focused on commercial execution to gain market share and to deliver on our APA commitments.
In the U.S., we started the season approximately 3 weeks ago with the shipment of doses to major retail pharmacies. We achieved our prelaunch goal of securing broad access to our vaccine, the only protein-based non-mRNA option in the country. Having launched several weeks after the competitor vaccines, we have limited preliminary data, and although early we are seeing indicators of increased awareness and growing interest in our vaccine.
In Europe, Nuvaxovid was approved in October. We are also awaiting authorization in Canada, U.K., Australia and New Zealand. In these markets, we have advanced purchase agreements under which we expect to deliver all of the contracted doses for the '23-'24 season. Given the U.S. launch of our vaccine in mid-October, we believe it's too early to assess the true market uptake at this point in time.
Market wide, we have seen lower-than-expected COVID-19 vaccine demand. Given the uncertainty in the U.S. market and approval in Europe several weeks behind our competitors, we expect to deliver revenue at the low end of our prior guidance for the season with some of the revenue expected to shift into the first quarter of 2024. Importantly, we did not originally expect any revenue to occur in Q1 of 2024. Jim Kelly will provide more context on this later in the call.
Our management team is leaning into and focusing on our opportunity to create a robust and sustainable business platform for years to come, which includes an optimized and differentiated product presentation in 2024 and 2025, as well as additional restructuring to create a more efficient business model, which will facilitate the late-stage development of and a smooth transition to the anticipated launch of our Combination COVID-19-Influenza vaccine in 2026. We believe that a Combination COVID-19-Influenza vaccine represents a significant opportunity in this market, which is why we are concentrating our portfolio investments to bring forward our unique protein-based combination vaccine, which is likely to be a preferred option for many consumers and health care providers.
Now let's move on to Priority #2, which is to reduce our rate of spend, manage our cash flow, and evolve our scale and structure. In the quarter, we continued to make significant progress on our commitment to improve our financial position while maintaining the capabilities to support long-term value creation.
Year-to-date results include a $950 million reduction to operating expenses versus 2022, and in addition, an approximate $1 billion reduction to current liabilities from our December 22 baseline. We are on track to exceed our previously announced global restructuring and cost reduction plan for 2023 by over $100 million for combined R&D and SG&A expenses, while at the same time, having successfully achieved our objective of updating our vaccine and launching this season, demonstrating that we can significantly reduce cost while maintaining our core capabilities.
While this reduction was an important step, there are more efficiencies we can achieve. And we are prepared to further reshape and size the scope of our operations beyond previously announced 2024 targets, to align with the emerging COVID market opportunity, while advancing our COVID-flu combination vaccine program. Therefore, we are prepared to initiate additional cost reductions to decrease 2024 expenses by over $300 million above and beyond the previously stated targets for 2024. Jim Kelly will speak further about our 2023 guidance and plan to drive significant improvements to our cost structure later in the call.
Finally, let's discuss Priority #3, which is to leverage our technology platform, our capabilities and our portfolio of assets to drive additional value beyond Nuvaxovid. Our recombinant protein-based nanoparticle technology platform and Matrix-M adjuvant have the potential to produce a variety of differentiated vaccines. Our priority here is to focus our R&D investment and resources on bringing forward our protein-based COVID-Influenza Combination vaccine product.
As Filip will discuss later in the call, contingent upon FDA concurrence on an accelerated approval pathway, we are now planning to move directly into Phase III in 2024 and to fund this program independently. Initiating a Phase III program in '24 would enable a potential launch in the United States in 2026.
Now I would like to hand it over to additional members of the team to discuss our results from the quarter in more detail, beginning with John Trizzino to discuss our commercial updates. John?
Thank you, John. Please turn to Slide 6. As John outlined in the U.S., we are approximately 3 weeks into our season launch. We are pleased that we have secured broad access to our vaccine through contracts with the majority of major retailers, including Costco, CVS, Giant Publix, Rite Aid and Stop & Shop, as well as top integrated delivery networks and major medical groups across the country. To date, the retail channel is the largest segment of the market with approximately 90% of COVID-19 vaccinations thus far, and availability of product was prioritized by distributors in the retail setting.
Looking at the food market, we see that the retail to non-retail channel split is currently approximately 65-35, which mirrors prior years. Therefore, we can reasonably expect that non-retail channel for COVID-19, which includes health care provider offices, could grow through the end of the year.
Please turn to Slide 7. In the U.S., we have seen a slower season start than 2022 for COVID. At this point, last season, just over half of COVID vaccines have been administered. So we expect that a significant market opportunity could remain with the potential to extend the season into the first quarter. However, we believe that multiple factors are leading to slower-than-anticipated vaccine uptake this fall, including distribution challenges in the U.S. market as it is converted from government purchase to commercial.
The availability of multiple vaccines, COVID, flu, RSV and updated pneumococcal for the first time in the same season, trailing vaccine fatigue from the pandemic amongst others. Based upon the data available to date and without a significant trend break, it is our estimate that the U.S. market could be as low as 30 million doses or as high as 50 million doses, should we see a trend break pickup from other channels or an elongated vaccination season that goes into the first quarter. We are expecting lower-than-anticipated sales in the U.S. market due to these and other factors. Jim will provide more information during his section.
Importantly, we do not believe that the 2023 market will be representative of the future opportunity, including combination-vaccine options in the future; and C, the COVID market providing a growing and sustainable revenue opportunity for Novavax for years to come.
Please turn to Slide 8. We are encouraged that our vaccine is now available in the U.S. alongside mRNA options, offering consumers and health care providers a choice this season. While we are currently seeing low single-digit market share, which is consistent with analogs for third to market products in their early stages of their launch, we believe that it is too early to assess our full 2023 potential.
We are seeing some early indicators that where we are positioned on a level-playing field and fully stocked and available we can effectively compete. For example, based on recent feedback in a select national retailer, we have achieved up to 10% market share in our first few weeks of launch. We anticipate market share improvement over the course of this season based upon both consumer and HCP demand for our vaccine as the only protein-based non-mRNA COVID-19 vaccine option. Its refrigerator stable product profile and ease of use and market research showing that around 25% to 30% of consumers and health care professionals prefer a protein-based option.
Please turn to Slide 9. Given the high proportion of vaccinations we are seeing in the retail channel, we are currently focused on driving market share in this channel, working with pharmacies to promote the availability of our vaccine both in their online scheduling systems and in store, and we'll continue to work to stimulate new demand in the non-retail channels. We are also focusing on executing highly targeted direct-to-consumer education and public relations efforts to drive the Novavax brand name and awareness and drive consumers to locations with availability of Novavax' vaccine.
Just 3 weeks into our in-season promotional efforts, we have seen substantial lifts in awareness of Novavax. The HCP aided awareness increasing from 46% to 72%. And we are seeing that within retail and over half our retail outlets that offer the Novavax vaccine, it is offered as 1 of only 2 COVID-19 vaccines available.
Please turn to Slide 10. Outside of the U.S., our 2023 product sales continue to be driven by our existing APAs. In the EU, we received approval and expect to deliver all of the remaining committed doses in other key markets, including in the U.K. Canada, Switzerland, Australia, New Zealand, Singapore, Taiwan and WHO regions, we are awaiting regulatory authorization. Based on committed dose delivery schedules and subject to those regulatory approvals, we expect to deliver all APA doses for the '23, '24 season.
Please turn to Slide 11. I want to reiterate, we believe that this season is a transitional one both for the size of the market opportunity and our market share potential and that long term, both the COVID-19 market and our ability to penetrate to penetrate the market, represent a significant ongoing opportunity for our company.
Early feedback from our launch has reinforced our belief that there is a demand for a differentiated vaccine option and that Novavax will play a meaningful role with potential product sales for Nuvaxovid alone between the U.S. and rest of world projected to be greater than $1 billion opportunity annually. This should provide a foundation for us to advance our pipeline, leading with our Combination Influenza-COVID vaccine, which when combined with our stand-alone COVID-19 vaccine has the potential to be a multibillion-dollar respiratory vaccine franchise in the future.
And with that, I would now like to hand it over to Filip to discuss updates for R&D.
Thanks, John. Please turn to Slide 12. Today, I will cover a couple of topics. The progress in our COVID-Influenza Combination program and how we're expanding the use of Matrix-M adjuvant. These topics exemplify different approaches to capitalizing on our core technology.
I came to Novavax after seeing the original nanoparticle plus Matrix-M publications for influenza and understood the promise of the technology. This has been validated by the development, licensure and commercialization of our COVID vaccine, the exact same technology is used in our combination vaccine.
Please turn to Slide 13 for an update on the COVID-Influenza Combination vaccine. As we previously discussed, the combination vaccine program is a priority because it has the potential to be a preferred product by consumers and health care providers. Previously, we evaluated 11 discrete formulations, and we've now selected the formulation to advance into the next study.
I'm displaying neutralization responses on this slide. Neutralization responses are important because we believe the most closely predict clinical efficacy. On the left side of the slide are COVID-neutralization responses and the right influenza-neutralization responses for the 3 strains that will be included in future Influenza vaccines. Our selected formulation compares well to Nuvaxovid as well as Fluzone High-Dose and FLUAD.
Separately, we compared the gemetricmen mean ratios of the HAI responses to these formulations. They achieved noninferiority margins previously used in the Phase III studies, paving the road toward late-stage development. I also want to remind you, we observed a favorable reactogenicity profile with our combination vaccine that was clinically indistinguishable from the licensed influenza vaccine comparators. This appears to be a hallmark of our technology, we can increase the antigen load while maintaining acceptable tolerability.
Overall, this points to a favorable product profile demonstrating both a convenience factor of a 2 in 1 vaccine, coupled with the reactogenicity profile comparable to license influenza vaccines. Formation development is ongoing, and we are still on track to initiate the next study in 2024. Pending final regulatory concurrence, we've designed the study to evaluate endpoint for an accelerated approval pathway while simultaneously building a co-formulated database. Therefore, we've updated the next year's study designation to a Phase III study.
Please turn to Slide 14 to talk about Matrix-M. But first, let me remind you about the adjuvant performance characteristics. Matrix-M induces high levels of broadly neutralizing antibody, a long-lived polyfunctional CD4 cellular response, and is antigen-sparing, which may be appealing for companies that have difficult to manufacture antigens. As a component of our COVID vaccine, it is a large and well-characterized safety database.
And as we've previously discussed, even large quantities of antigens, it maintains a reactogenicity profile consistent with licensed vaccines.
We pursue multiple approaches to increase the adjuvants value. It's included in veterinary vaccines commercialized by MSD Animal Health and Intervac in Europe with additional vaccines in development. It's included in the R21 malaria vaccine that has recently received WHO Sage recommendations for use. As we have previously announced, it's in preclinical evaluation by the Bill & Melinda Gates Medical Research Institute for targets of public health importance. And in addition to its use in our own pipeline products, it is being evaluated as a component in 12 clinical stage candidates by biotech, academic and government partners.
And finally, it's being evaluated in animal models by a biopharma partner to improve currently authorized vaccines against herpes and respiratory viruses. As these projects mature, it will expand the Matrix performance data set, and if these projects are successful, unlock additional value. These external Matrix-M collaborations represent opportunities for long-term future of Novavax and do not distract us from our top focus on the development of the Combination COVID-Influenza vaccine.
Please turn to Slide 15, and I'll lay out our planned time lines for the combination-vaccine program. For the COVID-Influenza Combination vaccine program, we've selected our dose and are developing our formulation and finalizing our manufacturing strategy. Pending regulatory concurrence, we are anticipating initiating the accelerated approval Phase III study in the second half of 2024. This implies a regulatory filing in 2025, which could allow for us to participate in the fall 2026 season, if development goes smoothly.
Okay. Let me hand it over to Jim to discuss our financial results.
Thank you, Filip. Please turn to Slide 17. Before discussing our third quarter financial performance, I would like to first share updates on 3 important financial themes to drive shareholder value.
Today, we are sharing our updated financial guidance that includes our expectation to achieve total revenue for the COVID 2023, '24 season of $1.3 billion, reflecting the lower end of our prior guidance range of $1.3 billion to $1.5 billion, which was for the full year 2023. For updated total revenue guidance, we have combined the full year 2023 in the first quarter of 2024 total revenue to reflect the full delivery timing and revenue recognition of sales associated with the 2023-2024 vaccination season.
Consistent with 2023, we originally expected no product sales revenue in the first quarter of 2024. However, due to the delayed start to an expectation for a longer season in the U.S., we expect some portion of revenue recognition will extend into the first quarter of 2024. In addition, outside of the U.S., some portion of the committed APA dose deliveries may extend into the first quarter of 2024.
Therefore, our guidance now includes our expectation for approximately $1 billion for the full year 2023 total revenues, and approximately $300 million of sales in the first quarter of 2024. This updated total revenue guidance of $1.3 billion reflects a lower U.S. sales estimate based on current market expectations, offset by $150 million in favorability in our APAs plus grants and royalties.
As noted earlier, our management team is leading into and focusing on our opportunity to create a robust and sustainable business platform for years to come. While we're pleased to be over $100 million ahead in our previously announced cost reduction efforts for R&D and SG&A for the full year 2023. We are prepared to initiate additional cost reductions to decrease expenses by over $300 million in 2024 beyond our existing targets.
Regarding cash and APAs, we have over $960 million across cash, accounts receivable as of the third quarter 2023, plus expected cash from the contingent Canadian payment. In addition, we will have $750 million in APA contract value post the 2023, '24 season deliveries. As we move forward, our U.S. market opportunity along with this combination of APA sales aggressively reducing costs and managing our cash key financial levers to drive towards profitability and long-term shareholder value.
Please turn to Slide 18. Turning now to our third quarter 2023 highlights. For the third quarter of 2023, we recorded $187 million in total revenue. The $165 million in grant revenue recognized during the quarter puts Novavax on track to realize the full value of the $1.8 billion funding under our U.S. government agreement. The decrease in total revenue quarter-over-quarter compared to the prior year was consistent with our expectations for a later start for the 2023, '24 COVID vaccination season.
Combined R&D and SG&A expenses for the third quarter of 2023 were $213 million. This reflects a $214 million or 50% decrease compared to the third quarter of 2022 and includes a $58 million benefit associated with the manufacturing settlement. Year-to-date results highlight a $950 million or 47% reduction in total expenses and an additional approximate $1 billion reduction to current liabilities.
Please turn to Slide 19. A few comments regarding the more detailed review of our third quarter 2023 results. Our operating expenses in the current period include the $79 million favorable impact associated with the previously announced SK Bioscience settlement of certain manufacturing liabilities that is recorded to both cost of goods sold and R&D expense. Our cost of sales for the third quarter of 2023 were $99 million compared to $435 million in the third quarter of 2022.
Third quarter 2023 cost of sales included $82 million related to excess obsolete or expired inventory and losses on firm purchase commitments as compared to $249 million in the same period in 2022. For the third quarter of 2023, we recorded a net loss of $131 million as compared to a net loss of $169 million in the third quarter of 2022.
Please turn to Slide 20. As noted, we are prepared to initiate additional cost reductions to decrease expenses by over $300 million and further reshape the size and scope of business operations align with the COVID market opportunity. We plan to do so by reducing 2024 R&D and SG&A expenses by $200 million compared to prior targets to reflect $750 million or lower spend in 2024. In addition, we intend to reduce supply network costs by over $100 million as we continue to rationalize our manufacturing footprint.
Please turn to Slide 21. Now turning to financial guidance. We're providing some additional details related to our full year 2023 financial guidance and total revenue guidance for the first quarter of 2024. Our total updated revenue guidance for the combined full year 2023 and first quarter 2024 of $1.3 billion reflects $850 million for product sales and $450 million related to grants and royalties.
Product sales includes over $700 million from committed APA dose deliveries, secured new orders and U.S. market sales of between $50 million and $150 million. The first quarter 2024 total revenue guidance of $300 million reflects the balancing amount to achieve our expected combined full year 2023 and first quarter 2024 product sales and total revenue of $1.3 billion.
Of note, we previously expected no product sales in the first quarter of 2024. For R&D and SG&A expenses in 2023, we're on track to exceed our previously announced global restructuring cost reduction plan by over $100 million. We now expect full year 2023 R&D and SG&A expense to be approximately $1.2 billion at the midpoint and positions us well as we prepare to further improve our cost structure in 2024. If successful in achieving the guidance outlined today, we believe this will support the funding of our operations for the next 12 months. In our 10-Q filing, you will see that we have provided an update on our going concern disclosure, which we first provided in our 10-K filing in February. Specifically that this forecast continues to be subject to significant uncertainty related to revenue for the next 12 months and pending arbitration. We look forward to sharing additional updates as we seek to improve Novavax' financial performance, cost structure and strength to deliver shareholder value.
With that, I'd like to turn the call back over to John for some closing remarks.
Thank you, Jim. Please turn to Slide 22. I am proud of the significant progress we've made against our 3 priorities year-to-date in 2023, including the launch of our updated vaccine in the United States, being $100 million ahead of our cost reduction targets, paying down over $1 billion in current liabilities and enabling a potential Phase III initiation of our combination-vaccine program in the coming year.
We are excited about our ongoing U.S. commercial launch and the opportunities ahead as we begin to see the long-term shape of the business to come. This includes the potential for a sustainable COVID-19 business to generate annual seasonal revenue, a combination COVID-flu program to capture significant future market opportunity, and our Matrix-M adjuvant to further strengthen and diversify our revenue generation opportunities for the company in the future.
As I said earlier in the call, we are leaning into and focusing on our opportunity to create a robust and sustainable business platform for years to come, which includes an optimized and differentiated product presentation in 2024 and '25, as well as additional restructuring to create a more efficient business model, which will facilitate the late-stage development of and a smooth transition to the anticipated launch of our Combination COVID-19-Influenza vaccine in 2026.
I remain confident in and grateful for our employees' dedication to advancing our objectives. We are also appreciative of the ongoing support of our loyal investors as we strive to deliver on our objectives with the intent of driving long-term shareholder value.
And with that, we will now take your questions.
[Operator Instructions] Our first question comes from Roger Song from Jefferies.
Thanks for the comprehensive update. So a couple of questions from us. Maybe start from the U.S. market. Understanding you're updating the guidance to $50 million to $150 million sales for the season. Just want you to give us a little bit kind of color how confident you about that guidance given -- based on the third-party database seems you're still way behind that number -- so far? And just curious about your thinking around the season, how Novavax will capture further market share in the -- towards the end of the season. And also, more importantly, how do you think about the next season and the future to come in terms of the potential market share for Novavax protein-based vaccine for COVID.
Roger, thank you for your question. Appreciate you joining the call. Roger, obviously, it's very early in the season right now. We're just a few weeks in with a few weeks of data before us. We've seen some very strong sparks that I'll ask John Trizzino to elucidate here for you on the call, of early interest in the vaccine. And it's still one of the biggest unknowns is how large the market will really be right? -- and that's something that no one's really sure about. And so I'll ask John to comment on a few of those things. But that remains the largest uncertainty is market size in the U.S. as we go through the [Technical Difficulty]. John?
Thanks, John. Roger, look, I think we're learning a lot every day about this current '23, '24 season with some number of factors that we talked about during this presentation about delayed season start, the dynamics associated with multiple vaccines being in the market, the distribution challenges that have been there. And then I think we're also dealing with total market size and some [indiscernible] fatigue here. So -- but related to us, I think that there's an opportunity for the balance of November and December as we look at ongoing pharmacy vaccinations.
I think we also are going to see some significant growth in change in the non-retail sector based upon how low that, that is right now. I wouldn't expect that there would be consumer behavior, significant change of not going to the doctor's office. So I think we'll see that. And then we'll see it being a little bit elongated into Q1.
As far as some of the early metrics that we're seeing, Look, I think overall, we said we were seeing low single digits in some of the national -- and one in particular, national retailer, we're seeing 10% market share. This is where we're on a level-playing field. There's product in the pharmacy, and we're having good recommendation coming from the pharmacy. So we remain optimistic about the balance of the season. Obviously, that is all a controlled enthusiasm, if you will, understanding that we're kind of third to market. And we're also dealing with kind of consumer behavior where I'll just get the same vaccine that I had before. And we're beginning to see some of that shift taking place in the marketplace. So stay tuned.
And then, Roger, the other part of your question was, confidence about next year. And I think right now, it's too early to tell. As we said, we got 3 weeks of data in our hands here. But we've seen that spark, like John mentioned, major retailer up to a 10% share. And next year, we anticipate having a better presentation, unit dose [indiscernible], BLA, a full label, including pediatric data, et cetera. So right now, we're much better than we were in years before when it comes to or even playing-field with mRNA. But next year, we're taking the learnings from this year. It's a transition year in the U.S. and really leaning in to position ourselves very well for market penetration in 2024.
And then so in terms of the ex-U.S. APA, can you let us know how likely this current $700 million in total, I think around $400 million for the remaining of the year into 1Q will be further renegotiated or are those APA already set for the delivery upon the approval? And also you already got just recently got approval in that start to deliver based on the order.
Jim Kelly, do you want to handle that?
Certainly. So with our APAs included in our guidance for the fourth quarter and first quarter, these are secured APAs, they're tied to committed delivery schedules. Of course, in the case of Europe, we have that approval, it's about getting the doses in the market. And for important markets like Australia, New Zealand, we're in the process of completing those regulatory filings to enable us to deliver those doses.
Importantly, they're Southern Hemisphere. So when those doses arrive, they're going to have the type of shelf life to be meaningful to them as they enter their season. Now all of these APAs, they do come with stipulations that we have to deliver on time per the agreement. And if not, they can attempt to renegotiate. We currently have the expectation that we'll get them there on time per the agreement.
Maybe just one last one from me. Is the -- it's good you can directly move into the COVID-flu combination trial, Phase III trial, next year. Given the additional operational expense cut for 2024, how do you think that will impact the Phase III plan? And will you be able to sufficiently fund that trial without a partner?
Good question, Roger. Go ahead, Jim.
Great question. And -- I will first reference back what is, I think, a pretty exciting update from Filip today about a very lean approach in path and potentially accelerated path to get our combination product to the market as early as 2026 with a single pivotal study. I mean this is an important game changer. I think many folks heard something very similar from Moderna recently. And we think it enables us a path to market any highly capital, I'll call it, efficient manner.
Okay. So with respect to the update we provided today, where we are going to drive our R&D and SG&A to below $750 million next year. That is inclusive of beginning this study next fall. And so we have contemplated that, that we are both focused on creating not just the competitive COVID product, but also accelerating our combination product, while establishing a lean and focused organization to do so.
And if you wouldn't mind, I'll talk a little bit about the cash runway that enables that. I described to you 3 really important components. And I'm going to describe these components before factoring in the U.S. market opportunity, which I think John did a really nice job highlighting. We can see a path through the end of 2025 to over $2 billion in cash through 3 critical pieces, I described as of today, over $960 million in cash and expected cash on combining cash on hand, accounts receivable, plus that $175 million expected contingent payment from Canada.
Add to that, the $600 million at midpoint of current season '23, '24 sales in the fourth quarter and first quarter of next year. And then we described over $750 million outstanding APA contract value for '24 and '25. Now you net out some of the upfront and you've got clear visibility of over 200 -- or excuse me, $2 billion in cash. Then as you seek to execute against that lean and focused organization, reducing our cost structure to ensure we are prepared with financial strength for both next fall and to accelerate and invest in that combination program. So hopefully, that's helpful.
And Jim and Roger, also that doesn't include what Jim just laid out, that over $2 billion runway over the next 24 months does not contemplate anything else from U.S., from Europe from other markets like South Korea, which just placed a new order with us from our R21 vaccine, which just received 2 authorization from things like UNICEF in low-income countries, all additional opportunities for the company to generate revenue in the coming years and even in the coming quarters potentially. So what Jim laid out is just what's primarily secured revenues already contemplated through APAs.
One other point is on the $600 million Jim talked about between Q4 and Q1. The vast majority of that is secured revenue through APAs, which we intend to deliver the full doses for and the minority of that is the first year launch in the United States. So just to give you the opportunity we have before us from a revenue standpoint, a cash standpoint to carry us independently forward to our kit program launch and then the upside potential beyond for all of those other pieces.
Our next question comes from Eric Joseph of JPMorgan.
In the U.S., looking across the pharmacies that you contracted with to carry the updated vaccine, can you just -- well, how should we be thinking about their aggregate market share as it relates to seasonal vaccines, perhaps prior COVID seasons, flu seasons, really getting at the question of how much was ceiling -- Wallgreens not being a part of the mix, not being a carrier -- represents for your product uptake? And I guess, should we see perhaps Wallgreens revisiting that decision over the season?
All right, Eric, I'll ask John T to comment. First, John, maybe on channel share and then the dynamic with Walgreens.
So I think you're talking about what is historical channel mix and then what is it looking like so far this year. So I made reference to some of that in the presentation where for flu, what we're seeing this year is about 65% in retail and 35% in non-retail that's approximately accurate for the last 5, 6-plus years or so. And typically, for a seasonal vaccine for COVID last year, similar statistics and there was about 60%, 70% in retail and the balance in non-retail. We're just not seeing that at the moment. We're seeing some let's call it, a few hundred thousand doses in the non-retail channel based upon the accumulated data that we're seeing so far. So we expect to see that change a bit in market mix.
Consumer behaviors and actions don't change dramatically in that sort of period of time. But we're monitoring that to see if that's true. But so far, it's heavy, heavy retail sector and not yet seeing that shift. What we're also seeing is a season that's elongating typically for flu, you'd see 50% of the volume before the end of October. Again, we're not seeing that for COVID, and we saw that for COVID last year. So there's a push for multiple reasons. I think there's a heavy burden on pharmacy vaccinations that is affecting all that. And so we're monitoring it closely. As we said earlier on in the presentation, we're only 3 weeks into data that we're seeing. And so more to come over the next few weeks as we monitor that mix in the market.
And Eric, I believe the other part of your question was specific to Walgreens for John. And so we're in over 14,000 retail outlets in the United States right now with broad distribution and also working with the IDNs to make sure if physician network or other channels want the vaccine. It's readily accessible to them, including our participation in the U.S. government bridge program. But John, you may want to just put into context the Walgreens piece. That was Eric's specific question there, I believe.
Hello, operator?
We can hear you.
And it's important to understand that we're seeing that through that retail locations for all of the retailers, a great relationship with CVS. I think they're seeing a lot of vaccines coming through their locations. We're talking about programs to evolve that communication into the pharmacy to make sure that there's awareness looking at all any other opportunities to create awareness for the consumer as well as awareness for the health care provider and mentioning that earlier that, that awareness and acknowledgment is up over the last couple of months, and we expect to see that trend continue.
Eric, I'll just add -- thank you, John. I'll just build one point on top of what John so clearly stated there, which is that based on CVS alone, you have roughly 75% of all Americans are within 5 miles of 1 of their retail outlets. So the vast majority of Americans are very close if they want our vaccine, they can get our vaccine. That was the goal. Would we like to have Walgreens? Absolutely. We continue to work with them. They're a good partner and will be for the long run. But despite that, we're close to most Americans. And if they want our vaccine, they have access to it, that's the important thing.
Maybe just I can ask one follow-up for Jim, just thinking about sort of how the OpEx efficiencies perhaps should be recognized over the course of 2024. And maybe it's too early for this, but just in thinking about sort of the longer-term outlook, how -- whether we anticipate sort of resumption of -- or build of OpEx in '25, particularly as you think about obviously self-funding the CIC Phase III trial?
I'm going to begin this with what I'll call a profile of profitability that we're driving to. When we think about a long-term, sustainable, profitable organization, we're looking to what I'll call at least 50% commercial contribution margins. And what I mean by that is sales minus COGS, minus SG&A, all right? And then, of course, you reinvest in R&D under that. And in doing so, you really got to get your gross margins, in sort of sales minus COGS in that 70% to 80% range. So start with that as, hey, what's your blueprint to drive this company to be an efficient and capital or cash producing entity? That's the vision.
And then as we look at the evolution of that through '24 and '25, while we are describing an urgency to evaluate and act and drive to this cost structure, we're not today announcing, for example, a specific restructuring. We're previewing it for you. but you witnessed us earlier this year act with speed. And so you should expect that we will do so that we can recognize as much of those savings as early as possible to fully drive towards that $750 million or less in R&D and SG&A for 2024, while continuing to accelerate the CIC program and driving to a filing in 2025 that in turn could enable a launch as early as 2026. So those are the, I'll call it, the blueprint, the guiding principles for where we're headed.
Our next question comes from Brendan Smith from TD. Cowen.
Just a couple of quick ones from us. First, I wanted to clarify something, I think I might have heard, for the Ex U.S. approvals, are you still in the process of completing some of these filings? Or are they all done and you're just waiting on actual approval? And can you maybe provide any additional color you have on the potential timing or cadence for the remaining Ex U.S. approvals kind of just based on your conversations there? It's kind of really related to Roger's earlier question, trying to understand just the possibility that any of those might get pushed a little past Q1, just kind of based on the cadence.
And then related to that, can you kind of tell us how you're thinking about that $300 million in Q1? Have any of the Q4 APA renegotiated at all? Or have you actually confirmed delivery in Q1 with some of these territories? Or is this kind of just a best guess based on the current trajectory of how things are going? And then I have a follow-up.
John Trizzino, why don't you take that first question, then we'll hear the follow-up.
So Ex U.S. approvals, we are still waiting on several, we have U.S. and EMA at this point. We're waiting on U.K., Canada, Australia and New Zealand, Singapore, Taiwan, and also have expectation for WHO regions to be received within the next few weeks. And certainly, that will allow us to make those deliveries. Many of them before, the end of the year and the possibility that some of that timing might roll over into Q1 as we've provided some guidance for in that [indiscernible].
I'll leave the explanation of the $300 million in Q1 to Jim.
Yes, go ahead, Jim.
Yes, certainly. As John mentioned, we've got secured orders for delivery. If you look at the midpoint of our guidance, you are going to see that we've got APAs within that guidance that are approximately $500 million, so call it sort of $475 million to $525 million, spread across the fourth quarter and the first quarter. And with that said, the way things are moving with our supply chain, we've got inventory ready to go. It's really about lining up those deliveries. And with some of them, like the European deliveries, there could be some -- it could end up hitting in the fourth quarter, in total, but we just don't want to overpromise.
The bottom line is we don't expect any of this to drive beyond Q1 [indiscernible].
Jim, anything to add to that?
No, that's it.
And then just on the cost cuts, can you maybe expand a bit on maybe where some of the new R&D cuts will be coming from, how they're distributed across 2024? And maybe whether these are being accounted for elsewhere in your filings. Just kind of trying to get a little bit of a sense beyond the plan really -- what they'll look like and potentially if there's been any tangible changes in like accounting methods over the past few or upcoming quarters?
So we shared with you that we're going to be reducing our R&D and SG&A by over $200 million. and also reducing our supply chain-related expenses by over $100 million for a total of over $300 million in savings. Where did these come from? I should first say, this is not a function, I would say, a forward-looking accounting. It is not. This is about real savings, real cash, real improvement to our cost structure. Where these come from? It's a focused evaluation that begins with the markets we serve and the return on that investment as we pursue the COVID opportunity and prepare for the combination opportunities to start with focused investment, then you assess your people, your sites, facilities, capabilities, capital investments to support that. You then evaluate third-party vendors and what it takes to have them along assisting us on that journey and you resize and reshape all of it.
So I'll give you specific examples of thinking along supply chain. One, we got to better manage the alignment of supply with demand. We got to avoid these write-offs, this E&O. This has to do with how much we do at risk we further sharpen our focus on the demand signal, we've got to knock that out. Then you look at your internal operations and based on that, you got to be leaner I'm talking about facilities, reduce idle capacity and any overhead support. And then we got to continue to negotiate aggressively third-party agreements relating to our supply network. So that's how you come after your supply side.
On the R&D side, you heard from Filip, a lean focused approach with CIC. That's how you do it. You get to market faster with CIC and a more efficient investment profile. And then everything I said about commercial market and infrastructure and overhead, we're going to drive for higher efficiencies to support this leaner-focused company.
And Jim, just to build upon that, thank you for that clarity. The company was originally scaled and built for a much larger opportunity in a global pandemic. And we demonstrated earlier this year with decisive action as a leadership team, management team and Board that we can make the right decisions to scale down that business. And in fact, we're proud of the fact that this year, we're over $100 million ahead on the 2023 cost reduction targets that we announced earlier in the year, and we did so without damaging our capabilities to operate, that's really key.
And now as a new team here, a management team, since I joined in the beginning of the year, we've had a line of sight on strain selection to shots and arms cycle this year and an assessment of how the COVID market is unveiling itself post pandemic. And with that line of sight and the knowledge of the capabilities we need to continue to operate efficiently and bring forward our program, we're confident we can make the real cuts, as Jim said, not by accounting function, but by reducing scope and scale and taking expense out of the system to make this company leaner and more focused and more competitive and able to independently bring forward that CIC program to a filing status.
Jim, anything to add to that?
It's that focused the way we're operating day-in and day-out, we're laser focused on driving towards everything you just said, John.
[Operator Instructions] And our next question comes from Mayank Mamtani of B. Riley Securities.
So maybe just a follow-up to a prior comment on cost of goods expectations for 4Q, 1Q. Any early insight on sort of the returns expected retail, nonretail segments. I know you're trying to manage this as real time as possible. And I also noticed your grant revenue was particularly high today, and there were some write-offs, I guess. Could you just clarify, what's sort of going on in that line item?
There's 3 particular pieces you hit there. One is, hey, what are we learning about returns? A second one has to do with grant revenue? And what are we seeing there? And forgive me, Mayank, what's the third one?
Yes, the cost of sales line item today that reported for Q3.
So beginning with returns, our return window really opened the first of November. So too early to tell what we're pleased with is, we had really good, I'll call it, specialty distribution uptick and also sell-through to ensure we've got our vaccine across the country available. But too early to give feedback on returns, we're going to be monitoring that one very closely, of course.
On grant revenue, you are seeing across both grants and royalties that we're upticking our guidance by $100 million. Why? Filip has done an exceptional job working with our partners in the U.S. government to do -- enable us to take full advantage of that $1.8 million [indiscernible] revenue. And in addition to that, there were multiple milestones tied to our success in being prepared for the U.S. market, we met them. and that's why you're seeing improvements there.
In addition, about $12 million this quarter, Matrix R21 revenue related to the malaria R21 vaccine as our partner, Serum is preparing to launch as early as next year. So really important advancement there.
Okay. Let's talk a little bit about the COGS line. what you're noting is that we had COGS in a quarter where we had no revenue, we had COGS a $99 million. All right. Let's talk about what's happened in there. There's a benefit from the SK Bio settlement of $22 million. I think you know that. So that would take it up to about $121 million. What is in that? You've got $85 million or $82 million in excess capacity. We noted that add to that some scrap and overhead. What I mentioned to you is, hey, we got to be better. We can't have that happen. We got to be more focused on that front. And then finally, some unabsorbed overhead, about $20 million. Again, this is a part of being lean and focused. These are the types of things we're seeking to drive down. [indiscernible], that helps you?
Yes. Super helpful, very comprehensive. And then maybe just picking on that regulatory milestones that I think was noted also in your Q, including for under 18-year-old -- maybe for higher dose that you're looking at for the elderly. Could you just, Fill, update on what all is going on there for the updated 2023, '24 vaccine and then also a similar road map for the CIC program. On sort of those optimization work remains? And also if you anticipate any Ex U.S. regulatory guidance to also come along with all the discussions we're having with the FDA.
Mike, why don't we ask Filip to address some of your questions on the clinical programs and the related regulatory milestones there, Filip?
Your mentions squeeze a lot into that one run-on sentence, Mayank. So we laid out the regulatory timing for CIC in the U.S. We think that's going to be the most important market for us, right? It's a product that we see demand from consumers as well as from health care providers, and that's our focus. The timelines we laid out was a potential regulatory filing in 2025, with a potential accelerated approval in the market in '26.
Now as far as the high dose product. That's a program that was supported by U.S. government. We've finished enrolling that study or we will today. So the time lines of that aren't going to be available until the following year. pediatric data. We previously said that we would be filing the -- or we would have data available in the first quarter of next year. And we think that older age group will be relevant for the following season.
I think we have time for one or 2 more questions here.
And our next question comes from Alex Stranahan of Bank of America.
A couple from us as well. The first is on the multi-dose format. Given the demand kinetic you've seen to date, do you see a risk of some doses in a vial not being used? And what happens to those doses? Are they shift back to you guys? And how does that feed into the price or reimbursement to pharmacies? And then I've got a follow-up.
I will have John Trizzino address that one on returns.
Alex, look, we're in a 5-dose vial. And I think, of course, it would anticipate it for our future, we beat some kind of unit dose presentation. that's what the marketplace wants and we're moving in that direction. As far as the use of those vials, we've made sure that there's flexibility to the health care provider and the use of that vial. So if not all 5 doses are used, there's an opportunity to return partial vials and we're tracking that through a third-party provider of that returns process. So it's been made clearly communicated that our intent is to provide access, getting product on the shelf and available that -- then -- is utilization of whatever is available in that period of time. And that there is a returns provision in place that allows for that with no cost and economic disadvantage to the health care provider. And then we monitor that on our end.
And then a quick comment on Rev Rec. I mean pharma products, highly common to have a return provision. So this is far from uncharted territory. We'll have the regular gross [indiscernible] at entry, and we'll make an estimate. We've got visibility on our return rate as we seek to close the books for the fourth quarter based on both actual returns come in and then visibility through the channel. So this will be an important part of our revenue recognition go forward.
And Alex, you said you had another question.
Just a quick one. I noticed some new language in the queue around the -- withholding the installment payment to Fuji Film. Is this due to a breach contract or something else? Are there other vendors that you may seek to withhold payments to for similar reasons? And just high level, how you see the arbitration playing out?
Kelly, do you want to take that one?
Absolutely. Alex, you're exactly right. We have disclosed that -- with respect to the remaining 2 payments that were targeted for the third and fourth quarter, that $68 million total that we are currently in a dispute or difference of opinion with Fuji at this time, it's a legal matter. So I can't speak too much about it. You might remember that those payments were each subject to commercially reasonable effort to mitigate our exposure. And I think that's all I can say at this time.
And time for one more question.
And our last question comes from Vernon Bernardino, a private investor.
I am from H.C. Wainwright. Can you comment on what regulatory concurrence is being discussed for a final clinical study designed for the combination vaccine? And I'll just throw the follow-up now. For the '24, '25 season, can you give us your thoughts on what dynamics you expect regarding authorization of your uptake in vaccine and it's roll out for that season.
Filip, you want to take the first part of Vernon's question.
So the major focus with us is going to be with the FDA, and this is really going to be part of a pre-IND discussion with them. Since we're filing an IND in the U.S. to support the U.S. study. That's an interaction that we have planned for the first quarter. We are going into that with a lot of data to bring to them, and that's why the timing is in the first quarter of '24.
So let me follow up on that next question, Vernon, on plans for '24, '25. We're intending to have an updated profile for the vaccine that's being offered. We're looking at a unit dose presentation available on a more timely basis than we were able to this year, so earlier in the season availability. And then, of course, it's our reasonable expectation that we would be under BLA for the '24, '25 season as well. So I think those are significant factors that are driving an improved uptake in market share and presentation to the marketplace.
And operator, I believe we're at-time, at this point.
And this will conclude our question-and-answer session. I'd like to turn the conference back over to John for any closing remarks.
Want to thank everyone for their time and energy and for your questions and wish you a great close to your week. Appreciate you all. Thank you.
The meeting has now concluded. Thank you for joining, and have a pleasant day.