Dynavax Technologies Corp (DVAX) 2021 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Dynavax Technologies Third Quarter 2021 Conference Call. As a reminder, this conference call is being recorded. (Operator Instructions) I would now like to turn the call over to Nicole Arndt, Senior Manager, Investor Relations. You may begin.

Good afternoon, and welcome to the Dynavax Third Quarter 2021 Financial Results and Corporate Update Conference Call. Before I begin, I advise you that we will be making forward-looking statements today, including, but not limited to, statements regarding market size, the impact of ACIP recommendation, customer buying patterns, financial guidance and trends and potential future uses of CpG 1018. These statements involve risks and uncertainties that could cause actual results to differ materially. These risks are summarized in today's press release and are detailed in our Risk Factors section of our current 10-Q reports filed with the SEC, which we encourage you to review.

Our forward-looking statements speak as of today, and we undertake no obligation to update such statements at a later date. Joining me on the call today from Dynavax are Ryan Spencer, Chief Executive Officer; Kelly MacDonald, Chief Financial Officer; Robert Janssen, Chief Medical Officer; and Donn Casale, Senior Vice President Commercial. Go ahead Ryan.

Thank you, Nicole, and thank you all for joining us today. I'm pleased to report that we continue to make strong progress on each of our core priorities, including accelerating momentum with our lead commercial asset HEPLISAV-B, advancing our COVID-19 vaccine collaboration and continuing to add to our development efforts to leverage our vaccine adjuvant CpG 1018 to generate long-term value. HEPLISAV-B, our two dose adult hepatitis B vaccine approved in the U.S. and in Europe, achieved another record this quarter with net product revenue of $22.7 million, up significantly from $13.7 million in the prior quarter.

I'm also excited to report that yesterday, the ACIP voted unanimously to adopt an upgraded recommendation greatly expanding the number of adults recommended to be vaccinated against hepatitis B in the United States. With this upgraded recommendation, we believe the U.S. hepatitis B market opportunity has the potential to grow to over $800 million annually over time. We believe HEPLISAV-B is progressing to become the standard of care adult hepatitis B vaccine in the U.S. HEPLISAV-B provides an important foundation for our company as our lead commercial asset generating durable long-term revenue growth. The opportunity for our CpG 1018 adjuvant has also advanced rapidly. Our collaborators have generated significant data demonstrating its efficacy, immunogenicity and safety in COVID-19 vaccines, which is expected to lead to multiple emergency use authorizations.

Additionally, our commercial supply agreements for CpG 1018 have generated $84 million in revenue this quarter alone. As a result of the progress made by our collaborators and our growing CpG 1018 capacity, we now expect to generate approximately $375 million to $425 million in aggregate CpG 1018 product revenue in 2021, an increase to our previously estimated range of $300 million to $400 million. I will turn the call over to Rob Janssen to review the current status of each collaboration before we move on to HEPLISAV-B and our financial results. Rob?

Thanks, Ryan. Starting with Medigen Vaccine Biologics. Medigen was the first of our collaborators to receive emergency use authorization for COVID-19 vaccine adjuvanted with CpG 1018. They received approval for inclusion in Taiwan's COVID-19 vaccine immunization program and residents began receiving the vaccine in August. Another of our collaborators, Clover Biopharmaceuticals, recently reported topline results from a Phase III global efficacy study of their COVID-19 vaccine adjuvanted with CpG 1018. The study enrolled over 30,000 participants, and the results are spectacular. They met their primary and secondary efficacy endpoints. And importantly, demonstrated 100% protection against severe disease, hospitalization and death in the study in which only variant viruses such as the Delta variant were observed.

We were particularly excited that this high level of efficacy was obtained while having a tolerability profile as measured by solicited systemic adverse events that was similar to placebo. Separately, our collaborator, Valneva, also reported positive top line data for their COVID-19 vaccine candidate as adjuvanted with CpG 1018. This was a comparative immunogenicity Phase III trial that enrolled approximately 4,000 adults. The trial demonstrated superior neutralizing antibody titers compared to AstraZeneca's vaccine, with the seroconversion rate over 95%. Their vaccine candidate was well tolerated, demonstrating a statistically significant better tolerability profile compared to the AstraZeneca vaccine.

Lastly, in July, Dynavax and Biological E entered into a commercial supply agreement for the provision of CpG 1018. Bio E is currently conducting a Phase II/III trial of their subunit COVID-19 vaccine candidate, adjuvanted with CpG 1018 that are anticipated in the fourth quarter. Based on these impressive Phase III data sets across our COVID-19 partnership portfolio, we believe the combination of high efficacy and immunogenicity coupled with favorable safety and tolerability could be at a very competitive profile as the COVID-19 pandemic evolves. These data reinforce our belief that CPG 1018 is a unique and valuable adjuvant for the development of novel and improved vaccines.

Additionally, we've developed a portfolio of global research collaborations to help establish CpG 1018 as a broad vaccine adjuvant platform. The versatility of CpG 1018 enables us to support multiple vaccine approaches across a variety of indications, which has now enabled a portfolio of development programs beyond hepatitis B and COVID-19 that currently includes Tdap, universal flu and plague. To take you through our update on HEPLISAV-B, I'll now turn it over to Donn Casale, Senior Vice President of Commercial.

Thank you, Rob. I'm excited to provide an update on HEPLISAV-B and our continued progress within the U.S. market. HEPLISAV-B, our adult hepatitis B vaccine adjuvanted with CpG 1018, deliver higher rates of protection in only two doses in one month compared to other hepatitis B vaccines that require three doses over 6 months. HEPLISAV-B has been proven to demonstrate broad protection achieving seroprotection rates of over 90% across all patient types, including diabetics and older adults who often fail to generate an adequate immune response from traditional 3-dose hepatitis B vaccines.

I am thrilled to report that HEPLISAV-B has achieved another record quarter with $22.7 million in net product revenue, the highest quarterly revenue since launch. This revenue outcome is an increase of 96% compared to the third quarter of last year and growth of 66% compared to the second quarter of this year. Our third quarter revenue milestone was achieved despite the hepatitis B market remaining below historical norms due to the ongoing pandemic.

Hepatitis B market utilization during the third quarter was at 76% of pre-pandemic levels. Our success in the third quarter was driven by continued progress in field targeted and national accounts. We looked at field targeted market share as a critical metric and it has been especially important over the last year as the overall vaccine market has been disrupted by the pandemic. In the third quarter, field targeted market share increased to 33.5%, up 3% from the previous quarter and up 10% from the same period last year.

Within national accounts, we significantly expanded the number of retail pharmacy locations initiating their first order for HEPLISAV-B. Additionally, we drove meaningful reorders across retail outlets during the quarter. All of this led to significant growth in the Retail segment of 93% compared to the previous quarter, with all-time highs in doses sold and market share realized in the segment.

Progress in field targeted and national accounts have helped to increase our total U.S. market share to 26% in the third quarter. Q3 was a remarkable quarter for HEPLISAV-B. We are immensely proud of the results and want to thank our team for all their hard work and dedication.

Looking ahead for HEPLISAV-B, we project that field targeted market share will continue to increase over time, and we anticipate continued increases in the number of new ordering and reordering locations across our promoted segments. However, we anticipate the overall hepatitis B market will soften in the fourth quarter. This projection is based on two market dynamics occurring in the quarter. First, pre-pandemic historical trends have shown us that the hepatitis B market decreases by up to 15% in the fourth quarter due to seasonal purchasing patterns of key segments and 1 to 2 weeks of depressed demand due to the holidays.

Second, COVID-19 booster planning and administration may cause intermittent customer disruption or preventative services such as immunizations. Because of the convergence of these two events, we believe the hepatitis B market in Q4 could temporarily contract by as much as 30% from Q3 2021 levels. Early market utilization data supports this expectation, and we will continue to monitor the outcome. That said, we remain confident in the market recovery over the long term.and anticipate the market returning back to a positive recovery trend in early 2022.

Our ability to increase market share and drive new ordering locations in a volatile market due to the pandemic, supports our confidence in continued long-term growth for HEPLISAV-B with revenues expected to increase year-over-year. Furthering the positive outlook for HEPLISAV-B, the CDC Advisory Committee on Immunization Practices or ACIP, yesterday voted unanimously to recommend that all adult 19 to 59 years of age should receive hepatitis B vaccination. This recommendation simplifies the identification of patients who need a hepatitis B vaccine compared to the current risk-based recommendation and significantly expands the number of adults in the U.S. who should be vaccinated against hepatitis B. We expect this new hepatitis B recommendation to be included in the updated adult immunization schedule published in early 2022.

While it will take some time for this recommendation to work its way through the healthcare system, it has the potential to expand the number of adults vaccinated annually for hepatitis B by approximately 50% over the next 5 years. Based on this opportunity, we plan to launch innovative marketing campaigns that will target consumers and health care providers to increase the awareness of HEPLISAV-B as the only 2-dose hepatitis B vaccine option with broad protection across all patient types that can best support CDC's goal to eliminate viral hepatitis.

Q3 was an exceptional quarter for HEPLISAV-B achieving all-time highs in revenue and market share. We remain confident in our ability to generate momentum and look forward to continuing to drive long-term growth for the brand. I will now turn the call over to Kelly to discuss our Q3 financial results in more detail.

Thank you, Donn. I'll focus my comments on the highlights of our financial performance in the quarter and refer you to our press release issued this afternoon, along with our 10-Q filed with the SEC today.

Let's begin with revenue. During the third quarter, we recorded total revenue of $108 million, which primarily includes net product revenue from HEPLISAV-B as well as CpG 1018 adjuvant sales to our COVID-19 vaccine collaboration partners.

Starting with HEPLISAV-B financial performance. As Brian and Donn also mentioned, we reported record quarterly net sales of $22.7 million. This represents 96% growth from $11.6 million, which was recorded in the third quarter of last year. This year-over-year growth is primarily driven by increased market share and increased utilization, as health care facilities continue to navigate reopening amidst the pandemic.

Moving on to CpG 1018 adjuvant revenue. We recorded $84.3 million in product revenue associated with adjuvant sales for our COVID-19 collaboration partners in the third quarter. This is compared to $1.7 million in the same quarter last year. As Rob highlighted, we continue to make significant progress with each of our CpG 1018 partnership and are very excited to report that we have increased our revenue outlook for the year. We now expect approximately $375 million to $425 million in aggregate CpG 1018 adjuvant revenue for 2021. This is a substantial increase from the previously estimated range of $300 million to $400 million. And this increase in our expectations is primarily driven by the recent positive clinical data readouts from our partners, along with the corresponding increase in near-term demand for CpG 1018 to support commercialization in respective markets.

As a reminder, adjuvant shipments and corresponding revenue remain contingent on each of our partners' continued success and the timing of product delivery. Further, as we continue to sell to certain of our partners who support vaccination efforts in low and middle income countries, gross margin may fluctuate quarter-to-quarter. However, we expect margins to settle in the 50% range over time. We look forward to providing additional clarity for 2022 and beyond as our partners work towards securing additional commercial contracts and regulatory approval.

Moving on to expenses. Our research and development expenses for the third quarter were $6.2 million compared to $8.5 million in the comparable period in 2020. During the third quarter of last year, we recognized certain costs associated with the wind down of our legacy immuno-oncology business, which were nonrecurring in the current period.

Looking ahead, we expect R&D expenses to continue to reflect progress in our early-stage pipeline as we continue to advance our programs through the clinic. Notably, this includes our expectation to begin incurring costs to develop a recombinant plague vaccine adjuvanted with CpG 1018 in connection with our $22 million contract with the Department of Defense, which was recently executed.

SG&A expenses for the third quarter were $26.9 million compared to $21.5 million in the comparable period in 2020, with the increase primarily driven by our expanded HEPLISAV-B field sales team which was brought on at the beginning of the third quarter. Looking forward for SG&A, we expect these expenses may slightly increase over time as we carefully invest to drive market share for HEPLISAV-B in addition to supporting our CpG 1018 adjuvant partnerships in our growing pipeline.

Turning now to our bottom line. Dynavax generated a GAAP net loss of $28.4 million in the third quarter. This compared to a net income of $4.4 million in the prior year quarter. Importantly, our GAAP net loss and net income include noncash fair value adjustments for our outstanding warrants that fluctuate quarter-to-quarter in connection with the movement in our stock price. During the third quarter and tracking to the recent increases in our stock price, the impact to net income from this fair value adjustment was a loss of $45 million compared to a gain of $21 million in the prior year third quarter. We anticipate these quarterly fluctuations continuing through expiration through the expiry of the warrants in February 2022.

Turning now to our cash position. We ended the quarter with a very robust balance sheet, including cash, cash equivalents and marketable securities of approximately $414 million compared to $164 million as of December 31, 2020. This is driven by cash flow from operations of $215 million over the same period. In the near term, we remain focused on our core strategic objectives to inform our capital allocation decisions. This includes driving HEPLISAV-B market share; fully executing on our CpG 1018 adjuvant supply collaboration; and lastly, exercising disciplined allocation of capital to advance and further establish our pipeline, leveraging our CpG 1018 adjuvant to generate long-term value.

Additionally, we look forward to multiple important milestones and anticipated catalysts in 2022, including the beginning of the implementation of the updated ACIP recommendation for adult hepatitis B vaccination, upcoming clinical and regulatory milestones from each of our COVID-19 partnerships and continued progress in our early-stage R&D program.

Lastly, and in closing, none of these results that you heard Ryan, Donn and Rob and I discussed, would have been possible without the incredible Dynavax team. And I'd like to pass on our sincere thanks to each of our teammates for their hard work and dedication. Thank you, everyone, for your attention today. Operator, we would now like to open the Q&A portion of today's call.

(Operator Instructions) Your first question comes from the line of Matt Phipps from William Blair.

Congrats on the quarter. Great to see continued execution here on top of the tailwinds for you guys. So you did give some breakdown for the increase in the total market opportunity you guys think. Wonder if you could just give maybe any more kind of color around how much of that is through just -- you think there'll be increased uptake in some of those groups like the diabetic group versus other patients that weren't at risk? And then if there's any change to kind of price assumptions that you guys had previously with the new guidance?

Donn, why don't you take that question?

Sure. Matt, regarding the modeling that we look at, predominantly, a lot of this growth is going to come from the at-risk patients in particular, that was the primary goal of this universal recommendation is to increase the coverage rate in particular for the at-risk patients. One of the things we look at, and it's a good analog, is looking at influenza from a little over 10 years ago. When that recommendation went from an at-risk to a universal, and we modeled basically at-risk increases in vaccination rate similar to what happened with flu as a way to think about growth in the market. So a lot of that is driven through the at-risk. There's some modeling them with the, what we'll call a healthy patient as well, but predominantly, a lot of the growth is coming from the at-risk patients. With regard to price increase, price increases, we do anticipate having price increases year-over-year but that hasn't changed with regards to this recommendation. Our strategy around price has remained the same, regardless of this recommendation from ACIP.

Great. Maybe just -- probably a follow-up for you as well. This quarter, the new slide deck doesn't show that kind of dose is sold by segment. Just wondering if you could maybe give any kind of high level on any change there, especially how much DoD was there in Q3, which we assume would not recur and it seems to be more heavy in Q2 and Q3?

Well, as a typical DoD, certainly, you see what we call the summer surge in Q3. So DoD, we did see growth in DoD, but predominantly, a lot of our growth, as I mentioned earlier, came in the retail segment. We had 93% growth quarter-over-quarter in retail. So certainly, that contributed to a lot of the success. Certainly, the field targeted market share increasing 3 points quarter-over-quarter also increase. So by the end, public health also saw increases quarter-over-quarter. So predominantly, you're seeing growth across all the segments. The retail in particular, had a lot of success in growth quarter-on-quarter at 93%.

Yes. And Matt, just to add on to that. We talked a lot about the summer surge in the past and Donn's commentary around the seasonality between Q3 and Q4 is some of that is impacting that 15% that you see as the typical delta between Q3 and Q4. So it's already captured in the number we showed there.

Great. And then maybe last question for me. For Kelly. On the COGS in the quarter, just wondering how much of that is kind of this dynamic of, okay, you're making the product now, you're recognizing some revenue of baseline, but there'll be kind of a true-up in revenue later once it's -- once that's finally sold depending on where -- which market it's sold into. So just how the COGS in this quarter reflect maybe total CpG potential that you made? Any change, I guess, to your margin assumptions around CpG revenues?

Thanks, Matt. And as it relates to CpG, as I mentioned, we're going to continue to see quarterly fluctuations based on customer mix. You're spot on in pointing out that there may be some reconciliations downstream to the extent that product is sold to market at a higher price and are contemplated at the base level of the arrangement. We do believe that over time, despite these fluctuations that the 50% ballpark is the right metric for CpG COGS.

Your next question comes from the line of Phil Nadeau from Cowen & Co.

Congratulations on a great quarter. First, a follow-up on the Q3 to Q4 dynamics. And Ryan, I think to follow on a comment that you just made to Matt's question. Are we right to interpret what you're saying is typically, Q4 is 15% below Q3 in HPV vaccine utilization. This year, you think there could be an incremental 15 percentage points down because of the timing of booster shots for the COVID vaccine in the U.S? Are those the two factors? Or is there anything else onetime about Q3 or a headwind in Q4 that we're missing for 2021?

No, I think that's -- I mean those are -- like we said, we are focusing there on the underlying market. And that those are the two main market factors that we think will reduce the total market size in Q4 compared to Q3.

Great. And then second, also on HEPLISAV. In terms of the ACIP recommendation, it seems like Dynavax anticipated that this could happen for quite some time. Does it trigger any change in your marketing strategy or your distribution strategy? Or have this change in the ACIP recommendation been contemplated as you put together your strategy in the past?

Donn, why don't you take that?

Yes, Phil, I mean regarding the recommendation, we certainly are thinking about a different marketing mix. As I mentioned earlier, with this recommendation, we feel there's an opportunity actually start to go to consumer in particular. So that's a big shift in how we've operated in the past from a marketing mix perspective, putting more investments in direct-to-consumer marketing to support the recommendation as well as continuing to increase awareness at the provider level as well. We do believe retail will be a critical piece of this equation as it relates to ACIP. And so our success continue to drive share within retail and marketing to retail outlets will be critical as well to take full advantage of this opportunity with ACIP.

Perfect. That's helpful. And on CpG 1018, I guess first on Valneva. Any update on the procurement agreement with the U.K. and the status of the dispute?

Well, no -- we have no insight into their discussions with the U.K. We did -- and you'll see this in the 10-Q, we did execute an amendment to our agreement with them, whereby they would cancel the -- they officially canceled the purchase orders that were outstanding under that the original supply agreement as anticipated for CpG 1018. And Kelly, you can actually provide a little more clarity on the -- on how that's going to be seen in the financials.

Sure. So that executed amendment, which we just recently executed to Ryan's point, outlined our supply obligations through 2022 and importantly, as Ryan pointed also canceled a couple of purchase orders, which were previously included in deferred revenue. They had associated advanced payments of about $36 million. And we would expect to pull that through the P&L in the fourth quarter.

Got it. But despite those -- the cancellations, you were still able to take up 2021 guidance, which is impressive. I guess then the second question is on actually 2022. Do you have visibility on orders for 2022 for CpG 1018? And if you don't have visibility today, do you have a sense of when you will have some visibility on what level those orders could be at?

Yes. So we have -- our commercial supply agreements have indicative demand and certain timelines, by which they have to provide the -- their order. So we have visibility to the extent it's contained in the supply agreement or it's in the -- or we receive the POs for the future periods. I think one of the things we're waiting to also see is the finalized tab to approval for our collaborators to lock in the certainty around the ultimate demand, which comes from the actual end user customers. So we'll be able to provide more guidance on that in the coming periods.

Your next question comes from the line of Madhu Kumar from Goldman Sachs.

This is Rob on for Madhu. Congrats on a great quarter. I was just wondering, how should we think about the revenue recognition for the COVID-19 vaccine programs, namely Clover and Bio E, through 2021 and 2022?

Kelly, why don't you walk through Rob through the revenue (inaudible)

Thanks for the question. We recognize revenue when we need all the revenue recognition criteria. It's in the similar substance, I mean which is delivering products to the end customer. We do have some cash flow ahead of that, which you'll see reflected in our 10-Q and in our balance sheet and deferred revenue to the extent that we actually collect cash from our customers ahead of that final delivery, but the predominant trigger for revenue recognition is upon delivery of product to our end customer.

Yes, just to highlight, there is some nuance for some of the CEPI funded doses and timing and delivery in the way that gets recognized. But just as you hear that play out, that's very temporary and it's not part of the ongoing business.

Okay. And just one other question. How should we think about capital allocation from CpG 1018 revenue opportunity in terms of potential new clinical programs or BD?

Sure. So we are, obviously, continuing to focus on generating the capital by strong execution of our CpG 1018 program, focusing now on ensuring that we have the capacity needed to meet the global demand. But as we continue to have success in this program, we do expect to have reasonable capital to deploy. And we're going to look to invest in fully funding HEPLISAV-B to capture the full opportunity and to identify additional development opportunities to leverage a proven growth profile of CpG 1018. So you've seen that begin with our Tdap product. Plaque program is another unique way that we're able to leverage the asset to that one happens to be funded and our early stage collaboration. So we'll continue to evaluate different approaches to leverage that adjuvant throughout next year.

Your next question comes from the line of Josh Schimmer from Evercore.

Given the dramatic jump in the retail contribution, in third quarter. Maybe you can provide a little bit more in the way of details. What drove such a dramatic increase? What percent of HEPLISAV sales in the third quarter have come from the retail channel? And what are the specific forces that may be affecting the retail channel compared to others as we think about either the fourth quarter or 2022 and beyond?

Donn, do you want to (inaudible)

Yes, sure. So Josh, we've put quite a bit of focus into this particular segment, thinking about the future specifically as it relates to ACIP and the universal recommendation. The first objective is to get our retail outlets to stock HEPLISAV-B. And so there's several large banners that are familiar to us all that we've been able to really expand the breadth of ordering, but more importantly, the reordering within these particular outlets within retail. And so we have an entire pharmacy sales team that engages these pharmacy chains, more of the regional and district manager level to drive ordering for HEPLISAV-B.

So we've had a lot of momentum, as I mentioned before, quarter-over-quarter growth, which really drove some of our success here in the quarter. Looking ahead, the primary objective, again, is to continue to expand breadth of ordering and reordering. But more importantly is to also continue to find partnership opportunities and initiatives with these particular banners. Because I think as we've mentioned in the past, retail is really initiative-based. So they'll do initiatives for several weeks and then go on to the next initiative. So we continue to look at initiatives as we think about next year, in particular to drive HEPLISAV use, but step one is to get obviously boxes and fridge across these different outlets within the banners within the segment.

Your next question comes from the line of Ed White from H.C. Wainwright.

The first question is just on the hemodialysis. You're going to get the final safety data in the fourth quarter -- in this quarter, I guess. What are your steps after you received that data to target future penetration of the dialysis segment.

And the first step, obviously, is to work with the FDA to get that data into our label. And so after we need to finish the trial and engage with the FDA on a potential [FBLA] pathway. Once we have the data in the label, we can proactively promotes in that segment. Obviously, so now, we've been limited to focusing only on employees, which you can imagine is a bit of a limit engagement of such on that segment. So really the key is to get the file of the trial done, work with the FDA to identify the appropriate pathway to get that data into the label

Thanks, Ryan. And when you talked about upping your DTC, I'm just wondering if you have any programs currently implemented or planned to target some of the at-risk patients that you had mentioned that should be coming on board with the ACIP recommendation?

Donn?

Yes. Ed, it's twofold. But as it relates to the at-risk patients, the diabetic patient certainly is going to be a focus with this direct-to-consumer advertising. That, coupled with, again, working with our retail segment in identifying diabetics at point of sale. Within the retail terminal will be really the strategy that relates to diabetic and going after the diabetic patient. We also plan to, in addition to the adverse diabetic patients, put some of our marketing mix towards the healthy patient as well. Obviously, that's a bigger opportunity, more patients out there. And so it's going to be a mix between the two. But from an at-risk perspective, the diabetic patient will be our primary focus from a consumer perspective.

Gentlemen, that is actually the last question.

Well, thank you for your questions. Just to close out the call, a few closing remarks. The ongoing coronavirus pandemic has driven awareness and greater understanding of the importance of the vaccines and the protection they offer against infectious diseases. Our recent progress with both HEPLISAV-B and CpG 1018 reinforces our confidence in the Dynavax vaccine business model, and we are very optimistic about the opportunities we see with these two assets to continue to drive value for the company. Thank you for joining us today. We appreciate your time and interest in Dynavax. And operator, you may end the call.

Goodbye.