Dynavax Technologies Corp (DVAX)

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Dynavax: Date With Destiny

Aug. 31, 2017 8:52 AM ET
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8 comments
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About: Dynavax Technologies Corporation (DVAX), Includes: ADMS, MDCO

John Engle

Value, special situations, Deep Value, Growth

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Summary

•Dynavax’s Heplisav-B has had a long and fraught journey, but the end is in sight with a PDUFA no later than Nov. 10.

•An overwhelmingly positive AdCom makes approval almost certain, yet approval is not priced in.

•This article discusses the journey of Heplisav-B, the probability of FDA approval, and the likely share movement upon approval.


“


Carry on my wayward son

For there'll be peace when you are done

Lay your weary head to rest

Don't you cry no more

- Kansas

Over the past year, the travails and triumphs of Dynavax Technologies (DVAX) and its principal candidate drug, Heplisav-B, have taken on the proportions of an operatic drama. That drama is swiftly approaching its final act and, while a happy ending now seems extremely likely, it is worth both taking a look back at the road DVAX has traveled, and a look forward at the new era shining out ahead.

The Road So Far

2015 was a story of hope, with exuberant investors reaching for the stars to drive DVAX past $30 a share. Then, in 2016, the story started to take on the trappings of a tragedy. Delays with approval proceedings for DVAX’s Hepatitis B vaccine shook investors, causing the share price to list downward until it was moving between the high teens and low 20s. Finally, there was the fall from grace: The FDA first cancelling a scheduled Advisory Committee meeting (AdCom) and then issuing a complete response letter (CRL). Unsurprisingly, the share price cratered off the back of these twin disasters, falling below $4 for a spell.

After the Heplisav-B rejection, the market was valuing DVAX at little more than its cash assets. Even DVAX management seemed to have lost faith in their ability to get the drug over the finish line – the company announced in January 2017 that it would restructure to emphasize its immuno-oncology program.

Yet if 2016 was the year of tragedy for Heplisav-B, then 2017 has so far been the year of redemption. First, the FDA agreed to a new PDUFA review, scheduled for August. Then it scheduled an AdCom for July 28. Another shot at the prize galvanized DVAX and investors. The share price shot up, but not to the levels seen before the CRL. Stock message boards were on fire as the AdCom date approached, and no doubt many shareholders watched the live webcast with a mixture of hope and trepidation – I know I did anyway. In the end, despite some lingering safety concerns, the AdCom was a triumphant success, with the panel voting 12-1 (with 3 abstentions) in favor of approval.


Investors met the positive AdCom with jubilation, launching the share price into the high teens in after hours trading, a price level not seen since the first half of 2016. Even after a brief market temper tantrum driven first by the news that the FDA would push its PDUFA decision out (to no later than November 10) in order agree on the parameters of a post-marketing study, and then by the company’s move to raise $75 million (revised down from an initially announced $125 million) through a new share offering priced at $15 per share. The pushed-out PDUFA date stopped the upward momentum, and the capital raise reversed it.

Despite the usual grumbling on stock message boards, these events evidently failed to dent DVAX’s renewed luster in the eyes of the market. Dipping back toward $15 for a short spell, the share price has since risen steadily, to float around or above $17.

With about a month to go before the FDA deadline (which could be brought forward, depending on how quickly the agency and DVAX management can work through outstanding issues), it is time to address two questions. First, how certain can we be that Heplisav-B will be approved? And second, what price movement can investors expect, in the event of approval?

Let’s address each of these questions in turn.

Signs Point to Yes

After the PDUFA postponement-induced slump, investors evidently came to realize that more time could be a blessing, giving DVAX management and the FDA sufficient time to collaborate on the construction of a post-marketing study, which would remove some of the uncertainty from the eventual PDUFA.

Yet the market clearly feels the nagging doubts about the low-probability negative outcome. There is occasional talk about how the FDA has gone against the advice of AdComs in the past, citing various examples. Yet it is worth recognizing that, in past studies of FDA behavior, AdComs have had a very high degree of predictive power. According to a report by the McKinsey Center for Government on AdComs conducted between 2001 and 2010, the FDA approved 88 percent of drugs endorsed by its AdComs. Furthermore, it found that the strength of the endorsement had a positive impact on the ultimate outcome. With an unequivocal 12-1 vote in favor, DVAX is sitting pretty. Add to that the fact that management is engaging the FDA constructively on the parameters of an acceptable post-marketing study, approval should be a slam-dunk.


Another factor to consider is that the FDA looking at Heplisav-B in 2017 isn’t the same agency that reviewed its BLA in 2013 and 2016. Agency leadership, driven in significant part by the priorities of the Trump administration, clearly favor a more expeditious and friendlier approach toward drug approval. They aren’t about to approve every new drug, but there will undoubtedly be an improvement on the margins. The AdCom was itself charged with the political moment, taking place on World Hepatitis Day (there is no explicit indication that the FDA knew that when the scheduled the AdCom, but it certainly stood as a powerful theme during the proceedings) and featured a ringing endorsement from the Hepatitis B Foundation. As far as political and perceptual considerations affect the FDA decision-making process (which few people are naïve enough to deny is the case), Heplisav-B stands to benefit.

The one thing that would be nice to see, as we enter September, is a status update from DVAX on their discussions. A conference call would likely go a long way to reassuring the market that its talks with the FDA remain on track. 12 percent is small – though that probability likely far overstates the probability for a de-risked and thoroughly vetted product like Heplisav-B – but it is not zero. Anything DVAX can do to demonstrate that it can tip the scales further in its favor would be would be most welcome.

Ac-Cent-Tchu-Ate the Positive

Once the cloud of approval is lifted, what will happen to the near-term share price? That’s the question for shareholders deciding whether to hold through the PDUFA or to get out beforehand. Part of the problem is that there is no fixed date for the catalyst, with November 10 officially just the outer bound. In practice, government agencies tend to take their time, but not having a date set in stone makes trading the catalyst rather vexing.

It is not a problem for those investors who are confident in the outcome – and they have plenty of good reason to be. But the lack of clarity on the short-term horizon has an impact on share price movement. Presently, DVAX is trading above $17 a share. For people weighing the risks and rewards, the case might be made that most of the near-term benefits of approval are already baked into the stock. One could point to Adamas Pharmaceuticals (ADMS) as an example of this. While it is true that ADMS rallied 40 percent in after-hours trading August 25 in the wake of approval for its Parkinson’s disease treatment, taking a look at a chart of the past few months shows ADMS trading generally in the $17-18 range until the start of August, when investor fears of a negative PDUFA sent it down to the $14-14.50 range until it got the green-light. Buying in during that preceding period would still have seen a 17 percent gain, which is hardly inconsequential, but might not have been worth the binary risk when the downside could be as much as 50 percent.


Another example to consider is The Medicines Company (MDCO), whose drug, Vabomere, which treats urinary tract infections, was approved August 29, yet saw its share price actually decline after hours and in trading the next day. MDCO is a very odd case: In the three months prior to approval, it had traded down from about $40 a share to a low of about $35.40. Then the price reversed direction in the fourth week of August, reaching $38.60 a share during regular hours on the August 29, before spiking briefly above $40 after hours when Vabomere was approved. MDCO quickly gave up those gains, and traded down on August 30, closing at $36.43 a share, a more than 5 percent decline from the price before approval.

These disparate examples should illustrate some of the difficulties in projecting the likely behavior of DVAX’s share price in the near-term after approval. However, we can do a lot better than guessing. The average price target among analysts is $27.67, with not much variance between the low and high estimates of top-ranked analysts. That would represent more than 60 percent upside from the closing price on August 30. But how much of that can be expected in the short-term?

DVAX enjoyed a 70 percent jump after the successful AdCom. Given the huge projected earnings from Heplisav-B and the drug’s vital importance to DVAX as a company, it is understandable that the market is not fully pricing in approval even now. Pricing binary events is notoriously challenging, after all. But in the case of DVAX, approval should see a rapid rise, easily reaching the $23-25 range.

Unlike ADMS, which has a good drug but that isn’t as big a game-changer as Heplisav-B, or MDCO, which has a range of issues shaking investor confidence, the ride to the DVAX PDUFA should lift the share price as investors accumulate. And there should be an excellent payoff for those who hold through the catalyst. Should accumulation manage to lift DVAX to $20 a share (or near it) in advance of the PDUFA – which is not an impossible proposition – some risk-averse investors might consider booking some gains. But, appreciating the real risk-reward profile on display with this company, holding through the catalyst is what I recommend.


The Road Goes On

Provided a shocking disaster does not materialize, DVAX should have its first FDA-approved drug by mid-November. That will mark a whole new phase for the company, as it seeks to bring Heplisav-B to market, likely with a partner experienced in commercializing new drugs (though its recent capital raise gives the company both leverage and the option to commercialize on its own, should it have to).

The question moving forward will be how well DVAX can cope with the realities of selling drugs, and not just developing them. With the proper partnerships, DVAX will be well positioned to reap rich rewards from Heplisav-B and to fund its promising pipeline.

Disclosure: I am/we are long DVAX.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

https://seekingalpha.com/article/4103292-dynavax-date-destiny?app=1&auth_param=gdu:1cqg1lm:294c6dbd7892283d65cf3e45e5e0749f&uprof=45