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Dynavax: A Strong 2021 Plus Market Tailwinds Makes This Discounted Stock Attractive

May 13, 2021 7:23 AM ET Dynavax Technologies Corporation (DVAX)

https://seekingalpha.com/article/4428211-dynavax-strong-2021-plus-market-tailwinds-makes-this-discounted-stock-attractive?mail_subject=dvax-dynavax-a-strong-2021-plus-market-tailwinds-makes-this-discounted-stock-attractive&utm_campaign=rta-stock-article&utm_content=link-2&utm_medium=email&utm_source=seeking_alpha

Dynavax stock is currently trading around $7.30, having peaked at $11 in early April. A potential buy opportunity.
The downside catalyst was a $200m debt offering, although this ought to help the company unburden itself of a $180m debt position paying 9.5% interest.
Both of the company's assets - its Hepatitis vaccine Heplisav-B and adjuvant CPG-1018 - look capable of driving >$100m of revenues in the medium to long term.
A deal in place with French biotech Valneva to supply CPG-1018 for its COVID vaccine could be worth $400m to Dynavax, and $230m in FY21 alone.
Dynavax is a stock worth watching closely - my price target would be ~$15 - less than I forecast in my last note, but still offering solid upside potential, even if shares fall short of this number.
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Investment Thesis
Dynavax (DVAX) stock has fallen by 20% this week, to trade around the price of $7.30, after the vaccine and adjuvant maker announced a debt offering of $200m, in the form of a private placement of convertible senior notes due 2026.

Although the move adds to the company's considerable debt burden, which stood at $180m as of Q1'21, the resultant fall in Dynavax's share price may represent an attractive entry point for acquiring some shares.

Dynavax has two lead assets in Heplisav-B - its vaccine developed for the prevention of infections caused by the hepatitis B ("HBV") virus - and its proprietary adjuvant CPG-1018, which is used in Heplisav-B, and in also in several vaccines currently in development by different biotechs, in indications including COVID-19, Pertussis, and Universal Flu.

In my last note on Dynavax back in September last year, I set a price target of $18 for Dynavax stock - or a firm valuation of nearly $2bn - largely based on the prospect of Heplisav-B achieving peak sales of ~$500m by FY25 - analysts' estimates range from a high of $600m to a low of $290m - with a low triple-digit million contribution from CPG-1018.

Dynavax's share price is around +35% since my last note, and the stock price has climbed from $5.5, to a high of $11 as recently as mid-April. The gains have been largely related to the CPG-1018 side of the business, whilst Heplisav-B has failed to achieve the hoped for revenue growth.

Dynavax announced its Q1'21 earnings on May 6th, reporting revenues of $82.9m, based on just $8.3m of Heplisav-B sales, and $74.6m of revenues from CPG-1018.

The company's aim is to position Heplisav-B as standard-of-care in HBV thanks to its proven (in a 10,000 patient pivotal trial) ability to offer greater protection, and more convenient 2 shots in 1 month dosing regime, compared to current market leading vaccines Engerix-B and Recombivax HB, marketed and sold by GlaxoSmithKline (GSK) and Merck (MRK) respectively, which require 3 doses across a 6-month period.

Heplisav-B sales have not lived up to their original billing, however, having been badly affected by the pandemic which has restricted access to hospitals for all but essential surgeries. In Q2'20, Heplisav-B sales fell to just $2.4m, and Q1'21 revenues of $8.3m were down from $10.5m in Q1'20 - owing to the fact the market is still at ~50% utilisation, management says.

On the other hand, despite the reservations I expressed in my last note, CPG-1018 has delivered for the company, thanks to a commercial supply agreement with the French biotech Valneva (VALN) to supply up to 190m doses of its adjuvant for Valneva's COVID-19 vaccine, which is in a Phase 1/2 trial, and has been pre-ordered by the United Kingdom.

Management expects the Valneva deal will deliver $400m of revenues overall over a 4 year period, should Valneva's vaccine succeed, and ~$230m in FY21 alone. Dynavax also receives funding support from the Coalition for Epidemic Preparedness Innovations, which has made a loan of $99m to Dynavax, in exchange for a steady supply of CPG-1018. The loan is forgivable, even if CEPI ultimately finds no use for the doses.

As such, with the prospect of earning revenues ~6x greater in FY21 than in FY20, based on the Valneva deal, and the expected recovery of Heplisav B sales in a post-pandemic environment, plus the use of its $200m debt issuance to eliminate an onerous debt burden of $180m, paying 9.5% interest, there are several reasons to believe that Dynavax stock can arrest its slide of the past couple of days and at least challenge a double-figure share price by the end of the year, and a 9 figure market cap valuation.

On the other hand, despite the reservations I expressed in my last note, CPG-1018 has delivered for the company, thanks to a commercial supply agreement with the French biotech Valneva (VALN) to supply up to 190m doses of its adjuvant for Valneva's COVID-19 vaccine, which is in a Phase 1/2 trial, and has been pre-ordered by the United Kingdom.

Management expects the Valneva deal will deliver $400m of revenues overall over a 4 year period, should Valneva's vaccine succeed, and ~$230m in FY21 alone. Dynavax also receives funding support from the Coalition for Epidemic Preparedness Innovations, which has made a loan of $99m to Dynavax, in exchange for a steady supply of CPG-1018. The loan is forgivable, even if CEPI ultimately finds no use for the doses.

As such, with the prospect of earning revenues ~6x greater in FY21 than in FY20, based on the Valneva deal, and the expected recovery of Heplisav B sales in a post-pandemic environment, plus the use of its $200m debt issuance to eliminate an onerous debt burden of $180m, paying 9.5% interest, there are several reasons to believe that Dynavax stock can arrest its slide of the past couple of days and at least challenge a double-figure share price by the end of the year, and a 9 figure market cap valuation.

Inevitably there are risks too, such as the uncertainty surrounding the sustainability of CPD-1018 revenues if its COVID and other vaccine partners do not make it to market, the uncertain growth trajectory of Heplisav B sales, and the ability of Dynavax to stop losing money and become profitable - net losses in the past 3 years have been $75m, $153m, and $159m.

In the rest of this post I will examine each situation in a little more detail and present an updated valuation of the company based on 5-year financial projections.

My revised target price for Dynavax is a little less than $18 - I would be happy to see Dynavax trade ~$15 by the end of FY21 - but in a fair weather market and if management continues to demonstrate good stewardship and partnership building capabilities, share price gains could be still more dramatic.

Long-Term Prospects For Heplisav-B
Whilst sales of Heplisav-B were underwhelming in Q1'21, owing to the overall market being down 41%, according to Dynavax management, conditions are expected to improve across the remainder of the year, and patient numbers may even spike, management believes, based on a renewed focus on vaccines triggered by the pandemic.

There are several other tailwinds that suggest a positive outlook for Heplisav-B sales. Firstly, the vaccine secured marketing approval from the European Commission in February, with management aiming for a full launch, beginning in Germany, before the end of the year.

Secondly, results from a 69,000 patient post-marketing study showed no evidence of increased risk of acute myocardial infarction ("AMI") from Heplisav-B compared to angiography.

The vaccine was rejected twice by the FDA before securing its US approval in 2017, on safety grounds related to higher instances of AMI in clinical trials compared to GSK and Merck's vaccines, leading to the FDA to insist upon a post-marketing study. In the study results, the AMI rate per 1000 person years was 1.67 for HEPLISAV-B, and 1.86 for Engerix-B, reinforcing management's belief that Heplisav is safe and can become standard-of-care.

Thirdly, Dynavax is targeting label expansions for Heplisav-B. In an ongoing study of patients with End Stage Renal Disease ("ESRD") undergoing haemodialysis, using a new four dose regimen, final immunogenicity analysis demonstrated seroprotection rate of 89.3%.

Diabetes is another target - Dynavax announced a partnership with Times Pharmacy and Hep Free Hawaii in July last year, to provide Heplisav-B to diabetes patients in Hawaii - where half of the population is estimated to have pre-diabetes or Type 2 diabetes, and where cases of liver cancer are the second highest in the US.

Finally, the Centers for Disease Control and Prevention ("CDC") recently reviewed a universal Hepatitis B recommendation for all previously unvaccinated adults, as opposed to a risk based recommendation for a vaccine, which is likely to increase the number of US adults eligible to receive an HBV vaccination.

As such, after a rocky start to its commercialization, which has seen Heplisav-B generate $6.8m, $34.5m, and $36m of sales revenues in FY18, FY19, and FY20, the vaccine may finally be in a position to start building sales momentum in FY21, prove its potential as a standard-of-care, and edge closer to more conservative target peak revenues of ~$300m.

Dynavax targets standard-of-care status for Heplisav-B. Source: Dynavax investor presentation.

Having shown that it confers greater levels of protection to current standards of care - a 10,000 patient pivotal trial resulted in 95% protection, compared to 81% for GSK's Engerix-B and 90% protection for diabetics versus 65% - and with its CPG-1018 adjuvant enhancing immunogenicity levels and enabling a more convenient dosing regimen, Dynavax will feel like it is now or never for sales of the vaccine to take off and for Heplisav-B to contest for market share against Merck and GSK.

Long-Term Prospects For CPG-1018
As an adjuvant, CPG-1018 requires the vaccines it is used with to be successful to guarantee recurring revenue streams, although its deals with CEPI and Valneva ought to ensure that Dynavax generates ~$500m of revenues from CPG-1018 manufacturing over the next 2-3 years.

With the success of mRNA COVID vaccines from Moderna (MRNA), and Pfizer (PFE)/BioNTech (BNTX), and presence of Johnson & Johnson (JNJ) and AstraZeneca's (AZN) adenoviruses in the market, plus possible upcoming approvals for e.g. CureVac (CVAC) and Novavax (NVAX), and the possible waiving of IP protection to enable the developing world to develop new vaccines, arguably, the prospects for approval of the 4 COVID vaccines that use CPG-1018 looks remote.

With that said, Valneva has agreed to a contract with the United Kingdom government to supply 100m doses of VLA2001, with an option to supply 90m more, which could be worth up to $1.4bn - providing guaranteed income for Dynavax - and VLA2001 is currently undergoing a 4,000 patient Phase 3 trial comparing it with AstraZeneca's Vaxzevria across a 2-dose regimen. If successful, Valneva expects to make a regulatory submission in the autumn of this year.

CPG-1018 adjuvanted vaccine partner product candidates. Source: Dynavax Investor Presentation.

In January, Medigen initiated a Phase 2 trial of its subunit vaccine with recombinant S-2P antigen adjuvanted with CPG-1018, MVC-COV1901, in 3,700 healthy subjects aged 20 and above, whilst Clover Bio has initiated a Phase 2/3 trial of its S-Trimer COVID-19 vaccine candidate, with interim data potentially available in the first half of this year.

In April, Indian Pharma Biological E's COVID vaccine candidate was approved to enter a pivotal Phase 3 trial which will take place at 15 sites across India, and enrol ~1,268 people.

Under the terms of its deal with Dynavax, CEPI is entitled to direct the doses of CPG-1018 it has pre-ordered via its $99m advanced payment loan to its partners, but should none of those partners prove successful or the doses are unused, the advanced payments will be forgiven.

In summary, then, excepting the Valneva and CEPI deals it is questionable if Dynavax's other partnerships will ultimately be revenue-generating, but if they prove successful in trials, Dynavax could be in line for at least a low triple-digit-million windfall, and if a commercial market emerges - in the developing world, or as a stockpile to be held in reserve - that sum could increase significantly, and become recurring - possibly in a post-pandemic environment in which COVID has nevertheless become endemic, and vaccination an annual or bi-annual process.

As a hedge against COVID-only treatments, Dynavax is investigating a tetanus, diphtheria, and acellular pertussis (whooping cough) booster vaccine, using CPG-1018, which dosed its first patient in a Phase 1 clinical trial in early February, alongside the Serum Institute of India. Pertussis affects ~30-50k people in the US annually, and the global Diphtheria, Pertussis and Tetanus vaccine market is expected to reach $7bn by 2027 - an attractive long-term opportunity for Dynavax, albeit a crowded market, dominated by vaccine giants such as GSK, Sanofi (SNY), Merck (MRK) and Johnson & Johnson.

Finally, a collaboration with Mount Sinai to develop a universal influenza vaccine candidate was agreed last July, to be partially funded by the National Institute of Allergy and Infectious Disease ("NIAID").

With 6 collaborations ongoing, one of which has resulted in a substantial supply contract, and through the approval of Heplisav-B, Dynavax has demonstrated the efficacy and safety of CPG-1018 - a synthetic form of DNA that mimics bacterial and viral genetic material - and established proof-of-concept, which could open the door to further deals and partnerships.

Only 5 different types of adjuvant are used in vaccines in the US, suggesting that their development can be difficult and costly. As one of only a few successful developers, Dynavax has benefited from the unprecedented demand for vaccines during the pandemic, without which the company may have faced severe financial difficulties as sales of Heplisav-B collapsed.

Looking ahead, however, the long-term outlook for CPG-1018 revenues is uncertain. There is room for significant upside volatility if e.g. Medigen or Clover Bio's vaccines run successful trials, but equally no guarantee that the opposite won't happen, and if Valneva were also to fail, Dynavax will only have 2 Phase 1 trials to fall back on.

Valuation
Dynavax's current market valuation is $872m, and share count is 114.5m - quite high for a smaller biotech.

For all of the reasons highlighted above, I believe Dynavax's future earning potential and organic growth are hard to forecast, but I have put together a discounted cash flow / EBITDA multiple fair value price calculation based on a few assumptions.

I am no longer forecasting ~$500m of sales for Heplisav-B as I did in my last post, but instead, I am forecasting $75m of sales in FY21, growing to $336m by FY26 at a CAGR of 35%.

Despite its pre-eminence as a treatment option, and $600m market opportunity, Dynavax has a small sales and marketing operation relative to its Big Pharma rivals GSK and Merck, and I think it will take time for the current market to recover, for Heplisav-B to win over prescribing physicians, and for Dynavax to expand Heplisav-B's label into diabetes, etc.

I am including the $230m from the CPG-1018/Valneva deal in my FY21 forecast, meaning I expect Dynavax to earn ~$305m in FY21. After that, added to the growing Heplisav-B revenues, I have an additional $125m per annum of CPG-1018 revenues - a combination of the CEPI funding, and potential opportunities arising from the other COVID partnerships, plus longer-term, the Pertussis and Influenza shots.

I may have been conservative forecasting for $125m per annum of CPG-1018 revenues until FY26, but by doing so it helps to illustrate the attraction of Dynavax stock as an investment.

Dynavax income statement forecast. Source: my table and assumptions using DVAX historical financials.

As above I have sketched out some revenue and free cash flow figures, which see Dynavax's revenues drop in FY22, owing to forecast drop in CPG-1018 earnings, but slowly recover as Heplisav-B revenues grow. I am forecasting for revenues of $461m by FY26.

Interest expense is high - I forecast ~$9m per annum based on current debt of $180m, paying 9.5% per annum, and due 2023, however the more recent debt offering ought to eliminates this present debt and, I assume, the terms of the latest debt offering are more favourable, allowing the company to continue paying off ~$20m per annum, and reducing interest down to ~$5m per annum by FY26.

My forecast net profit margin is also high however, at 21% in FY21, rising to ~25%, and EPS of $1 by FY26, for a forward price to earnings of 7.6, and price to sales ratio of just 1.9.

Dynavax present day value calculation using DCF/EBITDA multiple analysis. Source: my table.

Using a weighted average cost of capital of 10.6% (using a high beta of 1.22, and as a result reducing the expected market return to 10%, and using a risk free rate of 1.67), and after applying discount factors, my calculated present day firm value for Dynavax is $1.76bn using DCF, and $1.86bn using EBITDA multiple of 14.2x. Averaging the 2, I calculate a present day valuation for Dynavax of $15.4.

The fact the company is highly leveraged reduces the overall cost of capital, and raises the valuation somewhat, and I have also reduced total operating expenses from 247% of revenues in FY20, to 66% in FY21, in line with Q1'21 margins, which sees Dynavax OPEX in FY21 at $200m - still a 75% year-on-year increase.

Risks and Conclusion
Overall, I would say that my calculated fair value price for Dynavax stock of $15 is justified by the market tailwinds behind Heplisav-B, the Valneva deal, and the several other opportunities that CPG-1018 has as an adjuvant in promising vaccine opportunities. Although I may have gone a little high with Heplisav-B revenues, equally I have been pretty conservative with CPG-1018.

Early stage biotech investing is inherently risky, however, and there are several reasons to be fearful of buying a position in Dynavax stock. I would consider these primarily to be:

Competition - the presence of GSK and Merck - global vaccine giants - in Dynavax's markets is challenging for the biotech. Although their vaccines may be comparatively less effective, both companies are capable of developing new technologies and commercializing it rapidly. Another threat is VBI Vaccines (VBIV) which has developed a Hepatitis A and B vaccine which is approved in Israel and has completed Phase 3 trials in Europe and the US.

Funding and debt - hopefully, the latest debt issuance solves some of Dynavax's debt issues and allows the company to stop paying 9.5% interest on its $180m loan. The company reported total current assets of $427m as of Q1'21, but will want to avoid making the triple-digit million losses it made in 2018 and 2019, or even the $68m loss in FY20, or risk a falling share price.
CPG-1018 outside of COVID - in a post-pandemic environment the number of firms willing to work with CPG-1018 could reduce dramatically, and revenues from CPG-1018 could disappear altogether - although I would expect Dynavax to keep working with precommercial partners in other indications.
Lack of pipeline - outside of Heplisav-B and CPG-1018, Dynavax has no pipeline to speak of. It is still not impossible that safety issues could resurface that could damage the reputation of both assets.

All things considered, however, I think Dynavax presents an attractive risk/reward profile for investors, with a good mix of market tailwinds.

Heplisav-B sales may not have come back in the way I forecast in my last note, due to the prolongation of the pandemic, but this ought to happen, and the good thing is that, with CPG-1018 also making a contribution that is guaranteed for several years, sales expectations need not be unrealistically high to support a bull case for Dynavax.

I hope to see Dynavax stock trading ~$15 at the end of FY21, after 2 more strong sales quarters that paint a picture of a long-term reversal of fortunes for the company and its management, who have successfully managed to commercialize both of their lead assets.

The next goal is consistent triple-digit million revenues from both sources over the longer term. Finally, Dynavax may represent an attractive acquisition opportunity for either of its HBV rivals, GSK or Merck, likely at a significant premium to current trading price.

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