Good day, ladies and gentlemen, and welcome to the Dynavax Technologies Third Quarter 2019 Conference Call. As a reminder, this conference call is being recorded. At the end of the company’s prepared remarks, we will open the call for questions and provide specific instructions at that point.

I’d now like to turn the call over to Nicole Arndt, Senior Manager, Investor Relations. You may go ahead..

Thank you, James. Good afternoon. Welcome to the Dynavax third quarter 2019 financial results and corporate update conference call. With me today are Ryan Spencer, Co-President; and Michael Ostrach, Chief Financial Officer.

Before we begin, I advise you that we will be making forward-looking statements today, including statements about HEPLISAV-B’s commercial profile, revenue expectations, potential peak revenue, and the completion of post-marketing studies.

These statements are subject to a number of risks and uncertainties that could cause actual results to differ materially. These risks are summarized in today’s press release and are detailed in the Risk Factors section of our current 10-Q and 10-K periodic reports filed with the SEC, which we encourage you all to read.

I will now turn the call over to Ryan Spencer, Co-President of Dynavax..

Thanks Nicole and thank you all for joining us today for an update on Dynavax and to review our third quarter of 2019 results, which we were very excited to share. There are a few key things for you to take away from our discussion today about our focus and our ongoing transformation of the company.

To begin, Dynavax is solely focused on growing our vaccine business with HEPLISAV-B sales as the main driver. Continuing our successful commercial execution is our number one objective.

Based on our clinical data in over 10,000 patients and perhaps more importantly our interaction with healthcare providers and decision makers across each of our diverse customer segments, we believe HEPLISAV-B has the potential to become the standard-of-care adult hepatitis B vaccination in the United States, improving patient protection and representing a commercial opportunity with potential gross peak sales of about $500 million in the United States.

Due to our commercial team’s continued strong execution, today, we’re pleased to report net sales of $10.2 million for the third quarter of this year. And as a result of this progress, we are raising expectations for net product sales for the full year of 2019 to be between $34 million and $36 million.

We’re in a strong financial position, with capital sufficient to execute well on our HEPLISAV-B commercial strategy, placing us on the path to profitability based on continued revenue growth in the U.S. and management of operating expenses. With these key takeaways in mind, let’s turn to some specifics about HEPLISAV-B and our commercial efforts.

All right. So starting with HEPLISAV-B’s profile. HEPLISAV-B is the only two dose hepatitis B vaccine that has been approved by the FDA and has demonstrated higher rates of protection in head-to-head clinical studies compared to the three dose regimen of Engerix-B, which is the current market leader.

Importantly, challenges with compliance are well known, with only 30% to 55% of patients completing the legacy product’s three dose regimen, which takes six months to administer.

Now as you can imagine, the potential improvement in compliance from a two-dose, one month regimen that has demonstrated higher rate of seroprotection means that HEPLISAV-B offers an opportunity for greater protection to patients.

It is this profile that gives us confidence in our expectations that HEPLISAV-B will ultimately become the market leader and the standard of care for adult hepatitis B vaccination in the United States.

Our commercial efforts will continue to be the driver of HEPLISAV-B sales growth with a focus on personal promotion from field sales team and marketing initiatives to increase advocacy and awareness, more broadly. We are having success in our targeted accounts, adding both new customers and additional outlets within our existing customers.

In the third quarter, we captured 18% market share in those customers that are targeted by our field sales team, which was up from 13% in Q2.

Our field sales team is aligned to the highest-value customers across all segments, with the retail pharmacy and a few large national and regional customers targeted separately from the top-down by our national account directors in partnership with our corporate team.

Moving beyond our field-based promotion, we also continue to see progress within retail pharmacies. We estimate the top 10 retail pharmacy chains represent 80% of the adult hep B vaccine market in this channel. We are excited to have executed purchase contracts with nine of the top ten retail pharmacy chains.

Now securing the purchase contract is the first step in gaining traction into the retail segment. But the reality is each of the retail pharmacies handle implementation differently. In our interactions with our retail customers, we find that the top-down support significantly improves uptake at local pharmacies.

We continue to work with clinical decision-makers in the pharmacy organization to secure their support for broad availability and use of HEPLISAV-B. We’re pleased with how our retail partners view HEPLISAV-B and are enthusiastic about the opportunity this segment presents to increase coverage rates in the future.

As a part of our overall strategy in this segment, we are currently pursuing opportunities to develop initiatives with retail pharmacies specifically targeted to increasing diabetic vaccination coverage in the retail sector. In summary, our HEPLISAV-B commercialization efforts are making excellent progress.

And as a result, we are raising our expectations for full year 2019 net product sales to $34 million to $36 million. Additionally, I’m excited to share that Kaiser Permanente Southern California has completed accrual of more than 30,000 patients who received HEPLISAV-B and 30,000 patients who have received Engerix-B in our post-marketing studies.

These studies were initiated in August of 2018 and will continue for 13 more months to capture follow-up safety data. Overall, as we execute on our ongoing transformation into a leading commercial vaccine company, I am very pleased with the team’s execution, which resulted in a productive quarter and positive outcomes on multiple fronts.

With that, I’ll now turn the call over to Michael to discuss our financial results..

Thank you, Ryan. Our financial results are detailed in the press release issued this afternoon. Today, I’ll just touch on some highlights. Net product revenue for the third quarter of 2019 was $10.2 million compared to $1.5 million for the third quarter of 2018.

Net product revenue for the nine months ended September 30, 2019, was $24.1 million, compared to $2.9 million for the nine months in 2018. Product revenue from sales is recorded at the net sales price, which includes estimates of product returns, charge-backs, discounts and other fees.

Regarding cost of sales product, each of the prior periods include onetime charges and different percentages of components that previously had been charged to research and development expense prior to approval. This has caused COGS to vary period to period, and a particular period may not be indicative of what should be expected going forward.

We expect HEPLISAV-B cost of sales will normalize next year in the range of about 30% to 35% of net based on today’s pricing as we produce and then sell inventory that reflects the full cost of routinely manufacturing the product.

The decreases in research and development expenses for both the three- and nine-month periods in 2019 compared to 2018 resulted from the winding down of oncology clinical trial activity and reductions in R&D headcount and related expenses following the restructuring we implemented in May of 2019.

The third quarter included approximately $3 million in expenses related to oncology programs. This amount will continue to decrease over the next three quarters as these activities are completed.

The increases in SG&A expenses for the three- and nine-month periods in 2019 compared to 2018 were due primarily to increases in sales and marketing activities as well as higher facility costs due to increased lease expense and an increase in facility-related overhead allocation to SG&A, following the May restructuring.

In addition, the third quarter 2019 includes payments for completion of certain milestones in the post-marketing study at Kaiser Permanente. We expect the restructuring to be substantially complete and related costs incurred and paid by the end of this calendar year.

During the three months ended September 30, 2019, we recognized restructuring charges of $3.9 million and $12.4 million for the nine months. Restructuring charges of approximately $800,000 are expected to be recognized by the end of 2019.

Cash, cash equivalents and marketable securities totaled $174.9 million at the end of the third quarter, putting us in a strong financial position to achieve our objectives. And now I’ll turn the call over to Ryan for closing remarks..

Thanks, Michael. We appreciate everyone’s time today and your interest in the company. We are in an exciting and transformational period for Dynavax that has positioned the company for long-term commercial success to the benefit of patients and our shareholders.

We believe HEPLISAV-B has the potential to protect more adult patients from hepatitis B than any product in the market today, and we have focused our organization to make this possible. We thank all our investors and team members for their commitment to this goal.

Before we close, I would like to share our excitement to have had Andrew Hack join our Board of Directors during the quarter and his firm, Bain Capital Life Sciences, joining our existing shareholders. We look forward to all we will accomplish over the next months and years ahead as we build Dynavax into a leading commercial-stage vaccine company.

Operator, we’d like to open the Q&A portion of today’s call.

Thank you. [Operator Instructions] And we’ll take our first question today from Brian Abrahams with RBC Capital Markets..

Hi, thanks very much for taking my questions. Do you have a sense of the traction that you have so far in the diabetic populations with HEPLISAV-B? And curious as to the kind of upside opportunity that this segment could enable as you increase focus on them through the retail channel..

Yes. So one, we talk a lot about the data we have available to us, and we have great data as far as it relates to customer statements and where vaccine is utilized. The specific patients it is utilized in is a little bit trickier. So we don’t have great insight into where – how much – how many patients with diabetes are being vaccinated.

But given the trend in the market, there has been some increase over the last year, which could be attributed to more uptake in diabetes. It’s not obvious that it is, though, based on where we’re seeing the growth. So it’d probably be more relevant just to speak to the opportunity in retail, in particular. There’s a couple of ways to look at it, Brian.

We’ve talked about this over the years of the size of the market. The diabetes market is 20 million existing patients with about somewhere north of 1.5 million new patients diagnosed with diabetes each year. And comparing that to what we believe is about 2.5 million patients a year to get vaccinated against hepatitis B.

Currently, you can understand why it’s an area of focus. The retail segment. The power the retail segment has is they can identify the patients. And so a retailer is so inclined can take measures to proactively target patients with diabetes for vaccination. So this is where the opportunity really lies.

We have to – we’re in the early stages of doing this with some retail partners where we’re working on initiatives. And that’s something that’s going to be important as we kind of build out this segment for everyone to understand is that retailers are initiative-driven.

You’ve probably seen some of it yourself within this segment when you go to a retail pharmacy. And that’s how we expect us to work with diabetes, and that’s what we’re going to be doing in the short term, which will be these very aggressive initiatives to get pharmacists to identify patients and vaccinate.

Over time, we hope that after doing enough initiatives, it also becomes second nature as far as their willingness to identify patients and vaccinate. But the opportunity primarily exists because the sheer number of stores and pharmacists that can be leveraged if there is a corporate program for a large retailer.

So the broad opportunity, we’ll capture via retail as well as possibly through other institutional programs. And specifically, in the short term, what we’re working on is discrete initiatives within the retailers to begin the process..

That’s really helpful. Thanks, Ryan. And then just maybe one more question.

Can you give us an update on just your recent interactions with payers and progress with reimbursement? Any color on the – whether there’s been any shifts in discounting for HEPLISAV-B? I guess, I’m just curious what your latest view is on the actual net market opportunity based on the discounting trends, the epidemiology and the dynamics that you’re seeing on the ground in terms of market share.

And I’ll hop back in the queue. Thanks..

Yes. So I might have to just change that up a little bit. I think the clarification part of your question on around contracting and discount is helpful because in this case, for this product, payers aren’t really involved. Payers set reimbursement rates based on list price for vaccines.

And there is not – there hasn’t really been an opportunity to attack the payers’ segment with specific contracting that would drive utilization for us or others. But I think the other point of your question was how is the discounting environment evolving.

Those discounts are actually end-user discounts offered either directly or through group purchase organization. We’ve only had a – towed a pretty tight line here that this is a clinical sale for us. We’re not in a contract play with our competition. They have historically discounted pretty heavily. We are not chasing them from a pricing perspective.

So we are sort of divorced from their discounting and pricing strategy. And it’s been pretty static since we launched, we launched with a general discount available through a number of channels, and we are evaluating some additional programs for customers that have high control, but it’s been pretty static over the course of our launch.

There hasn’t been a huge amount of movement. And we haven’t directly seen any major change from our competitors other than price increases..

Got it. That’s really helpful. Yes, other treatments sort of framed that is end user customers rather than the payers specifically. That’s really helpful color. Thanks again, Ryan..

Next we’ll hear from Matt Phipps with William Blair..

Good afternoon, guys. Thanks for taking my question.

Ryan, can you remind me, I think, we’ve talked about this before, but now with the conclusion of post-marketing study, do you anticipate Kaiser will actually move to use some commercial HEPLISAV? Or will they wait and see the final results of that study? And then as far as where you guys are thinking on timing of interims now that the enrollment is complete, based on the event rate I guess that you’ve seen?.

Yes. So obviously, Kaiser is a target. There’s some complexity as it relates to the finishing of getting 30,000 patients versus when they’re able to transition that we have to work through over a few months. Remember, the way the trial is designed is it’s 30,000 patients who received their first dose.

So there’s still a number of patients, a large number of patients in the study, who haven’t received their second dose and/or if they’re in the sites that are Engerix sites, right, have not received the Engerix regimen.

So there’s some nuance there as far as not wanting to, for example, take over sites where Engerix is being utilized, how they’re going to manage through the transition from completing the accrual period versus the follow-on vaccination period for HEPLISAV. We’re looking through some of those details now.

As it relates to their overall uses, eventually, we’re going to have to treat them like any other customer and engage them at all levels. It’s – our work with them at a research level is very much that, it’s at a research level. They do a very good job appropriately keeping firewalls between the research team and any commercial interaction.

So when we have data available, and when they have the data that they deem to be sufficient available, I believe, we’ll be able to engage with them commercially. I can’t really comment on when that’s going to be at this point. As it relates to your other question around interim, look, the bottom line is the trial is on track.

As we’ve said all along, we’re very happy that we’ve completed the accrual, and we are on track to deliver the reports to the agency that we’ve committed to. So it’s all working as planned..

And then just curious on the market share that you mentioned increasing from 13% to 18% kind of in your target accounts.

Can you just give us an idea on if that is maybe – or how many – how much of that is an exclusive contract? Or how do you think the percentage of exclusive contracts has increased maybe recently?.

So Matt, the – I don’t mean to pick on the specific wording. It’s just I feel like this is going to be a dialogue we have for a few quarters now. So I want to make sure we’re all aligned. Contracts – we will be lucky when we can find exclusive contracts. But in general, the contracts are purchase agreements and then the usage has to become exclusive.

We are actually working towards some high-control contracts, which means they have some volume commitments. But the idea of how many customers have gone exclusive is, like, kind of the need of it all, and it’s not driven by a few customers going exclusive. That’s not where it’s coming from.

The reality is we have fewer customers who go exclusive than we have customers who make it available and utilize it in some subset of their system. And we view that as a continuum of use. You start somewhere, but that’s not where you end. And that’s why we’re going to continue to have to focus on targeting these customers.

And in my note, we talk about the fact that we’re happy we’ve added customers, both to new customers as well as we continue to add sites of care within existing customers. So exclusive right now is on the lower end of sort of what customers do. There’s a fewer number of customers who do that. They’re just not using the control that way.

But it’s open for everybody. And I think it’s – for us, we’re not deterred by that at all. It’s just a matter of how you go through the process. So you start somewhere and then pull it through all the way..

Got it. Thanks, Ryan..

Our next question will come from Phil Nadeau with Cowen & Company..

Good afternoon. Congrats on the progress. First, just a follow-up to Matt’s last question on the market share.

Can you talk a little bit about who are the key determinants of share within the accounts where you do have some agreements in place? Is there important physicians who determine which vaccine these patients get? Typical [ph] running guidelines that determine which vaccine is preferred within that purchaser? How does the process of gaining share work in these organizations?.

We generally think of our customers as having multiple pillars. So you have a financial pillar, a clinical pillar and an operational pillar. So your pharmacy director, which is where the process generically starts, is your financial pillar, which is obviously not where we like to begin. We need to build clinical advocacy.

And so that’s just getting the system aware and being supportive of introducing the product. When you get into moving it through to market share, it looks a little bit different with every customer. But oftentimes, it’s going to be department-driven, if not done from the top-down.

So we find our health or employee health is actually quite a large portion of this market, especially within the hospital systems. And so employee health directors or employee health professionals is a great place for us to start as from a champion perspective or to capture a decent amount of the overall business for that customer.

And then it moves kind of out from there into different areas of use, which could be within liver clinics or within a variety of primary care settings within the system.

So the share generally starts with becoming available for use and whatever champions, the clinical champions you’ve been able to build along the way to support becoming available, and then it grows out from there. But it varies.

The people who always involve pharmacy directors, it’s somebody from infectious disease or immunization subcommittees, which often exist in these systems..

Got it.

And do individual physicians have discretion? Or is it that they decide somebody should be vaccinated against HBV, and when they look in their electronic system, a recommendation is made to them as to what they should use?.

It’s a little bit more logistical than that. So when they don’t look into the system, they open the door of the refrigerator and they grab the product that’s available.

So yes, in many systems they do have say from the standpoint of – as I mentioned, if it’s available, they can order it, what – boils down to is, what the setup is like for that system, if you have an individual physician who controls the ordering for their floor, office, site location, then they can pick and choose.

If they’re vocal and an advocate in most situations people can get what they want. Physicians can generally get what they want when they’re vocal and they’re willing to advocate for it.

So it varies a little bit, the best way to think about it though, when you think about pull through is you’re still pulling through to a site and that site, if it’s one that has a reasonable amount of vaccine, probably has a reasonable number of physicians.

And so that site or location, even if it’s just part of a larger health system has to make a decision generally for what they’re going to pull in. So that might even be a couple physicians or office manager or group that decides what to do for that office or group of offices. So there’s still some group-based decision making as you pull it through.

It’s not really like a script where individual position within offices can make different choices on what they choose to prescribe..

Got it. Okay. And any individual site, is it you – typically are either 100% of their HBV vaccine use or you’re not there? Are there any sites that actually split their use? Or do they usually go all or not.

Typically those are all or none because there’s two medication errors and it’s not worth, there’s not really a reason to not go out, unless you have something, you have some patients that you decided that you want more data on for HEPLISAV, for example, our label is very broad from how we’re indicating, but we have some physicians who say, well, we don’t have data in transplant.

So they might want to keep up with Engerix around for subpopulations like that. But in general, I think we’re finding it’s more for – per site, it’s kind of – it’s basically an all or nothing..

Got it. One last question just on the COGS guidance. You said 30% to 35% at steady state in 2020.

Can we assume that over the very long term, as volumes increase, the cost of goods as a percentage of sales will go down further?.

Yes. Over the longer-term, yes. I mean, when we start to build our scale to meet ex-U.S. opportunities, but that will be over a three-, four-, five-year period from now where we can drive it significantly below that 30% to 35%, maybe..

Yes. I think that’s right. I mean, I think that’s what the 30% to 35% is trying to encompass so that we will drive down to 30s, that low 30% range or 30% based on scale. And then honestly, the other piece that is depending on what happens with price. As our price increases, that percentage actually will continue to become more favorable..

Got it. Okay. Thanks for taking my questions..

Thanks, Phil..

Our final question today will come from Ed White with H.C. Wainwright..

Hi, guys. Thanks for taking my questions. So just a couple and one going back to the market share.

Is that 18% share volume or is for dose? Or is that a dollar amount?.

Hi, Ed. How are you doing? We decided to use dose as far as – but it’s – just to be very clear on how we’re calculating this, we’re trying to be very appropriate and primetrics that show how we’re progressing. So we’ve sort of normalized the doses, right, because we have a different dosing regimen.

So we’ve normalized the doses that we see sold in the market to be comparable to HEPLISAV dosing regimen, so basically translate the market to HEPLISAV doses and then seeing what percentage of the doses we took.

So that’s to adjust so that we don’t overinflate for our price premium or under-inflate for our dosing regimen – or under-represent for our dosing regimen..

Okay, great. Thanks Ryan. And you mentioned the opportunity in the diabetes market. I’m just wondering if you can discuss briefly the potential in the dialysis market..

Sure. The dialysis market is somewhere – it fluctuates between 850 to 1 million doses a year. And the current products are administered over four shots, but they’re double doses. So that’s a very, very large amount of Engerix that’s given in a dialysis setting in a single shot. So they’re double 1 mil doses. It’s a 2 mil shot given in that setting.

So we are evaluating a 4-dose regimen in the clinical trial currently because of the fact that it’s historically known that there’s different dosing regimens in these hard-to-vaccinate patients in hemodialysis. So our opportunity is pretty strong there.

We’ve developed a regimen based on the idea that we want to maintain the same profile of HEPLISAV with higher rates of protection. So our 4-dose regimen, we’re hoping, will offer higher rates of protection compared to that of the 8-dose regimen of Engerix.

The opportunity there and I think it’s an important point as we talk through coverage and things like that, the dialysis market is extremely consolidated.

There is two players who cover or control about 80% of the dialysis market and then another couple below that, that are still fairly large, and they make national-level decisions for all of their outlets.

So with data in hand and with the appropriate – at the appropriate time, we’ll be able to target those customers at a national level, hopefully, being able to take over their business kind of in binary fashion. But obviously, we’re not there yet..

Okay. Great. Thanks, Ryan..

Thank you. That will conclude today’s question-and-answer session. And that will conclude today’s call. Thank you for your participation, you may now disconnect..