Dynavax Technologies Corp (DVAX) 2009 Q3 法說會逐字稿

Please stand by. We're about to begin.

Thanks for joining us for Dynavax's conference call today. Participating on today's call are Dr. Dino Dina, president and CEO, Michael Ostrach, Vice President and Chief Business Officer, and Jennifer Lew, Vice President of Finance.

I will now turn the call over to Amy Figueroa, Investor Relations for Dynavax. Amy, please go ahead.

Thank you, [Beau.]

Today we reported results for the third quarter and nine months ended September 30th, 2009. A copy of our press release can be found on our website at www.dynavax.com.

On today's call, we need to advise that we will use forward-looking statements that are subject to a number of risks and uncertainties, including statement related to the nature and timing of planned clinical trials of HEPLISAV and our other product candidates, and development and commercial plans and expectations for HEPLISAV. Actual results may differ materially due to the risks and uncertainties inherent in our business, including whether successful clinical development and regulatory approval of HEPLISAV can occur in a timely manner or without significant additional studies or difficulties or delays in development, our ability to obtain additional financing to support the development and commercialization of HEPLISAV and our other operations, possible claims against us based on the patent rights of others, and other risk factors detailed in the "Risk Factors" section in our current SEC report.

I would now like to turn the call over to our CEO. Dino?

Thank you. And I'd like to take this opportunity to provide you with an update on our progress this quarter, and in particular focus on our lead program, HEPLISAV, our enhanced hepatitis B vaccine.

We have started designing a commercialization strategy for HEPLISAV that we believe will be effective in maximizing the profitability for Dynavax and, of course, the returns for our shareholders. This results from Merck's termination of our agreement and the need to focus on a strategy that pursues large, high-margin segments that can be immediately targeted with HEPLISAV. And those consist of adults who are less responsive to current vaccines and adults that need rapid protection.

Second, I'd like to discuss our longer-term partnering objectives that would enable us to expand the existing markets and gain additional sales. In addition to our commercialization strategy, I'll take a moment to provide further clarity regarding HEPLISAV's clinical and regulatory development, including trial design, timelines, estimated cost as we move forward towards completing the Phase III registration trials.

Finally, we'll close by reviewing our clinical and preclinical programs, as these represent an important part of our current revenues and future upside potential, and we will discuss as well the financial results for the third quarter of 2009.

Starting then with HEPLISAV, the initial commercialization strategy for our lead product address significant unmet medical need in the $500 million market for adult hepatitis B vaccines. The market is fundamentally divided into two main groups - adults that are not responsive to current vaccines and adults that need rapid protection because of professional or [advantageous] exposure.

The first group, the adults that are less responsive to current vaccines, include patients with chronic kidney disease, HIV, chronic liver disease in adults that are older than 40. The second group, adults that need rapid protection, includes healthcare providers, emergency workers, and travelers that travel to HBV (inaudible) carriers. These two groups account for the majority of the estimated $500 million-plus market for adult hepatitis B immunization.

I will start by reviewing what is the most obvious target for Dynavax, which is the chronic kidney disease patient market. It's important to note that the CKD market is one of the largest patient groups in the adult market, and it's, unfortunately, growing rapidly. It is renewable. As patients are immunocompromised, their immunity doesn't last long, and they need to be boosted periodically. And it's highly concentrated in that, by reaching for dialysis centers, we can address this through institutional sales rather than through detail sales.

In the US and in the five major European markets, there are (inaudible) an estimated total 750,000 patients that have end-stage renal disease and are on dialysis, and approximately 150,000 new patients are diagnosed with chronic kidney disease every year. These numbers are increasing in a dramatic way due to the well-known obesity epidemic and the resulting diabetes and renal failure that ensues that.

Before receiving dialysis treatment, all the ESRB -- [these are conditioned] to immunize all the ESRD patients. And currently, that immunization takes place with either eight injections of the GlaxoSmithKline vaccine, Engerix-B, or 12 dose equivalents of Recombivax HB, which is the Merck vaccine.

To put this in context, (inaudible) immunization regimen is three doses of vaccine for the general population. Approximately 35% of patients do not achieve the necessary antibody titers and, therefore, are not protected even after these extensive immunization regimens, which are often repeated for a total of six shots plus. And 20% of them will require annual boosters, as I mentioned, because they don't maintain sufficient levels of immunity.

Finally, the CKD population is concentrated and, for example, in the US, two dialysis companies control two-thirds of the entire market, and the rest of the market is not very highly fragmented, either, although it's more spread out. These concentrated market, of course, can be easily served with a small targeted sales organization and through contracts rather than, as I said, through detailed sales.

In addition to chronic kidney disease patients, there are other sort of groups that include less responsive patients who are at high risk of infections and have conditions that make hepatitis B protection critical, including individuals infected with HIV and those who have chronic liver disease. These groups also represent large [unserved] patient populations for Dynavax, and they constitute a potential large growth area for the adult [type] immunization franchise in that they are only minimally penetrated with existing vaccines in part because of the lack of efficacy of available intervention.

HEPLISAV has also the potential to be highly profitable for us, and this is one of the key points that we focused on in redesigning our strategy for the market. In the US, current licensed vaccines sell for approximately $400 to $500 per eight-dose regimen in the chronic kidney disease market. For the general adult market, prices ranges between $150 and $200 per three-dose regimen.

Our market research to date indicates that enhanced hepatitis B vaccines with HEPLISAV's clinical benefits can command premium pricing and, therefore, provide a very attractive opportunity for Dynavax. So, we continue to look at this market as a market from which we can derive the price of an eight-injection regimen for a three-injection regimen, therefore completely changing the pricing per dose that would be accessible to us.

In addition, by selling HEPLISAV directly into the servable high-margin chronic kidney disease markets and their related markets in the US, we estimate that our gross margin could be approximately 90%. If you compare this to a [team] royalty, such as the one that we had as part of the Merck agreement, this constitutes a very dramatic change in the potential revenues for the Company.

As you know, we produce hepatitis B surface antigen in our own facility in Germany. And as we prepare for commercial production and the facility gets fully optimized, we anticipate producing in excess of two million doses of HEPLISAV to meet initial commercial demand. Using this initial capacity, it is, of course, our goal to prioritize sales in the easy-to-reach high margin markets, and this constitutes a truly unique opportunity for the Company. Just to use very simple math that doesn't aspire to be sales projections, if we have pre-tax earnings of $70 million or $80 million per $100 million in sales, as I mentioned earlier, that's a very different outcome from receiving a [team] royalty from a partner.

So, in this context, we've made a clear decision to aim for direct (inaudible) for those segments for which we have the ability to do so, but we have not at all discarded the notion of using partnerships for several purposes.

First and foremost, we would like to use partnerships outside of the US and for those populations that are more difficult to reach on a direct basis, and they do require a sales force. A typical example would be [HBV]-infected individuals that are served by key companies that sell antivirals and, in a similar fashion, HIV infected individuals that are not concentrated in specific institutional settings that are currently reached very effectively by companies that sell antivirals.

So, there are conventional strategic initiatives that we're pursuing that aim at potentially leveraging sales for target populations through established vaccine companies, but, in parallel, we're also using less obvious and less conventional approaches that may entail working with alternative companies, such as companies that have strong antiviral franchises, to be able to reach the patient populations that are indicated for HEPLISAV.

In addition, there is a third segment that is of very high value to us and constitutes potential growth of very large proportions for the vaccine, and those are middle-class populations in the private markets in Southeast Asia, in emerging countries such as India and China.

At this point, then, I'd like to move on to better clarify some of the aspects that relate to the clinical and regulatory programs as we continue to move forward towards the completion of the Phase III registration trials.

At this point, and differently from any other Phase III situations, we already have fully established, through a typical study, the efficacy of HEPLISAV, and that's not in question, nor part of the objective for what we need to do next. What we're going to do next is to test the vaccine and establish the validity of our regimen in a target population with chronic kidney disease, and the precedent for establishing a regimen and having a starting point in this population has been establishing smaller studies that are going to be reported at IDSA at the end of this month.

We believe that it proves the very long and cumbersome, not to say expensive, 18 months of limbo that we just lived through. We have, nevertheless, managed to gain a key advantage, which is that, through the extensive and extremely detailed discussions we've had with FDA, we have managed to obtain significant clarity for the completion of the development of HEPLISAV.

Accordingly, the registration trials have been designed and agreed upon with the key regulatory agencies, including FDA and EMEA, and we expect the two Phase III registration trials, which comprised approximately 2,600 patients in total, to be completed in the next 24 months. We've already announced that the first of these trials, the one in chronic kidney disease, has started and is enrolling and immunizing. It's designed to include an approximate 600 people, and these people will receive three injections at zero, one and six months with either HEPLISAV or Engerix in a one-to-one randomization scheme.

And Engerix is -- I'm sorry, is going to be administered in eight doses, two doses being given at time zero and then, subsequently, at one month, two months and six months. So, it's zero, one, six for HEPLISAV and zero, one, two and six months, double dose, for Engerix. Primary endpoint is non-inferiority of three doses of HEPLISAV versus eight doses of Engerix as measured at month seven, one month after the last immunization. Secondary endpoint for the trial is, of course, superiority of HEPLISAV, which is something that we are hoping to accomplish, as well.

The Phase III lot-to-lot consistency trial is conducted in adults of age over 40, and we expect to initiate this trial early next year. Trials will be conducted in the US, and potentially in other sites in Canada, and will include approximately 2,000 subjects, aged 40 to 70, in this case randomized four to one to receive two doses of HEPLISAV at zero and one month versus three doses of Engerix at zero, one and six months. In this trial, we will evaluate the relative sero-protection of both vaccines, as well as the consistency of antibody response between three consecutively produced lots of HEPLISAV manufactured at commercial scale versus the original lots that were tested in the past trial.

At this stage of HEPLISAV development, we fundamentally believe that there is no [doubt] in retaining maximum profitability for Dynavax, as I mentioned earlier, and that it will maximize return to our shareholders through this mechanism rather than resorting to raising capital through an [early] partnership, which would be, by definition, highly dilutive.

We estimate that the cost of completing the key registration trials for HEPLISAV is going to be approximately $30 million, and, in that context, we're clearly exploring options to finance the trials.

Needless to say, equity financing is an option, albeit we recognize an expensive one. And we have established in that market (inaudible) financing facility for $15 million that we're going to use only as a cash management tool. We've also initiated several strategic initiatives to potentially partner key assets in our pipeline, including, as we've discussed for HEPLISAV, to support and expand our commercialization strategy. And we would anticipate that, while these partnerships might require a definite amount of time to be negotiated, that they have the definite potential for offsetting the need to raise additional capital in the open markets.

These are -- these partnering initiatives, therefore, could also play a significant role in funding not only HEPLISAV but other programs and, in the end, as I said, limit the amount of equity in acquiring (inaudible) financing that would be required by the Company.

We've always been very successful in partnering with the government, and in particular with NIH, to conduct some of our key research activities and some of our key clinical trials. We intend to continue to do so, and there are definite opportunities to conduct trials that would be funded by public agencies, especially in unique populations where HEPLISAV would be of great advantage, and obviously in the case of pandemic flu.

As all of these financing initiatives are likely to take some time to reach completion, our goal is to limit, in the meantime, dilution to our stockholders. And we will pursue a range of financing options upon HEPLISAV's registration trials that consist of everything that we've mentioned earlier.

Recognizing that past performance is no guarantee of future outcomes, as you all well know, I'd like to remind you that the last time the Company raised money was in the fall of 2006. And we raised a total of $46 million during that period of time, and we reported $46 million in cash at the end of this quarter. And I think that gives you a measure of the cash management style that we've adopted, and I think you can assume that's going to remain our approach and our commitment moving into the next phase of the Company.

I'd like to cover, very quickly, some of the additional work that's taking place in the Company in the rest of the pipeline. As you know, we have focused quite substantially in the hepatitis area, with two additional programs being committed to therapeutic interventions in hepatitis C and hepatitis B. Both programs are in Phase 1B, with the hep C program being slated to go into larger scale trials in the near future in cooperation with Symphony.

The synergies that these programs provide with HEPLISAV are quite strong, and they exist both in terms of technology and expertise in the area of intervention, but also, as I mentioned earlier, from market reach and potential funding point of view. So, we value that the hepatitis C therapy program is fully funded by Symphony Dynamo, and that we are currently in the process of reviewing how these programs -- this program could unfold to achieve further evidence of antiviral activity.

So far, the tolerability and safety of the intervention has been impeccable, and we have clearly demonstrated rapid and substantial antiviral activity in virtually every patient we've treated at the various doses that have been used in the study. We are completing the final dosing in the study right now, and we will be designing a Phase II study in the immediate future.

Hepatitis B program will begin Phase 1B clinical trials. It's in the final stages of assembling [subject] patients. And we expect it to generate data that will be useful in evaluating the potential efficacy of the intervention next year.

With respect to universal flu vaccine, we continue to get compelling results in our animal and preclinical studies that demonstrate that the biology and pharmacodynamic activity of the vaccine are completely in line with our expectations. It's now a matter of completing the preclinical study required for filing an IND and then moving to the clinic hopefully in the first half of next year.

Finally, we have two partner programs, one in asthma and COPD with AstraZeneca. As I mentioned earlier, that's now entering stage of development whereby the $120 million or so in clinical and other milestones that are due to us will start kicking in, and that's part of our expected revenues for the future. And our TLR7 and 9 inhibitor program that is partnered with GSK is proceeding according to plan, and we expect to bring that into the clinic towards the end of next year.

I'll now turn the call over to Jennifer, our VP Finance, for a review of the third quarter results.

Thank you, Dino.

I'd like to quickly review our financial results for the third quarter and nine months ended September 30, 2009.

Our cash, cash equivalents, marketable securities and investments held by Symphony Dynamo, which we collectively refer to as "total cash," were $46.4 million at September 30, 2009 compared to $53 million at June 30, 2009. Total revenues were $2.9 million for the third quarter 2009 compared to $8.9 million for the third quarter of 2008. This decrease was primarily due to a decrease in collaboration revenue following the termination of the Merck and Company. collaboration for HEPLISAV.

For the nine months ended September 30, 2009, total revenues were $38.1 million, which included the recognition of $28.5 million of non-cash deferred revenues. It was accelerated upon the termination of the Merck collaboration. For the nine months ended September 30, 2008, total revenues were $25.1 million.

On a pro forma basis, which includes collaboration funding from Symphony Dynamo and excludes the non-cash deferred revenue from the Merck collaboration, revenues were $3.9 million for the third quarter 2009 compared to $9.9 million for the third quarter of 2008, and were $12.2 million for the nine months ended September 30, 2009 compared to $27.9 million for the same period in 2008.

Total operating expenses were $13.6 million for the third quarter of 2009 compared to $14.6 million for the third quarter of 2008. For the nine months ended September 30, 2009, total operating expenses were $41.6 million compared to $51.2 million for the same period in 2008. This decrease in operating expenses for 2009 was primarily due to a reduction in clinical development costs associated with HEPLISAV and the discontinuation of development for our TOLAMBA ragweed allergy program.

On a pro forma basis, excluding the non-cash charges for stock-based compensation and amortization of intangible assets, operating expenses were $12.5 million for the third quarter of 2009 compared to $13.3 million for the third quarter of 2008, and $38.8 million for the nine months ended September 30, 2009 compared to $47.9 million for the same period in 2008.

Net loss was $9.5 million, or $0.24 per share, for the third quarter of 2009 compared to $5.4 million, or $0.14 per share, for the third quarter of 2008. The increase in net loss for the third quarter of '09 is due to a decrease in collaboration revenue, partially offset by a decrease in total operating expenses.

For the nine months ended September 30, 2009, net loss was $0.3 million, or $0.01 per share, compared to $23.9 million, or $0.60 per share, for the same period in 2008. The improvement in net loss for 2009 is due to the recognition of non-cash deferred revenue and a decrease in total operating expenses.

We will now turn the call over the operator, who can open the call for your questions.

Thank you very much, ma'am.

(OPERATOR INSTRUCTIONS.)

Dr. Dina, it appears we have no questions this afternoon, sir. I'll turn the conference back to you.

I'm always amazed by the clarity we can achieve in our communications.

So, I'd like to thank everybody for their interest and for taking the time to listen in today's call. As we complete HEPLISAV's Phase III registration trials, our focus on the market opportunities in immunization strategy is clear. Goal is to provide maximum benefit at the highest level of profitability for Dynavax and for the largest and most easily served group - chronic kidney disease patients.

Selling HEPLISAV directly to the concentrated market of dialysis centers, building a small, highly qualified sales force, and potentially partnering with key distributors, we can capture a very high margin on these HEPLISAV sales, as I discussed earlier, therefore achieving maximum profitability for ourselves and a commensurate return for our shareholder.

We plan to expand the opportunity into broader markets and other segments, and of course internationally. And for this, we are looking at partnerships with the appropriate parties, potentially including vaccine companies, antiviral companies, and strategic distribution partners, including local companies in particular throughout Southeast Asia.

HEPLISAV is a late-stage product with a compelling commercial outlook. We're particularly excited about how the opportunities for this product has evolved. [With our royalty] alliance with Merck to building a highly profitable commercial strategy that capitalizes on niche markets for which the use of our enhanced vaccine provides critical benefit. We believe this product has company-building potential for Dynavax and for our stakeholders.

We look forward to providing you updates as we execute our plans for HEPLISAV and for the rest of our pipeline. You're free to contact us, and, if you have any further questions, you can call us any time.

Thank you.

And that will conclude today's conference. We'd like to thank you all for joining us and wish you all a great afternoon. Good-bye.