Dynavax Technologies Corporation (DVAX) is a small biotech company with an upcoming binary event on its stock. The FDA advisory committee will meet on November 15, 201,2 to discuss the company's HBV vaccine. If the committee recommends the approval of the product, the FDA will make a final decision before February 24, 2013. If approved, HEPLISAV will be the company's first commercial product. Moreover, it will be the first TLR9-based vaccine in the market. Although we agree with analysts' consensus view that the vaccine has an over 85% probability of receiving FDA approval, an event which will certainly move the stock price in the short term, we would also like to point out several challenges the company is likely to face after the approval, including competition, commercialization plans, patent infringement issues, pipeline drug candidates, and anti-takeover provisions, all of which may affect a stock valuation.
HEPLISAV is an HBV vaccine developed by DVAX, using its proprietary immune-stimulatory sequence (ISS) derived from the Toll-like Receptor 9 (TLR9) immune receptor. The role of TLR9 in stimulating innate immunity is well-established. HEPLISAV combines hepatitis B surface antigens with the TLR9 agonist, known to enhance the immune response. In Phase 3 trials, HEPLISAV demonstrated higher and earlier protection with fewer doses than current vaccines marketed by Merck (MRK) and GlaxoSmithKline (GSK) (here). From the company's publications, the vaccine regimen induces both higher and longer-sustained antibody response than the comparable vaccine (here).
We believe that there is a high probability (>85%) that the product will eventually receive the FDA's approval on or before 2/24/2013, which is in line with Wall Street analysts' consensus view (here, here).
The consensus stock price targets range from $6 to $10 (here). Our valuation model projects a fair value of $5.35, based on projected revenue of $18M, $90M, $180M, and $280M from 2013 to 2016. The stock is currently traded at $4.17 with a market cap of $745M as of 11/9/2012.
While the stock may have short-term upside, its long term profitability is less certain. The company will face several challenges that will impact its stock price and valuation:
1. Competition: The HBV vaccine market is small ($300M-$400M), and is currently dominated by GSK and MRK products. DVAX would require a strong commercialization plan to penetrate the HBV vaccine market.
2. Patent issues: DVAX cited patent infringement as a potential risk factor for the commercialization of their product (DVAX 10Q Q3-2012). In particular, its competitors, Merck and GSK, are the exclusive licensees of broad patents covering methods of production of recombinant hepatitis B surface antigens, an essential component of HEPLISAV. In addition, the Institut Pasteur also owns or has exclusive licenses to patents relating to aspects of production of the same antigen. Finally, Pfizer (PFE) has issued patent claims that may be asserted against DVAX ISS products.
3. Drug pipeline partnership: DVAX has entered into a collaborative agreement with GSK to develop a TLR inhibitor for lupus. It also entered a partnership with AstraZeneca (AZN) to develop a TLR9 agonist for asthma and COPD. We have reservations on the success of those programs, based on our knowledge of how the product works. The immuno-repressive sequence (IRS) and ISS are DNA sequences corresponding to the TLR9 and TLR8 receptors. While it makes sense in the vaccine setting for ISS to provide protection against infectious agents, it is quite another matter for an IRS to work in suppressing immune response.
The challenges lie in the path of administration. How would one administer a DNA oligonucleotide to a disease like lupus to achieve systemic immune suppression? As for asthma, the respiratory system has high nuclease activities, and so a DNA oligonucleotide may be degraded in that environment. As a result, while these partnerships may provide some revenue for the company, we believe that their upside is limited.
So, is there any potential upside for DVAX? The approval of a TLR9-based vaccine would be a remarkable achievement in and of itself. It would be only the second TLR-based vaccine, following the approval of a TLR4-based vaccine, Cervarix, made by GSK in 2009. The TLR-9 based platform can be expanded to develop vaccines for other infectious agents, including influenza. However, given the crowded influenza vaccine field, DVAX will most likely seek a partnership with a larger pharmaceutical company to expand its potential. Could DVAX be a takeover target? This is certainly a possibility, though any merger or acquisition would require approval by its board of directors, as there is an existing anti-takeover provision.