Valneva SE
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Valneva SE
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Thank you so much. Yes, good day, good morning for those calling in from the U.S., and very warm welcome to our quarter 1 2019 analyst call, this time primarily focused on our financial results. Just a way of reminder, first slide, Valneva's profitable commercial business is funding our key R&D program. This is and has been our business model for a long time. And we are proud to present also today again that this combined business model was a strong growing commercial business generating cash that we focus in investments for clear programs of high unmet medical needs, primarily, right now, Lyme and chikungunya. We will go through the detail numbers later, but it is fair to say that the growth that we have been expecting has been tremendous. And when you look at the news flow, followed on the next slide, you see that we have had product sales of EUR 32.8 million, which is a 9% growth at constant exchange rate, primarily driven, of course, by growth in IXIARO, with a total revenue of EUR 34.9 million and EBITDA of EUR 8.2 million in the quarter. And again, David is going to put this into perspective of what it means for the full year, and a strong cash position at the end of the first quarter. When we look at our R&D program, in the first quarter, we had 2 major milestones or data points for our Lyme disease vaccine candidate, VLA15. We reported Phase I data and -- so final data and the first booster data. And the booster data specifically were extremely encouraging because we saw a great memory response, and this underpins our hypothesis with regards to our target product profile, which means the 3 primary vaccinations, followed by a booster after a year, and then most likely another booster after 3 years. At least this is what we have currently in our development hypothesis. Hence, we kicked off the Phase II according to plan, and right now, everything is progressing exactly according to plan and guidance. So hence, we do not have something specifically to report online, but you would see later when I close out on future milestones when we're going to expect one. On chikungunya, we saw interim Phase I results, still at group level. So we did not stratify by dose proofs, for example, in the Phase I. But the immunogenicity and safety data that we saw, they're very, very encouraging. And we expect very soon the uncooked data, and the uncooked data, of course, will then determine the exact route to licensure of this second program that we have under prospect designation with the FDA. And just to mention it already here, but we're going to come back to that at the end of the call, we plan an R&D Investor Day, specifically of course targeting our 2 lead compounds and lead vaccine targets in July 2019 in the U.S. And again, more details will follow. With this short introduction, I would like to hand over to David to give you our financial report.
Thank you, Thomas. And as Thomas said, good afternoon to those of you in Europe, and good morning to those of you in the U.S. A slight apology for my voice, and I'll just flag a note that my colleague Manfred will participate in this presentation and help with the Q&A. So much as Thomas said and on behalf of the MB, Management Board, I'm very pleased to have the opportunity to present our quarter 1 earnings for 2019. We've had an excellent quarter as many of you have noted already this morning, based on the notes that I've seen. Our financial results are very strong, both in our profit and loss and in our balance sheet. IXIARO sales were particularly impressive, driven by businesses in North America. And our gross margin is also excellent. So even with this -- the way our [indiscernible] sign posted increase in R&D investments, we have a great EBITDA and net profit results. And that's all topped off with a very healthy cash position. So to start, we could view some of details, next slide, please, and that's Slide 7 for those of you following the slides. So here, you can see the makeup of our revenues, in particular, along with some of our KPIs. IXIARO is making up an increasing proportion of this pie chart due to the ongoing double-digit growth of the product, driven by our strategy of focused sales and marketing efforts to increase penetration. IXIARO overall sales were over EUR 22 million and growth is in line with our guidance of CER growth of over 15% for that product. So an excellent quarter for IXIARO. In the U.S., both the military and private markets are driving and contributing to that overall growth. And you can see that the direct sales KPI in the middle of the slide was just over 90% for the quarter and that's the proportion of sales that we manage directly ourselves and not through distributors. And that's up from just over 80% for the full 2018 year. Now that's in part due to the timing of the U.S. military IXIARO orders. So while we've got a 90% in direct sales for the quarter, we will likely track it between last year's level of around 80% and this quarter's around 90%. DUKORAL sales were EUR 9.6 million for the quarter. And again, going back into the KPIs. In the middle of the slide, you can see that our gross margin has also moved up nicely. We'll come back to some comment in that in a second, and that's a combination of growth in our higher-quality revenue markets, plus a great performance in cost of goods for quarter 1 of 2019, which in fact were lower than the same period in 2018, which we'll show in a second. So that pushed our gross margin to about 65% for the quarter, which is up from about -- between 60.5% and 61% for the full year of 2018. And to round this particular slide off, we generated cash from our commercial operations of over EUR 5 million in the quarter. And that meant that our cash stood at EUR 68.1 million for the end of quarter 1. The main reason for the decline compared to the end of the year was the final repayment of our loan with Pharmakon. We'll see a bit more -- I'll talk a bit more about that later. And we also had a payment in January, which related to our pipe costs from late 2018. Just a couple of comments on that cash number at EUR 68 million. We're very comfortable with this cash position. And combined with our nicely performing commercial business, this allows us to fund Lyme Phase II and chikungunya Phase II. Should there be major changes to R&D plans and time lines, then of course we'd re-evaluate our capital formation plan, which currently, as we've previously signaled, is that we would look towards a potential U.S. IPO to bring in funding for Lyme Phase III. Both Lyme and chikungunya have FDA Fast Track status and have key milestones coming up, as Thomas mentioned, in the next few months. And there'll, therefore, be a major update on the way up to the R&D Investor event in July in New York, as Thomas mentioned. So we will deal with any major changes to our R&D plans then. And any impact on guidance will be covered in our H1 results on August 1. I'll talk more about the guidance as we go through the presentation. So next slide, please. This moves on to a little bit more insight into the sales performance. So as I mentioned, IXIARO continues to perform extremely well. Our U.S. private market commercial team delivered growth in 2018 during its first year of operations. And we're seeing that growth continuing into 2019, and hopefully, beyond. The U.S. military continues to be a strong partner and customer for Valneva. We received our biggest-ever contract award in January, and we're continuing to work through the detailed logistics and planning with them. And we'll give more information on how that's shaping up at our half 1 results on August 1. So IXIARO growth for the quarter on a constant exchange rate basis was 17%, which is in line with our guidance of over 15%. As mentioned earlier, DUKORAL sales in Q1 of EUR 9.6 million were very much in line with quarter 1 2018. We've guided for growth of up to 5% for the year. So we look forward to reporting progress on that target during the year. IXIARO sales, just to underline this, now make up 68%-or-so of our overall product sales. Third-party product sales, just to draw the key point here, they were down in quarter 1 2019 compared to the same period last year and that's because -- mainly because VIVOTIF's competitor was off the market during the first part of 2018 and notably in Canada. And if we had excluded the third-party product sales, declined growth in our 2 proprietary products would have been just over 11%, so double digit. So -- and our Management Board were very pleased with the quarter. And our most important product is growing well, and that's very much what we focus on. So next slide, please. I would just like to comment on some of the key lines in the P&L. I think the first highlight to draw attention to on this slide is that although we had growth in the sales top line, our cost of goods and cost of services at EUR 12.2 million was lower than the comparative period last year. And this underlines our commitment to drive ongoing efficiency in our manufacturing operations, and that, of course, contributes to the gross margin. R&D expenses were EUR 6.3 million for the quarter. That's up almost 10% in the same period last year. And we've guided, as I think you all know, towards further increases in R&D investments as our programs move from left to right through the time line and development cycle notably as our Lyme and chikungunya programs advance. Marketing and distribution expenses were very similar to quarter 1 2018. This will pick up a bit in Q2 as we start to bring a few key commercial hires onboard, we're hiring on a very selective basis, which lends neatly into G&A. So G&A is higher than 2018. But that's partly driven by recruitment costs. So we've been undertaking some key hires in the U.S., a couple of key account managers, U.S. general manager, U.S. medical head, and 1 or 2 other key hires in commercial. So the hiring costs, the recruitment costs have kicked in in Q1 and to G&A, and then I think we'll see the marketing and distribution expenses start to pick up from there. There were also some additional Board costs in the quarter, in quarter 1 '19 compared to quarter 1 '18. So this resulted in operating profit for the quarter of over EUR 6 million, which is almost double the quantum achieved in quarter 1 2018. And EBITDA for the quarter stood at EUR 8.2 million. And I will come back to guidance more specifically later in the call. So next slide, please. So this slide is an important one. We committed at the full year of 2018 results when we were presenting our full year 2019 guidance, that we'd explain what we meant by this KPI that we introduced called net operating margin. So we already use that target internally to provide a base and a framework for our revenue-generating businesses. This slide tries to explain how we do that. So what we basically do is take our product sales revenue, which you can see here. We deduct the cost of goods related to product sales that is clearly marketing and distribution expenses, product-related R&D and a proportion of R&D that's in keeping with our business model, which is about 56% to be precise. And there's a bit of an amortization of intangibles. So this resulted in a net operating margin for quarter 1 of just over 35%, which compares to about 23% for the quarter last year. And our full year guidance that we gave for this KPI was in the range of 25% to 35%. The range is important for us as we have, for example, a wide range of pricing, and we also need to encourage investment by the commercial team with a view to improving the KPI in the mid to long term. And then what I'd like to make clear is that having hit the higher end of the full year guidance in the quarter, we may revisit that at the half 1 results, but it's too early in the year to consider amending guidance. So just to go into the next couple of slides, I'd like to introduce my colleague, Manfred Tiefenbacher, that many of you will have spoken to before. And Manfred is going to take some time to explain the dynamics caused by the changes related to IFRS 16. So I'd like to hand over to Manfred just now. Thank you.
Yes. Thank you, David. On the next 2 slides, as David mentioned, I would like to take you through the effect the adoption of the IFRS 16 standard had on Valneva's financial statement. From January 1, 2019, onwards, the IFRS 16, this standard has to be applied, replacing the IAS 17 standard. Which means for the next year, this results in the removal of the distinction between operating and finance leases. Hence, most of those leases will be recognized and have to be recognized on the balance sheet. Valneva elected to apply the modified retrospective approach as of the mandatory adoption date of January 1, 2019. This also means that the financial statements for prior periods have not been restated, but the IFRS 16 standard has been applied on the statements, starting with the first quarter of 2019. On Slide 11, we have summarized the effect IFRS 16 had on Valneva's balance sheet. Well, on the left column, you can see that already in prior years Valneva had reported both assets and liabilities related to a finance lease agreement of the Vienna building for the amount of EUR 26 million. The adoption of the new standard for this finance lease agreement had a reclassification effect on the financial statements and resulted in a decrease of property, plant and equipment and an increase in right of use assets, also starting with the first quarter of 2019. In addition, as of the first quarter, all operating lease agreements, which were previously not included in the balance sheet statements, has been reported as right of use assets. And accordingly, the liabilities now include noncurrent and current finance lease liabilities. In the second column on Slide 11, we have outlined the effect on the balance sheet statement resulting in an increase in assets of around EUR 24.4 million as there is a total increase in liabilities of EUR 34.2 million, with the difference of EUR 9.8 million reported in the equity. The major driver for this increased value of right of use assets originates from the long-term lease agreement related to Valneva's manufacturing site in Sweden. On the next slide, Slide #12, we have outlined the effect of the IFRS 16 adoption on Valneva's profit and loss statement. The change is mostly related to the operating lease contract of the Swedish manufacturing site. And the second column of the table shows the changes in the way these expenses are reported under the new standards, where about EUR 0.5 million of rental charges, which were previously reported within the operating expenses, are now partly moved to the depreciation and amortization line and are partly reported as interest charges. For the first quarter of 2019, the change resulted in a positive effect of about EUR 0.5 million on the EBITDA line and an improvement of the operating profit line of about EUR 0.1 million and a consequent reduction in the profit before income taxes of EUR 0.1 million. So I think with this, I want to conclude the IFRS part and hand back to David to provide an update on the financial outlook for 2019.
Thanks, Manfred. And so next slide, please. This is the slide that shows our guidance. Just coming back to the guidance for the year briefly. As you've heard, we've got a lot going on, notably in R&D, and that's why we're planning the New York event in July. We'll be doing our half 1 results and earnings call on August 1, and therefore, for now, we'd like to reaffirm the guidance that we gave in late February when we did our full year 2018 results. I'd like to repeat and emphasize that we're not an EBITDA growth story. We expect our increasing investments in R&D will pay off and that we'll be creating significant value from those investments. And furthermore, our commercial business, as many of you all know, is somewhat seasonal and delivery and shipment driven. And therefore, you shouldn't expect each and every quarter in 2019 to follow the Q1 results. So we are confirming our guidance for the time being. Any updates to major R&D plans and/or financial guidance, we'll give a combination of the Investor Day in New York in July and then on the half year results in August 1. And with that, I'd like to hand back to Thomas to give a recap on the news flow and move us on to the Q&A. Thank you very much for now.
Thank you so much, David, and thanks so much to Manfred Tiefenbacher, our VP of Finance. So yes, as David mentioned, I think, our guidance on top line has clearly been 15% to 20% product sales growth at constant exchange rates. We reaffirm that and expect this to be our, let's say, final number in 2019. Just by way of reminder and why do you hear us a bit cautious when it comes to maybe adjusting guidance. I'm not adjusting guidance based on a strong first quarter. The major driver is and has been our military order and the U.S. business, in particular. And still on the U.S. military order, we have not yet a final delivery and supply plan. And hence, since this contract goes well into 2020, we have still a little bit of uncertainty with regards to timing of the respective product-based revenue split in between 2019 and 2020. Yes. And let's talk a little bit about the R&D programs and what I -- can you expect next. As I mentioned, for Lyme disease, everything is progressing according to plan. Everything is progressing according to guidance that we have previously been giving. Well into Phase II, we have completed the enrollment. The entire enrollment of the so-called run-in phase. You may recall that run-in phase was necessary since we decided to increase dose compared to the Phase I. And since the higher doses have not been in human beings before, we had go through a so-called run-in phase. This is a phase during which you have a continuous monitoring by an independent drug safety monitoring board. All this has progressed well thus far. And we are expecting the dose selection at the end of the run-in phase. So we will determine the 2 highest doses, 2 highest safe doses that we're going to progress into the further Phase II. And at the same time, we're going to kick off the second Phase II trial because, as you may recall, our objectives are to determine final dose and final schedule at the end of our Phase II program with Phase II data expected mid-2020. So basically, these are the 2 points, namely completion of run-in phase, determination of the 2 doses and basically then kickoff of the second Phase II trial. When it comes to the chikungunya, the chikungunya situation is slightly different. I mentioned earlier that we are expecting, of course, that we will see uncooked data. So we saw already 0 conversion of 100% in the cooked way. So this means by definition, every single dose cooked has to have 100% 0 converted. But of course, we had a safety profile that was very acceptable for further development, but still a significant level of reactogenicity and we, of course, expect a differentiation of the safety profile. Meaning, safety and tolerability better for the lower doses compared to the higher doses. And this data we will expect very soon. And what does this mean? This data will determine the route to licensure. And specifically, based on the data, we will decide what is needed from now onwards to go into pivotal. And this is something that we're going to report back as soon as possible, and then, of course, we will go into more scientific details, data details as part of our R&D day. Strategic partnering progress. We have promised that, especially when it comes to our Lyme program, which is, as we all know, a very, very unique vaccine candidate with a huge potential and has very, very significant unmet medical need, that we would basically give partnering certainty. Certainty in a way that we say -- we will say, okay, this is going to be our partner for Phase III and beyond, whether it's GSK or have an opt-in or whether it's another partner. But we have guided very clearly that by the end of the day and by the end of this year, specifically, we will have partnering progress. And then we are opportunistic on other partnering opportunities, and this is what we will all see during this year, and this is why we have accumulated this under the headline, strategic partnering progress. And then we mentioned already a couple of times the date that we have picked for our R&D day is July 9 in New York, and we hope to be able to welcome many of you. And with that, I would like to hand back to the operator to take your questions. Thank you so much.
[Operator Instructions] The first question is coming from the line of Samir Devani from Rx Securities.
Congrats on the good quarter. I've just got a question on -- clarification of the borrowings and just commenting obviously of the changes from IFRS 16. But when I look back at the annual report for 2018, I think borrowings, excluding financial lease obligations, were something like EUR 34.2 million. So I'm just wondering if you can help me reconcile that to the current EUR 16 million appreciating the, obviously, the Pharmakon payback, but maybe just a bit more color there would be helpful.
David, Manfred?
Yes. So I think Manfred's going to handle this question. Thanks for the question, Samir.
Yes. Samir, happy to take this question. So indeed, when comparing our financial statements from December 31, you can basically see borrowings in the noncurrent part remaining unchanged, so that we kept on reporting around EUR 14 million of borrowings, which primarily relates to the EIB loan. Indeed, in the current liabilities, we have seen a big and strong reduction from the EUR 16.7 million reported by the end of the year towards -- down towards a value of EUR 2 million, which, as you mentioned, have been driven by the repayment of the Pharmakon loan, which has taken place in January 2019. And then the changes specifically related to IFRS 15, you can see in the lines noncurrent and current finance lease liabilities, where you see the increases in the short term in the current part from about EUR 900,000 to about EUR 2.2 million. And on the noncurrent finance lease liabilities from about EUR 25 million up to EUR 58 million where again most of this has been driven by, including a long-term lease agreement related to our Swedish manufacturing site. So I think those are the main drivers. And then maybe again just to point you also to the retained earnings line within our equity where, again, you should be able to find back and reconcile that with the year-end position by adding the 2018 net result and then taking into account as well the EUR 9.8 million addition we have also included in the equity, which, again, is driven by IFRS 16. So I think this should help you to reconcile both borrowings and of the impact from IFRS 16.
Can I just confirm that the EIB loan is within the borrowings line on the balance sheet?
Yes, that's correct.
We have -- next question is coming from the line of Max Herrmann from Stifel.
Congratulations on a good quarter. Couple of things. One, just a little bit more color on DUKORAL. If I recall correctly, you had a strong first quarter last year and were investing significantly in the marketing and then ran into some production constraints. And I wanted -- I thought those had been relieved, but I noticed, obviously, that there wasn't a big campaign to marketing to grow this winter and I wondered whether that was because some of the constraints still remain. And then secondly, just to get a bit more color again on the Zika program. Obviously, just exactly what triggers the Emergent BioSolutions option decision time frame? What new data are we expecting from that program before that time frame is triggered?
Okay. Thanks a lot, Max. Thomas speaking. Let me start with your second question first and then I will hand over to Franck to give you a bit more color on where we are with DUKORAL's [ rising ] state. So basically, on Zika, I'm sure you will have noted in our PR flagging the quarterly, that by now we have had the final data, which are basically the 6-month data. But since the 6-month data did entirely confirm the interim data with basically the same picture, we did not consider this data to be material by any means. We are now writing up the final CSR. Upon the final CSR, a clock is being triggered, 180 days, for Emergent BioSolutions to decide on its opt-in. And we have a very good dialogue with the merchant, but you know well what the situation around Zika looks like right now. So I would say there are big, big, big question marks around how a pivotal development for a potential Zika vaccine could look like. The authorities have not reached any conclusion yet. At the same time we see, of course, very low instances, and we have a lot of question marks around the general investment hypothesis. I would say, yes, with that, I think we are good on the Zika question. With regards to the other question, first of all, the production issues that we start from there, we have been a little bit victims of our own success. For DUKORAL, we -- the ramp-up of DUKORAL manufacturing has not been as kind of swift and smooth as we were hoping. We had to invest quite significantly, but I think we have done that. The lead time of DUKORAL is very long because we are talking about 5 active ingredients in DUKORAL, which are all being manufactured on a campaign basis. So you almost need 2 years from start to end and we are almost there. And we had towards the end of last year, beginning of this year, some minor kind of production issues, not really material. But when you live from hand to mouth, then, of course, even small ones, which are very normal in the world of vaccine manufacturing, become an impact and require to privatize supplies to certain markets. Yes. When it comes to what we do on DUKORAL overall, and especially, the promotional and direct-to-consumer campaigns, maybe, Franck, you want to give a bit of color to Max?
Yes. Very quickly, just to confirm that we have not decreased any marketing effort on the DUKORAL. So we continue to invest on this product. So the growth of the DUKORAL will not, I would say, compete within [indiscernible], but we continue to invest in the marketing of this product on our key market such as Canada, obviously U.K. or the Nordics. And we confirm that we expect this year, this product to grow by at least 5%.
Can I just have one quick follow-up in terms of the manufacturing capacity, in terms of -- you talked about a 2-year process to get that back up to speed. What sort of voluming -- are you going to be able to grow volumes in that product now? Is that the plan? And when do you think you will be able to have that additional supply coming on stream?
Yes. So excellent question, Max. So first of all, we have gone from -- when you look from '17 to '18, from '18 to '19, we have a combination. The growth has been a combination of volume and price and -- or ASP, let's put it this way. And basically, we have been able to grow volume further by a bit less than 5% last year and we are again growing volume this year by about 5%. And we have a buffer of maybe another 5% growth on volume and that we are investing and have invested. And we will be completely out of any capacity constraint by the end of the year or mid next year, I would say. So then -- sorry, by the end of the next year. And then we can -- basically, we have no restrictions on volume anymore, right? Until then, we can nicely say what we have said, namely according to our guidance. Overall, top line growth for DUKORAL, 5% to 10%.
So just to clarify. By mid-2020 to the end of 2020, that's when new capacity comes on stream?
Yes, when we have expected to complete that, yes. When it is coming onstream, meaning, available for sale, yes.
The next question is coming from the line of Christophe Dombu from Portzamparc.
I have 2 or 3 points I wanted to clarify with you. The first one comes from IXIARO. Can you please give us more color about your contract with the U.S. Army? I mean, the current contract covers also a part of the year 2020. So at this time, should you have any more visibility on how far it will go in 2020? I mean, will it be more in the first quarter or in the second semester? And also, can you give us which part -- tell us which part of the sales you privileged comes from this contract and which part comes from the private market in the U.S.? This is about IXIARO. And I also have one question regarding VLA15, specifically your partnership with GSK. It seems that, to me, that you recently said that you wanted to speed GSK decision in order to have the answer as soon as this year. Is it still relevant for you? And have you been able to make any progress on this point? So this is my questions.
Okay. So let me get started. I mean, just all what I'm saying is a bit of recap because we mentioned all the points already during this call. But you may not have spotted it, so I will try to repeat. So first of all, the military contract, as announced, is a contract that goes -- that includes quarter 1 2020. So this means -- and you know that in the announcement, we gave a wide range of the amount of total because the military has options and they can determine the supply schedule all the way from left to right. And I would assume for your modeling that we -- that the military will probably take somewhere in between, let's say, 320,000 to 380,000, maybe 420,000 doses from -- for the entire year 2019 plus first quarter 2020. And this is the range that the contract provides. And you can certainly appreciate that in the absence -- and they do typically 6 to -- yes, approximately for this period, let's say, 5 to 6 orders. And we have had 1, right, that basically covered the first quarter. And this has showed also where we are in terms of split. And so it's very, very difficult to predict more than that, right? In terms of value, you have seen in our announcement on the contract the details, what it means in terms of price, right? It's 24% below the best price in the U.S. private sector by law. And with those 2 parameters, you can easily model depending on the range you take into consideration. When it comes to the -- when it comes to your question around VLA15, maybe I have not been exactly clear on that, but we have been very, very consistent. We have said we don't want to wait for the end of Phase II or for the Phase II data mid-2020 and then start a dialogue about opt-in, not opt-in and so on and so forth and what kind of partnering model we're going to use for the Phase III. Is it a licensing deal? Is it a co-development or what is it? Because this would entirely delay the overall progress into Phase III, which is why it has been our intent all the way along to do a so-called pre-opt-in agreement or a pre-licensing agreement. So we -- our objective remains the same. By the end of this year, we want to have an agreement on the Phase III partnering setup. Of course, subject to successful Phase II data, that's clear, right? But with the data, everything must be set. And we, of course, would like to do this with GSK because they have an option on that. But if GSK, for whatever reason, decides not to go for it, then we would also be willing to do this with another partner. The important thing, and this is our guidance, is by the end of this year, we want to have the partnering model certainty for Lyme core 2020 when the data comes. And this is going to be for the management team at Valneva a very, very big objective for the second semester this year. And I hope that I have been clear now and answered as good as I can, of course, within the certainty of military, your question.
[Operator Instructions] There are no further questions at this time. Please continue.
Okay. So if there are no further questions, then I would like to thank you all for your support for following Valneva. As usual, we will be in touch on many different locations, and we are all looking forward to seeing you or hearing you again in the next coming months. And we are excited about where we are. We are very proud of where we are. We are proud of what we have achieved to date and that we have been able to deliver according to our promise. And that, thus far, everything looks great for our revenue objectives, our financial objectives but also for our key, key value and collection points around R&D. With that, thank you so much and still have a wonderful day. Bye-bye.