Dynavax: Little Stock With a Big Story – Plunge a Buy Opportunity?

Shares in Dynavax Technologies (DVAX) fell more than 47% a week of so ago after an FDA panel failed to endorse its investigational vaccine, called Heplisav, for Hepatitis B in adults. Nonetheless, formal regulatory recommendation might only be delayed – not refused – suggesting the California-based biotech company might prove to be of speculative interest to investors.

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The Vaccines and Related Biological Products board voted its confidence in the immunogenicity of Heplisav by a 13 – 1 vote; however, the committee said in an 8 – 5 decision, with one abstention, that it could not recommend the vaccine for approval to the FDA due to insufficient clinical safety data, especially in certain minority groups.

A theoretical concern exists that vaccines containing adjuvants (pharmacological agents added to enhance seroprotection) might induce autoimmune diseases, such as multiple sclerosis. Dynavax’s drug contains the same Hep-B surface proteins (antigen) as currently marketed HBV vaccines. What has some panel members worried, however, is that Heplisav enjoins a first-in-class adjuvant, which activates immune responses by specifically targeting Toll-like Receptor 9 (TLR-9), found on a specialized subset of immune cells.

However, briefing documents posted by the regulatory agency last week failed to demonstrate a mechanistic link between the company’s TLR-9 agonist and autoimmune response: Pooled results from two pivotal late-stage trials demonstrated the relative risk of developing a serious adverse event in patients treated with Heplisav was no greater than the group injected with the comparator vaccine Engerix-B, marketed by GlaxoSmithKline (GSK).

The risk of African-Americans contracting HBV is three times greater than that of whites. Committee chair Robert Daum, MD, expressed concern “that there’s not enough data from different ethnic groups to be sure the immunogenetic response [of heplisav] is adequate.”

On average, the ethnicities in the two phase-3 trials containing 4,800 participants were White (87.8%); Black (8.8%); and Hispanic (4.3%). However, it’s important to remember that last year blacks and those of Hispanic or Latino origin comprised only 13.1% and 16.7% of the U.S. population, according to U.S. Census Bureau data.

To ask Dynavax – or any company -- to power the study design specifically tailored to those at minority groups at higher-risk would be cost prohibitive. The biotech has spent more than $300 million (in just the last five years) to move the drug through the pipeline approval process.

If a larger cohort represented by a more diverse ethnic sampling is necessary, how come an under-represented enrollment of blacks (about nine-percent) was sufficient when the FDA positively reviewed GlaxoSmithKline’s other adjuvant vaccines, like the Hep-A drug Havrix and the combination DTP-HBV vaccine Infanrix?

Agency reviewers who voted against the safety profile also criticized the company for perceived flaws in study-design, complaining about sample size – one member suggested enrollment of 10,000 patients would be more satisfactory -- and study duration (more than one year was desirable).

Heplisav supporters on the advisory board did suggest that larger and longer – including surveillance safety monitoring – studies could be conducted after marketing approval.

There was consensus among the committee that there is a medical need for more HBV vaccines, as efforts to inoculate persons in high at- risk groups (prisoners, IV drug users, diabetics, etc.) have had limited success. Compliance problems with vaccination schedules is a likely culprit as global health agencies struggle to eliminate the transmission of HBV and the incidence of HBV-associated chronic liver disease.

Unlike currently licensed HBV vaccines from GlaxoSmithKline and Merck’s (MRK) Recombivax-HB, immune responses with Dynavax’s proprietary adjuvant technology is achieved faster, resulting in the need for only a two-dose schedule (administered one month apart), compared to existing guidelines of three-to-four doses given up to a year between first and final dosing.

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Only approval and post-marketing surveillance studies, however, can factually address whether ease of administration with Heplisav might increase adherence and decrease the incidence and prevalence of HBV. Ergo, there is still hope for Hepsilav approval.

If approved, Heplisav would compete with vaccines in a global market with estimated annual sales of $750 million. This market is growing, too. The Centers for Disease Control has recommended increased prophylactic dosing for diabetics, which could add incremental sales of up to $300 million per annum.

The FDA is due to make a final decision on Hepsilav by February 24, 2013. The company can survive a “refusal to file letter” from the regulatory agency, if the negative response centers strictly on “repairing an incomplete or inadequate application” (such as, amendment to currently submitted clinical data – the talked about longer-term follow-up required of currently vaccinated patients).

The company does have the liquidity to handle commercial delays through next year. At September 30, the company had $148.2 million in cash on hand, largely due to a secondary stock offering last spring. Contractual obligations are manageable, save for a $15 million liability due the end of December (expect net tangible book of $0.73 to decline, as the loan will likely be paid in stock). With this clinical-stage biotech generating little in the way of quarterly revenue, monthly cash burn of just $6.5 million is a big plus, too.

Though the company has some big stakeholders, including SAC Capital Advisor’s Steven Cohen (5.1% stake) and Blackrock Partners (6.8%), don’t expect the hedge fund managers to emerge as white knights.

Dynavax’s market capitalization is just $436 million –even though the company does have other drugs in development, including a Lupus partnership with GlaxoSmithKline and an asthma drug collaboration worth up to $120 million in milestone payments from AstraZeneca (AZN). This valuation is cheap, if you believe that the FDA will ultimately believe in the safety of Hepsilav and its novel TLR-9 immune stimulating technology.

David J. Phillips is a contributing editor at YCharts, which includes the just-released YCharts Pro Platinum for professional investors.



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