Dynavax Technologies Corp

NASDAQ:DVAX

Earnings Call Transcript 2019-Q2

[Operator]

Good day, ladies and gentlemen. And welcome to the Dynavax Technologies' Second Quarter 2019 Conference Call. As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Ms. Heather Rowe, Vice President of Investor Relations and Corporate Communications. You may go again.

[Heather Rowe]

Thank you, Operator. Good afternoon. And welcome to the Dynavax second quarter 2019 financial results and corporate update conference call. With me today are Ryan Spencer, Co-President and Senior Vice President of Commercial 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 and expectations regarding HEPLISAV-B, including the amounts and timing of revenue, rates of adoption and reorder, clinical and financial information and our abilities to successfully pursue strategic alternatives for our immuno-oncology assets.

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 review.

With that, I'll now turn the call over to Ryan Spencer.

[Ryan Spencer]

Thank you, Heather. And thank you all for joining us today to review our second quarter 2019 results. Before we begin, I want to let you know that we will have a slightly different format for today. As you probably saw, we announced an offering this afternoon. And as you can imagine, there will be some activity around that. So we are only providing our prepared remarks this afternoon, and we will not be having a Q&A session.

Today, we reported HEPLISAV-B net sales of $8.3 million for the second quarter, which was in line with our expectations. This compares to net sales of $5.6 million for the first quarter of 2019. HEPLISAV-B is the first and only two-dose hepatitis B vaccine approved by the FDA, and have consistently protected more than 90% of adult patients in clinical studies. Based on this profile, we continue to believe that HEPLISAV-B will ultimately become the market leader and a standard of care for adults Hepatitis B vaccination, with potential gross peak sales in the United States of up to $500 million.

As you likely already know, during the quarter, we announced that we had taken strategic decision not to fund additional development of our immuno-oncology research programs. I'd like to take a moment to thank all our employees, both -- those who have or will be departing the company soon and those who will remain. Our people are our most valuable assets and will be responsible for driving our success as we reshape the company to deliver HEPLISAV-B to as many patients as possible. We are now completely focused on continuing to grow and develop our vaccine business with HEPLISAV-B sales in the North America as the main driver.

Commercial execution is our number one objective, and we are seeing good momentum in our sales growth. Importantly, we believe this growth will result in a substantial revenue flow. Once we convert a customer, we expect to keep them. Making a decision to switch to HEPLISAV-B and then implementing the new dosing regimen requires effort on the part of our customers. In our experience, HEPLISAV-B is well received and the favorable clinical profile carries us through this multi step process. While the process takes time and lengthens the sales cycle, this investment provides long term value. Institutions do not move quickly to switch. And after going through the work to adopt HEPLISAV-B, we think customers are unlikely to go back to a three dose regimen.

We continue to add customer wins. To-date, more than 1,700 individual customers have purchased HEPLISAV-B, including 187 of our top 300 account targets. HEPLISAV-B is available to order in over 650 of our targeted accounts. These accounts represent 59% of the doses in our targeted adult HEPLISAV-B market. Integrated delivery networks, or IDNs, represent our largest target segment. We continue to make progress in this segment with HEPLISAV-B available to order in 17 of top 20 IDNs.

Now, it's important to understand that each IDN does operate with a different level of control, access decision makers and physicians and organizational processes. In some cases, HEPLISAV-B is the exclusive choice for patients and in others it is available for use based on department or physician choice. In this instance, we must work with individual sites or departments within the system to pull utilization through after a P&T vote in system implementation. We have found that employee health within IDNs and hospitals represents a large portion of their utilization, and is a good point of entry to secure significant number of doses, while we work the rest of the system.

We've now also gained strong traction within retail pharmacy. We estimate the top seven retail pharmacy chains represent about 78% of the adult Hepatitis B vaccine market in the retails channel. We've executed purchase contracts with six of the top seven pharmacy chains. Establishing HEPLISAV-B within the retail segment is a critical step on the path to expanding the market and is particularly relevant in our effort to reach patients with diabetes.

In short, our HEPLISAV-B commercialization efforts are making excellent progress, and we expect to achieve net product revenue of between $32 million and $36 million for the full year 2019. We believe this positions us well going into 2020 and beyond for continued steady growth towards our long-term sales objectives.

Now beyond the commercialization efforts, our HEPLISAV-B post marketing studies continue to move forward as planned, and we expect to complete enrollment by the end of October. Kaiser Permanente Southern California is conducting the study, which was initiated in August 2018. The study start was anchored to the Advisory Committee on Immunization Practices recommendation for HEPLISAV-B that were published in of April 2018. These recommendations were necessary for Kaiser to initiate study startup activities.

As such, vaccinations that were expected to start in mid-2018 instead started in August 2018. And the remaining timelines and milestones have been updated accordingly. The interim analysis in the study are not time based analyses, rather they are event driven. And thus, the timelines for data are based on projected rates of cardiac events, which have been consistent with original expectations. So overall a very productive quarter with good progress on a number of fronts.

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

[Michael Ostrach, Chief Financial Officer]

Thank you, Ryan. Further details regarding our financial results can be found in the press release we issued this afternoon. As you heard, net product revenue for the second quarter of 2019 was $8.3 million compared to $1.3 million for the second quarter of 2018. Product revenue from sales is recorded at the net sales price, which reflects reductions for estimated returns, charge backs, discounts, and other fees.

Cost of sales product for the second quarter of 2019 was $2.1 million compared to $5.2 million for the second quarter of 2018. The second quarter of 2018 included excess capacity charges associated with resuming manufacturing operations after approval of our PFS presentation. And therefore, we expect HEPLISAV-B sales -- and a higher percentage of inventories sold in 2019 use components manufactured after approval compared to 2018, when most of the expense associated with product sold was expensed as R&D. Thus, we expect HEPLISAV-B cost of sales will increase in future periods, both in absolute dollars and as a percentage of product revenue as we produce incentives and sell inventory that reflects the full cost of manufacturing the product.

Research and development expenses for the second quarter of 2019 were $16.2 million compared to $16.3 million for the second quarter of 2018. In May -- late May of 2019, we announced the strategic organizational restructuring to align our operations around the vaccine business and significantly curtail further investment in immune-oncology R&D. Selling, general and administrative expenses for the second quarter of 2019 were $17.9 million compared to $15.7 million for the second quarter of 2018. And this increase was due primarily to additional personnel and supportive HEPLISAV-B commercial activities. The net loss for the second quarter was $42.7 million or $0.66 per basic and diluted share compared to a net loss of $39.4 million, or $0.63 per basic and diluted share for the second quarter of 2018. And at June 30, 2019, we had cash, cash equivalents and marketable securities totaling $140.5 million.

And finally, the total restructuring costs related to our May 23rd restructuring announcement is estimated to be $9.4 million, of which; $5.3 million is related to severance, other termination benefits and outplacement; $4.1 million is related to stock based compensation expense as a result of accelerated vesting of stock awards and exercise periods for stock options. During the three months ended June 30, 2019, we recognized restructuring charges $8.8 million. And the remaining $0.6 million is expected to be recognized by the end of 2019. The reef workforce reduction is expected as we have previously reported to reduce compensation and benefits costs by approximately $16 million annually. After all existing oncology trials and commitments are complete, we estimate our operating expenses related to external oncology costs will be reduced by approximately $8 million per quarter as compared to the first quarter.

Now as a result of our reduced headcount, we recently subleased a smaller office space. And overall, our expectation is that restructuring and focusing the business on commercializing HEPLISAV-B, will reduce our facilities' expenses by almost $2 million -- $1.9 million per year. In addition, we've agreed with our lender, CRG, to amend the annual revenue thresholds for sales of HEPLISAV-B in the loan agreement, revising the 12 months measurement periods from beginning on June -- January 1 of each year to beginning on July 1 of each year, including 2019 and further removing our obligations for the period subsequent to July 1, 2022.

So although, the measurement dates have shifted, the remaining minimum required revenue amounts are unchanged consistent with our belief in the long term trajectory of HEPLISAV-B sales. We continue to be confident in our revenue estimates for 2019 and beyond. And believe this change to our debt agreement should provide equity holders with increased confidence in our liquidity position.

I'd like to now turn the called back to Ryan for closing remarks.

[Ryan Spencer]

Thanks, Michael. We look forward to what the balance of the year holds for the company, and its shareholders. First, we have strong HEPLISAV-B sales momentum and anticipate increased revenue from HEPLISAV-B during the remainder of the year. As I mentioned earlier, we expect to complete enrollment in our HEPLISAV-B post-marketing studies in the fourth quarter. Additionally, we are evaluating a four dose regimen of HEPLISAV-B in patients on hemodialysis, and expect enrollment of 100 patients to be completed in early 2020.

We also continue to investigate opportunities to broaden the use of our 1018 adjuvant, which makes HEPLISAV-B so effective into additional next generation vaccines. Since launch, we have done the hard work necessary to understand the complexities and opportunities within our target market. Our customer interactions have consistently reinforced our belief in the ultimate value of HEPLISAV-B. The two dose regimen combined with higher rates of seroprotection continues to be well received by physicians and other decision makers. While we still have work to do, the responses and advocacy from physicians, nurses and other providers, reinforce our expectation that HEPLISAV-B will become the market leader and the standard-of-care, ultimately reaching peak gross sales in the United States of up to $500 million.

And with that, let me close with where we began. We believe HEPLISAV-B has the potential to protect more adult patients from Hepatitis B than any product in the U.S. market today. And we have reshaped our organization to make this possible. We thank our investors and team members for their commitment to this goal. We look forward to all we will accomplish in 2019 and beyond, as we build Dynavax into a leading commercial stage vaccine company.

[Operator]

Thank you for joining us today. We will now disconnect.