In after-hours trading, we saw an enormous drop in shares of Dynavax (Nasdaq: DVAX) that caught my attention due to the severity of the drop and the huge amount of fuss over the incident. What happened?
Ten days ago, I published an article on Seeking Alpha that provided briefings on three upcoming catalysts for biotech stocks - Dynavax was one of them with the Vaccines and Related Biological Products Advisory Committee vote on Heplislav's BLA for the treatment of Hepatitis B scheduled for November 14-15th. We saw the results of the meeting, along with the final vote on the BLA after the bell yesterday (November 16th), which you can view on Dynavax's press release.
Although we did see the committee vote thirteen to one in favor of the efficacy profile of Heplislav, the more important vote on the status of the BLA itself (yes versus no on FDA approval) was eight to five against approval of the drug, with one abstain. The committee pointed to the inadequately tested/measured safety profile of Heplislav, which met its primary endpoint in the "Booster" phase III trial as detailed just prior to the BLA submission in April.
This vote most likely means that Dynavax will not receive FDA approval for Heplislav in the treatment of Hepatitis B on its PDUFA action date of February 24th, 2013. How bad is this news?
In premarket trading today (Friday, November 16th), DVAX was down about 57% (or $2.65/share.) The company's market capitalization was $827 million at the closing bell yesterday, and is expected to open at ~$356 million or so. Is this news bad enough to warrant a $471 million drop in the company's valuation?
Possibly, but not really if you think that Dynavax was within the ballpark of its real value prior to this advisory committee vote.
Assuming that the FDA decision turns out to be no (a favorable bet), we can still infer that Dynavax will conduct additional safety studies that can be included in Heplislav's next BLA. The company only burns about $15 million each quarter, so even if the delay wasted 2 years of the company's time, it's hard to say that Dynavax is now worth almost $500 million less.
There is a risk that Heplislav is intrinsically dangerous though, which could explain some of the panic selling. Clearly if Dynavax cannot show that the compound's efficacy is worth the risks and side-effects, the BLA will never be approved and DVAX is worth a fraction of its current valuation. Still, I think this is an overblown risk that can be addressed by the company later on. In the short to medium run, however, DVAX could be a real nightmare for its shareholders.
Short interest is stubbornly high, and was on the uptrend throughout October
It's clear that the bears holding over 20 million shares short on DVAX have become a lot richer. While it's impossible to determine the exact timing of the short covering of ~11.8% of common stock, we may also see some technical/momentum traders short the stock in an attempt to chase the big move adding to short-term movements into the red.
On the bright side, time is against the bears and they will eventually cover. This does provide knife-catching potential for DVAX stock for anyone daring enough to buy the stock. If trapped, the trader could find some comfort in the notion that Dynavax is quite undervalued given that it can address the safety concerns brought up by the advisory committee.