# Vaxart, Inc.: Form 10-Q for the period ended Sep 25, 2010 - Company: [Vaxart, Inc.](/companies/vxrt.md) (CIK 72444) - Form: 10-Q - Filed: 2010-11-03 - Accepted by EDGAR: Nov 3, 2010, 21:01 ET - Period: 2010-09-25 - Accession: 0001193125-10-246293 - Inline XBRL: no - Main document: https://www.sec.gov/Archives/edgar/data/72444/000119312510246293/d10q.htm - All documents and exhibits: https://www.sec.gov/Archives/edgar/data/72444/000119312510246293/ ## Management's discussion and analysis As filed, 20,010 characters. ### FORWARD LOOKING STATEMENTS *Statements in this quarterly report that are not strictly historical are forward-looking statements and include statements about products in development, results and analyses of clinical trials and studies, research and development expenses, cash expenditures, licensure applications and approvals, and alliances and partnerships, among other matters. You can identify these forward-looking statements because they involve our expectations, intentions, beliefs, plans, projections, anticipations, or other characterizations of future events or circumstances. These forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties that may cause actual results to differ materially from those in the forward-looking statements as a result of any number of factors. These factors include, but are not limited to, risks relating to our ability to conduct and obtain successful results from our two Phase III clinical trials for NicVAX; GSK’s failure to exercise its option for and successfully commercialize NicVAX; GSK’s failure to successfully develop and commercialize any future generation candidate nicotine vaccine utilizing our intellectual property; our ability to commercialize NicVAX if GSK does not exercise its option for NicVAX; our ability to raise sufficient new capital resources to fully develop and commercialize NicVAX if GSK does not exercise the NicVAX option; our ability to attract, retain and motivate key employees; our ability to collect any further milestones and royalty payments under the PhosLo and PentaStaph agreements; the ability to obtain regulatory approval for NicVAX and any future generation candidate nicotine vaccine in the U.S. or other markets; our ability to successfully contract with contract manufacturing organizations for the manufacture and supply of NicVAX and the risk that these organizations will not fulfill their obligations to us; our ability to comply with reporting and payment obligations under government rebate and pricing programs; and loss of full use of our net operating loss carryforwards. Some of these factors are more fully discussed, as are other factors, in our Annual Report on Form 10-K for the fiscal year ended December 26, 2009 filed with the Securities and Exchange Commission. We do not undertake to update any of these forward-looking statements or to announce the results of any revisions to these forward-looking statements except as required by law.* The following is a discussion and analysis of the major factors contributing to our financial condition and results of operations for the three- and nine-month periods ended September 25, 2010. The discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto. ### OVERVIEW We are a biopharmaceutical company focused on the development of vaccines addressing the unmet medical need of nicotine addiction. We leverage our experience and knowledge in powering the human immune system to target this serious unmet medical need. We initiated a strategic alternatives process beginning in 2006 to enhance shareholder value that has resulted in the sale, licensure or grant of an option to acquire all of our marketed products and major pipeline products. Our sole remaining product currently in development is NicVAX® \[*Nicotine Conjugate Vaccine*\], an innovative and proprietary investigational vaccine for treatment of nicotine addiction and prevention of smoking relapse. In the first quarter 2010 we granted GSK (i) an option to exclusively in-license NicVAX on a worldwide basis and (ii) a license to develop follow-on next-generation nicotine vaccines using our intellectual property. #### Product Development The smoking cessation market is estimated to exceed $4 billion annually and is currently considered to be a largely unmet medical need. Nicotine is a non-immunogenic small molecule that, upon inhalation into the lungs, quickly passes into the bloodstream and subsequently reaches the brain by crossing the blood-brain barrier. Once in the brain, the nicotine binds to specific nicotine receptors resulting in the release of stimulants, such as dopamine, a chemical linked to pleasure and to addiction. NicVAX is designed to stimulate the immune system to produce antibodies that bind to nicotine in the bloodstream and prevent it from crossing the blood-brain barrier and entering the brain. With a reduced amount of nicotine reaching the brain, fewer stimulants are released and the pleasurable, positive-reinforcing effects of nicotine are diminished, thereby making it easier to quit smoking. Pre-clinical studies with NicVAX have shown that vaccination prevents nicotine from reaching the brain and blocks the effects of nicotine, including effects that can lead to addiction or can reinforce and maintain addiction, in animals. In humans, NicVAX, in combination with quit-counseling, has been clinically demonstrated to help smokers, who want to quit, achieve long-term abstinence. We believe NicVAX may have advantages over existing treatment therapies because the anti-nicotine antibodies limit the ability of nicotine to enter the brain. Moreover, these anti-nicotine antibodies persist for six to 12 months following vaccination. This is important due to the extremely high relapse rate that has been observed in smokers who attempt to quit smoking. - In November 2007, we announced the successful completion of a Phase IIb “proof-of-concept” clinical trial for NicVAX that showed statistically significant rates of smoking cessation and continuous long-term smoking abstinence at six and 12 months for subjects injected with NicVAX as compared with subjects injected with placebo. - In October 2008, we announced the results of a Phase II schedule optimization immunogenicity study assessing the antibody response and safety of a six-dose immunization schedule. This study showed that significantly higher antibody levels can be generated earlier in a higher percentage of subjects than in the Phase IIb proof-of-concept study and that the revised dose regimen continued to be well tolerated. These key results have supported the basis of our design for the NicVAX Phase III trials. - In December 2008, we announced that we had reached agreement with the FDA on a SPA for the pivotal Phase III clinical trials for NicVAX. The SPA forms the foundation to support approval of a NDA. In June 2009, we announced that we received Scientific Advice from the EMA which is well aligned with our SPA agreement with the FDA regarding the design of the trial. - In September 2009, we announced that we received a $10 million grant from NIDA, to partially offset the cost of the first of two Phase III studies that are required by the FDA to support NicVAX’s licensure. - In October 2009, we announced the initiation of an investigator initiated clinical trial in the Netherlands to test the efficacy of a combined therapy of NicVAX with varenicline, or Chantix. - In November 2009, we announced the initiation of the first of two Phase III efficacy trials in the U.S. In March 2010, we initiated the second Phase III trial and in July 2010, we announced the completion of enrollment in the first Phase III trial. - In March 2010, we announced that we granted to GSK (i) an option to exclusively in-license NicVAX on a worldwide basis and (ii) a license to develop follow-on next-generation nicotine vaccines using our intellectual property. - In August 2010, we received U.S. Patent No. 7,776,620 (Hapten-carrier conjugates for treating and preventing nicotine addiction) for the exclusive use of methods for treating and preventing nicotine addiction with NicVAX and related nicotine vaccines. The patent runs through December 2018. - In September 2010, we entered into a long term contractual manufacturing agreement for the manufacture of Drug Substance integral to the production of NicVAX. The Drug Substance will ultimately be combined with an adjuvant and filled in syringes to produce NicVAX. We believe that NicVAX is at a more advanced stage of development than any potentially competing smoking cessation vaccine. ### FOR THE THREE MONTHS ENDED SEPTEMBER 25, 2010 AND SEPTEMBER 26, 2009 *Revenue.* Revenue was $12.3 million for the third quarter of 2010; we had no revenues in the same period in 2009. Revenue in 2010 reflects amounts recognized under the PentaStaph and NicVAX agreements with GSK, including amortization of the upfront fees that are being recognized as revenue ratably over the terms of the joint steering committees created under these agreements. This includes $2.6 million from the initial $21.5 million payment received from GSK for PentaStaph and $0.6 million from the initial $40.0 million payment from GSK for NicVAX. Also reflected in third quarter revenue is $8.0 million for the successful achievement of a PentaStaph milestone. We also recognized $0.8 million and $0.3 million in the third quarter of 2010 related to services we provided to GSK under the PentaStaph and NicVAX agreements, respectively. Our revenue over the remainder of 2010 will reflect ongoing ratable recognition of upfront payments, reimbursement by GSK of costs related to the PentaStaph and NicVAX agreements, and possible achievement of the remaining PentaStaph milestone. *Costs of services.* Costs of services of $0.8 million represent the costs incurred by us to perform under the PentaStaph and NicVAX agreements with GSK with respect to the transitional services, including performance of the Phase I clinical trial for PentaStaph and associated activities. These costs include internal labor, external contractors and allocated indirect costs. These costs will continue for the balance of 2010. *General and administrative expenses*. General and administrative expenses were $1.4 million for the third quarter of 2010 compared to $2.4 million for the third quarter of 2009. The decrease of $1.0 million reflects our effort to reduce expenses and lower legal and facilities costs, and includes an allocation of a portion of these expenses to costs of services. We expect our full-year 2010 general and administrative expenses to be below those for fiscal year 2009. *Research and development expenses*. Research and development expenses were $6.8 million for the third quarter of 2010 compared to $4.7 million for the third quarter of 2009. Research and development expenses increased approximately $2.1 million primarily due to our two ongoing Phase III trials for NicVAX, and NicVAX manufacturing-related activities. Research and development expenses related to the PentaStaph Phase I clinical trial are reimbursed by GSK (and such reimbursement is recognized as revenue). Approximately $2.6 million of the costs for the NicVAX trial have been offset by grant funding from NIDA and approximately $0.1 million of the costs for PentaStaph have been offset by grant funding from the U.S. Department of Defense (DoD). We expect research and development expenses over the remainder of 2010 to be comparable to the third quarter expenses as we continue work on our various clinical trials. *Income tax expense (benefit)*. During the third quarter 2010, as a result of recent tax law changes, we recognized an income tax benefit of $1.8 million relating to an expected refund of prior year alternative minimum tax payments. ### FOR THE NINE MONTHS ENDED SEPTEMBER 25, 2010 AND SEPTEMBER 26, 2009 *Revenue.* Revenue was $30.9 million for the first nine months of 2010; we had no revenue in the comparable period in 2009. Revenue in 2010 reflects amounts recognized under the PentaStaph and NicVAX agreements with GSK, including amortization of the upfront fees that are being recognized as revenue ratably over the terms of the joint steering committees created under these agreements. This includes $10.5 million from the initial $21.5 million payment received from GSK for PentaStaph and $1.5 million from the initial $40.0 million payment from GSK for NicVAX. During the first nine months of 2010 we also recognized $16.0 million of revenue related to the successful achievement of two PentaStaph performance milestones and $2.6 million and $0.3 million related to services provided to GSK under the PentaStaph and NicVAX agreements, respectively. Revenue over the remainder of 2010 will reflect ongoing ratable recognition of upfront payments, reimbursement by GSK of costs related to the PentaStaph trial, and possible achievement of the remaining PentaStaph milestone. *Costs of services.* Costs of services of $2.1 million for the first nine months of 2010 represent the costs incurred by us to perform under the PentaStaph and NicVAX agreements with GSK with respect to the transitional services, including performance of the Phase I clinical trial for PentaStaph and associated activities. These costs include internal labor, external contractors and allocated indirect costs. These costs will continue for the balance of 2010. *General and administrative expenses*. General and administrative expenses were $4.4 million for the first nine months of 2010 compared to $7.8 million for the comparable 2009 period. The decrease of $3.4 million reflects our effort to reduce expenses and lower legal and facilities costs, and includes an allocation of a portion of these expenses to costs of services. We expect our full-year 2010 general and administrative expenses to be below those for fiscal year 2009. *Research and development expenses*. Research and development expenses were $19.2 million for the first nine months of 2010 compared to $11.9 million for the comparable 2009 period. Research and development increased approximately $7.3 million primarily due to our two ongoing Phase III trials for NicVAX and NicVAX manufacturing-related activities. The costs related to the PentaStaph Phase I clinical trial are reimbursed by GSK (and such reimbursement is recognized as revenue). Approximately $7.2 million of the costs for the NicVAX and PentaStaph trials have been offset by grant funding from NIDA and DoD. We expect research and development expenses over the remainder of 2010 to be comparable to the third quarter expenses as we continue work on our various clinical trials. *Interest expense.* Interest expense was $0.2 million for the first nine months of 2010 compared to $0.6 million for the comparable 2009 period. The decrease in interest expense reflects the impact of the repurchase of all of our Convertible Senior Notes in the second quarter of 2010. *Income tax expense (benefit)*. During the third quarter 2010, as a result of recent tax law changes, we recognized an income tax benefit of $1.8 million relating to an expected refund of prior year alternative minimum tax payments. ### LIQUIDITY AND CAPITAL RESOURCES Our cash, cash equivalents and marketable securities at September 25, 2010 totaled $112.2 million compared to $119.0 million at December 26, 2009. Cash provided by operating activities was offset by payments of approximately $42.8 million for the repurchase of our shares of common stock and $6.1 million for the repurchase of the remaining balance of our Convertible Senior Notes, as well as our operating expenses. Cash provided by operating activities for the nine months ended September 25, 2010 was $41.5 million, compared to cash used in operating activities of $13.8 million for the nine months ended September 25, 2009. The significant increase in cash provided by operating activities in 2010 was primarily associated with the $65.3 million received from GSK associated with the PentaStaph and NicVAX agreements offset in part by cash used for general and administrative and research and development expenses. Cash used for investing activities in 2010 was $15.3 million, consisting largely of the net purchases of our marketable securities. In the first nine months of 2010, the Company repurchased 7.8 million shares for $42.3 million at an average price per share of $5.45. Since the inception of the program in December 2007 through September 25, 2010, we have repurchased a total of 19.9 million shares at a total cost of $87.2 million, at an average price of $4.39 per share. Approximately $27.8 million remains available for share repurchase as of October 31, 2010. The Company also used $6.1 million to repurchase the remaining balance of its Convertible Senior Notes during the first half of 2010. We believe cash, cash equivalents and marketable securities on hand at September 25, 2010 will be sufficient to meet our anticipated cash requirements for operations for at least the next 12 months. ### CRITICAL ACCOUNTING POLICIES AND ESTIMATES Note 2 to our condensed consolidated financial statements includes a discussion of our significant accounting policies. A summary of the more significant policies follows: *Accounting estimates:* The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period, including such amounts related to discontinued operations. Actual results could differ from those estimates. *Revenue recognition:* Our contracts and agreements may include multiple elements and deliverables, including licenses, options, research and development activities, participation on joint steering committees, and contract manufacturing, among other elements. When we determine that an element has stand alone value to our customer, we allocate the total contract price to that element based on its objectively determined and relative fair value, and recognize revenue for that element according to its characteristics. When we cannot reliably and objectively determine fair value of any delivered element, we combine that element with undelivered elements as a single unit of accounting. Revenues related to substantive milestone activities are recognized as revenue in the period such activities are completed. We analyze cost reimbursable grants and contracts to determine whether we should report such reimbursements as revenue or as an offset to our expenses incurred. *Research and development expenses:* Research and development costs are expensed as incurred; advanced payments are deferred and subsequently expensed over the period of performance. Research and development expenses include direct labor costs as well as the costs of contractors and other direct and indirect expenses (including an allocation of the costs of facilities). We expense amounts payable to third parties under collaborative product development agreements at the earlier of the milestone achievement or as payments become contractually due. *Share-based compensation*: We currently account for share-based compensation at fair value; accordingly we expense the estimated fair value of share-based awards made in exchange for employee services over the requisite employee service period. Share-based compensation cost is determined at the grant date using an option pricing model. The value of the award that is ultimately expected to vest is recognized as expense on a straight-line basis over the employee’s requisite service period. *New accounting pronouncements:* There are several new accounting and disclosure requirements that we will be required to adopt in the future, primarily with respect to revenue recognition practices. In 2011, we will be required to adopt new revenue recognition practices relating to revenue arrangements that include multiple elements. Our agreements with GSK related to our PentaStaph and NicVAX products may be affected by the new accounting and disclosure requirements. We are currently evaluating any potential impact these new requirements may have on our consolidated financial statements. ## Market risk As filed, 220 characters. There have been no material changes to our market risk as described in Item 7A of our Annual Report on Form 10-K for the year ended December 26, 2009. We repurchased all of our Convertible Senior Notes on April 15, 2010. ## Controls and procedures As filed, 1,462 characters. Our Chief Executive Officer currently serves as acting Chief Financial Officer. ### Evaluation of Disclosure Controls and Procedures An evaluation was performed under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Accounting Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Accounting Officer concluded that these disclosure controls and procedures were effective. ### Changes in Internal Controls Over Financial Reporting There has been no change in our internal control over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met, and therefore, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. We do not expect that our disclosure controls and procedures or our internal control over financial reporting are able to prevent with certainty all errors and all fraud. ## Risk factors As filed, 148 characters. There have been no material changes to the Risk Factors contained in Item 1A of our Annual Report on Form 10-K for the year ended December 26, 2009. Filed Nov 3, 2010. Source: SEC EDGAR, the filing index for accession 0001193125-10-246293. Last ingested by Listed: Nov 5, 2026, 18:48 ET. No prices; not investment advice.