SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark one)

[X]

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004

OR

[   ]

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO ____________.

COMMISSION FILE NUMBER: 000-1029142

DYNAVAX TECHNOLOGIES CORPORATION

2929 Seventh St., Suite 100
Berkeley, CA 94710-2753
(Address Of The Registrant’s Principal Executive Offices)

Registrant’s Telephone Number, Including Area Code: (510) 848-5100

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [   ]

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [   ] No [X]

     The number of shares of the Registrant’s Common Stock outstanding as of October 31, 2004 was 24,623,438.

INDEX

DYNAVAX TECHNOLOGIES CORPORATION

PART I. FINANCIAL STATEMENTS

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Dynavax Technologies Corporation
Condensed Consolidated Balance Sheets
(In thousands, except per share amounts)

See accompanying notes.

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Dynavax Technologies Corporation
Condensed Consolidated Statements of Operations
(In thousands, except per share amounts)
(Unaudited)

See accompanying notes.

4

Dynavax Technologies Corporation
Condensed Consolidated Statements Cash Flows
(In thousands)
(Unaudited)

See accompanying notes.

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Dynavax Technologies Corporation
Notes to Condensed Consolidated Financial Statements
September 30, 2004
(Unaudited)

1. Basis of Presentation and Summary of Significant Accounting Policies

Basis of Presentation

     The terms “Dynavax,” the “Company,” “we” and “us” as used in this report refer to Dynavax Technologies Corporation. The accompanying unaudited condensed consolidated balance sheet as of September 30, 2004 and condensed consolidated statements of operations for the three and nine month periods ended September 30, 2004 and 2003 have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of the management of the Company, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine month periods ended September 30, 2004 are not necessarily indicative of the results that may be expected for the year ended December 31, 2004 or any other period. The condensed consolidated balance sheet at December 31, 2003 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. These unaudited condensed financial statements and the notes accompanying them should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.

     Certain reclassifications of prior year amounts have been made to conform with the current year presentation. Patent legal expenses in the prior year have been reclassified from research and development expenses to general and administrative expenses.

Dynavax Asia

     In October 2003, the Company formed Dynavax Asia Pte. Ltd., or Dynavax Asia, a 100% owned Singapore subsidiary, which focuses on the Company’s clinical and preclinical hepatitis B programs. Also in October 2003, the Company completed a sale of 15,200,000 ordinary shares in Dynavax Asia, which reduced the Company’s ownership in Dynavax Asia from 100% to 50%. The Company recorded the sale of the ordinary shares as a minority interest liability in the consolidated financial statements. In February 2004, the ordinary shares of Dynavax Asia were converted into 2,111,111 shares of common stock of the Company and Dynavax Asia became a wholly owned subsidiary.

Principles of Consolidation

     The consolidated financial statements include the accounts of Dynavax and Dynavax Asia, its wholly-owned subsidiary. All significant intercompany accounts and transactions have been eliminated.

Critical Accounting Policies

     The Company believes that there have been no significant changes in its critical accounting policies during the nine months ended September 30, 2004 as compared with those previously disclosed in its Annual Report on Form 10-K for the year ended December 31, 2003 filed with the SEC on March 30, 2004.

Use of Estimates

     The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from these estimates.

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Revenue Recognition

     The Company recognizes collaboration, upfront and other revenue based on the terms specified in the agreements, generally as work is performed or approximating the straight-line basis over the period of the collaboration. Any amounts received in advance of performance are recorded as deferred revenue. Revenue from milestones with substantive performance risk is recognized upon achievement of the milestone. All revenues recognized to date under these collaborations and milestones are nonrefundable.

     Revenues related to government grants are recognized as the related research expenses are incurred. Additionally, we recognize revenue based on the facilities and administrative cost rate reimbursable per the terms of the grant awards. Any amounts received in advance of performance are recorded as deferred revenue until earned.

     Payments by collaborators for the option to license technology or product rights in the future are deferred when received. When an option is exercised, revenue is recognized on a straight-line basis over the term of the resulting license agreement. In the event that an option expires without exercise, the payment is recognized in full at the expiration of the option.

Restricted Cash

     At September 30, 2004, the Company held $408,304 in a certificate of deposit account as collateral for an irrevocable standby letter of credit, which is required under the new operating lease the Company entered into in January 2004.

Net Loss Per Share

     Basic loss per share is computed based on the number of weighted average shares outstanding. The calculation of diluted net loss per share excludes shares of potential common stock, consisting of stock options and warrants, because their effect is anti-dilutive.

Stock-Based Compensation

     The Company has adopted the pro forma disclosure requirements of Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation (“SFAS 123”) as amended by SFAS No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure (“SFAS 148”). As permitted, the Company continues to recognize employee stock compensation under the intrinsic value method of accounting as prescribed by Accounting Principles Board Opinion No. 25 (“APB 25”) and its interpretations. Under APB 25,

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compensation expense is based on the difference, if any, on the date of grant, between the deemed fair value of the Company’s common stock and the option exercise price, and is amortized over the respective vesting period of the options using the straight-line method. The pro forma effects of applying SFAS 123, as amended by SFAS 148, on the Company’s net loss had compensation cost for options granted to employees been determined based on the fair value at grant date as prescribed by SFAS 123, would be as follows (in thousands, except per share amounts):

     Such pro forma disclosure may not be representative of future stock-based compensation expense because such options vest over several years and additional grants may be made each year.

     The estimated fair value of each option and employee purchase right is estimated on the date of grant using the Black-Scholes option pricing method, assuming no expected dividends and the following weighted average assumptions:

The weighted-average fair value per share of employee stock options granted during the three months ended September 30, 2004 and 2003 was $4.75 and $11.52, respectively. The weighted-average estimated fair value per share of employee stock options granted during the nine months ended September 30, 2004 and 2003 was $5.54 and $7.34, respectively.

     For options granted to non-employees, the Company determined the estimated fair value of the options using the Black-Scholes option-pricing model. Compensation expense is being recognized over the option-vesting period ranging up to 4 years. The Company recorded compensation expense of approximately $179,000 and $191,000 for the three and nine months ended September 30, 2004, respectively, in connection with options granted to non-employees. There was no compensation expense for the nine months ended September 30, 2003.

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2. Commitments and Contingencies

Operating Lease

     The Company leases its facility under an operating lease that expires in September 2014. Under this operating lease, the Company had an option through May 2004 to expand the amount of office and laboratory space it occupies. In May 2004, the Company exercised that option. This lease can be terminated at no cost to the Company in September 2009 but extends automatically until September 2014 if the Company chooses not to exercise the option to terminate the lease.

     Future minimum payments under the non-cancelable portion of the operating lease at September 30, 2004 are as follows (in thousands):

     We have entered into a sublease agreement for a certain portion of the leased space with scheduled payments to us of $50,179 (in 2004) and $334,525 (thereafter through 2006). This sublease agreement includes an option for early termination in September 2006 and an option for extension of the sublease term through February 2009.

3. Collaborative Research, Development, and License Agreements

University of California

     The Company entered into a series of exclusive license agreements with the Regents of the University of California (UC) in March 1997 and October 1998. These agreements provide the Company with certain technology and related patent rights and materials. Under the terms of the agreements, the Company pays annual license or maintenance fees and will be required to pay milestones and royalties on net sales of products originating from the licensed technologies. The agreements will expire on either the expiration date of the last-to-expire patent licensed under the agreements or the date upon which the last patent application licensed under the agreements is abandoned. The Company incurred license and milestone fees of $20,000 for the nine months ended September 30, 2004. There was no license and milestone fee for the three months ended September 30, 2004. The Company incurred patent expenses of approximately $240,000 and $45,000 for the three months ended September 30, 2004 and 2003, respectively, and $352,000 and $152,000 for the nine months ended September 30, 2004 and 2003, respectively, in connection with these license agreements. The Company incurred a $375,000 one-time charge to UC due upon the closing of the Company’s initial public offering as partial consideration for the technology licenses. The Company recorded this charge as research and development expense in the first quarter of 2004. Also as partial consideration for the technology licenses, the Company incurred a one-time charge of $150,000 to UC related to the $8.0 million upfront payment from UCB Farchim S.A., which is being amortized over the development period of the licensed programs, currently estimated to be eight years.

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License and Development Agreement with UCB

     In February 2004, the Company entered into an agreement with UCB Farchim, S.A., or UCB, a subsidiary of UCB, S.A. a publicly traded multi-national company based in Brussels, Belgium, in which the Company licensed the technology, know-how and preclinical and clinical data related to its AIC and grass allergy programs on an exclusive, worldwide basis. UCB was also granted an option to license the Company’s peanut allergy program. According to terms of the agreement, the Company received an $8.0 million upfront payment and may earn up to $40.0 million in milestone payments based on achieving defined clinical and regulatory objectives. The Company is amortizing the $8.0 million upfront payment from UCB over the development period of the licensed programs, currently estimated to be eight years. In addition, UCB agreed to fund ongoing development costs of the licensed programs, as well as costs relating to regulatory filings, potential launch, sales and marketing, and reasonable administrative support. The Company is accounting for such funding as collaboration revenue, which is generally recognized in the period in which expenses related to the licensed programs are incurred. The Company records the development costs and costs relating to regulatory filings, which account for substantially all of the costs as research and development expenses. The remaining costs are recorded as general and administrative expenses on the statement of operations. If any of the licensed product candidates are successfully developed and approved for sale, the Company will receive royalties on sales. The Company has retained an option to co-promote any approved product in the United States, in which case the Company would recognize revenue from sales in lieu of receiving royalty payments. UCB may terminate the agreement at any time on 60 days’ advance notice either in its entirety or with respect to one or more licensed programs, but may not terminate the agreement as to our ragweed allergy program prior to February 2006 except for safety or efficacy reasons, in which case it may not terminate the agreement prior to February 2005. Either party may terminate the UCB agreement if a default occurs and is not resolved. Otherwise, the agreement does not terminate until the later to occur of the date when the last valid issued patent claim covering any of the licensed programs expires or June 2018. Total revenue recognized during the three month period ended September 30, 2004, related to the UCB agreement was $3.8 million. Total revenue recognized during the nine month period ended September 30, 2004, related to the UCB agreement was $11.6 million, making up 94% of total revenues. Total accounts receivables at September 30, 2004, related to the UCB agreement was $3.5 million, making up 98% of total accounts receivables balances.

4. Initial Public Offering

     In February 2004 the Company sold a total of 6,900,000 shares of its common stock, after adjusting for a one-for-three reverse stock split, in an underwritten initial public offering, raising net proceeds of approximately $46.4 million. As a result of the initial public offering, all outstanding shares of Preferred Stock with a net value of $83.6 million converted to 13,712,128 shares of common stock and the 15,200,000 shares of ordinary stock in Dynavax Asia with a net value of $14.7 million converted into 2,111,111 shares of common stock making Dynavax Asia a wholly-owned subsidiary as of that date.

5. New Accounting Pronouncement

     In March 2004 the Financial Accounting Standard Board (“FASB”) issued an exposure draft entitled “Share-Based Payment, an amendment of FASB Statements No. 123 and 95.” This exposure draft would require stock-based compensation to employees to be recognized as a cost in the financial statements and that such cost be measured according to the fair value of the stock options. In the absence of an observable market price for the stock awards, the fair value of the stock options would be based upon a valuation methodology that takes into consideration various factors, including the exercise price of the option, the expected term of the option, the current price of the underlying shares, the expected volatility of the underlying share price, the expected dividends on the underlying shares and the risk-free interest rate. The proposed requirements in the exposure draft would be effective for interim or annual periods beginning after June 15, 2005. The Company will continue to monitor communications on this subject from the FASB in order to determine the impact on the Company’s consolidated financial statements.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     This Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 which are subject to the safe harbor created by those sections. These forward-looking statements include, but are not limited to: statements about our business strategy, our future research and development, our preclinical and clinical product development efforts, the timing of the introduction of our products, the effect of GAAP accounting pronouncements on our recognition of revenue, uncertainty regarding our future operating results and our profitability, anticipated sources of funds and all plans, objectives, expectations and intentions contained in this report that are not historical facts. We usually use words such as may, will, should, expect, plan, anticipate, believe, estimate, predict, future, intend, or certain or the negative of these terms or similar expressions to identify forward-looking statements. Discussions containing such forward-looking statements may be found throughout the document. These forward-looking statements involve certain risks and uncertainties that could cause actual results to differ materially from those in such forward-looking statements. We disclaim any obligation to update these forward-looking statements as a result of subsequent events. The business risks discussed in Item 2 of this Report on Form 10-Q, among other things, should be considered in evaluating our prospects and future financial performance.

     The following discussion and analysis is intended to provide an investor with a narrative of our financial results and an evaluation of our financial condition and results of operations. The discussion should be read in conjunction with our consolidated financial statements and notes thereto.

Overview

     We discover, develop and intend to commercialize innovative products to treat and prevent allergies, infectious diseases and chronic inflammatory diseases. Our clinical development programs are based on immunostimulatory sequences, or ISS, which are short DNA sequences that enhance the ability of the immune system to fight disease and control chronic inflammation. Our most advanced clinical programs include:

•

AIC, an immunotherapy product candidate for treatment of ragweed allergy that has completed Phase II trials, and is currently completing a Phase II/III clinical trial. A confirmatory Phase III clinical trial is anticipated to begin in 2005.

•

Hepatitis B vaccine, for which a Phase II program in adolescents conducted in Canada has been completed, and for which a Phase II/III trial in patients who are less responsive to conventional vaccine is currently underway in Singapore. We anticipate initiating Phase III trials in Canada, Europe and Asia in 2005. Our intention is to commercialize our Hepatits B vaccine outside of the United States.

•

An inhaled therapeutic product candidate for treatment of asthma, which has recently completed a pilot Phase II trial. We plan to advance the asthma program into a broader clinical program focused on direct measurement of efficacy.

•

Preclinical programs focused on chronic inflammation, antiviral therapies and improved, next-generation vaccines using ISS and other technologies.

Critical Accounting Policies and the Use of Estimates

     The Company believes that there have been no significant changes in its critical accounting policies during the nine months ended September 30, 2004 as compared with those previously disclosed in its Annual Report on Form 10-K for the year ended December 31, 2003 filed with the SEC on March 30, 2004.

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Results of Operations

Comparison of Three Months and Nine Months Ended September 30, 2004 and 2003 (In thousands, except percentages)

     Total revenues for the three and nine months ended September 30, 2004 were $3.7 million and $12.4 million, respectively, compared to $23,000 and $119,000 for the three and nine months ended September 30, 2003, respectively. Total revenues for the three and nine month periods ended September 30 2004, consisted of $3.8 million and $11.6 million, respectively, from a collaborative agreement with UCB in ragweed and grass allergies, which was initiated in the first quarter of 2004, as well as grant revenue of $(109,000) and $713,000, respectively, from government grants for biodefense programs awarded by the National Institutes of Health (NIH). The $(109,000) in net revenue from government grants for biodefense programs for the three months ended September 30, 2003 includes a one-time adjustment of $(303,000). This one-time adjustment reflects the minimum cost overhead rate allowable under the grant awards until such time as the final rate is determined. Revenues of $23,000 and $119,000 for the three and nine months ended September 30, 2003, respectively, consisted solely of a government grant awarded by the NIH. We expect revenues from our collaboration with UCB and from government grants for biodefense programs to be consistent with or increase moderately through the remainder of 2004 as these programs progress.

     Research and development expenses were $5.9 million for the three months ended September 30, 2004, an increase of 102% from $2.9 million for the three months ended September 30, 2003, and $17.7 million for the nine months ended September 30, 2004, an increase of 86% from $9.5 million for the nine months ended September 30, 2003. The increases for the three and nine month periods ended September 30, 2004 compared to the same periods in 2003 were primarily the result of increased clinical trial activities in our ragweed allergy, hepatitis B vaccine and asthma programs, as well as preclinical works associated with government grants for biodefense programs, being conducted during the three and nine months ended September 30, 2004. Non-cash stock-based compensation expense included in research and development expenses was approximately $344,000 and $379,000 for the three months ended September 30, 2004 and 2003, respectively, and approximately $1.1 million and $790,000 for the nine months end September 30, 2004 and 2003, respectively. We expect research and development expenses in future periods generally to be consistent with or increase moderately from levels experienced in the three and nine month periods ended September 30, 2004 as our clinical and preclinical programs progress.

     General and administrative expenses were $2.0 million for the three months ended September 30, 2004, an increase of 53% as compared to $1.3 million for the three months ended September 30, 2003, and $6.0 million for the nine months ended September 30, 2004, an increase of 61% as compared to $3.7 million for the nine months ended September 30, 2003. The increases for the three and nine month periods ended September 30, 2004 compared to the same periods in 2003 reflect higher compensation and benefits associated primarily with the expansion of our management team and higher expenditures for consulting and professional services. Non-cash stock-based compensation expense

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included in general and administrative expenses was approximately $383,000 and $121,000 for the three months ended September 30, 2004 and 2003, respectively, and approximately $877,000 and $360,000 for the nine months ended September 30, 2004 and 2003, respectively. We expect general and administrative expenses to increase from levels experienced in the three and nine month periods ended September 30, 2004 as a result of our organizational growth and increased costs of operating as a public company.

     Interest income, net, was $252,000 for the three months ended September 30, 2004, an