The Fall Of Another Promising Biotech - Dynavax Technologies

Nov.16.12 | About: Dynavax Technologies (DVAX)

Dynavax Technologies Corp. (NASDAQ:DVAX) announced Thursday that an FDA advisory committee voted overwhelmingly in favor (13-1) of the company's hepatitis B vaccine Heplisav in terms of efficacy, saying the drug clearly showed immunogenicity in clinical trials. However, the same panel returned with a surprising 8-5 vote, with one abstention, against the drug's uncertain safety profile. The pending Prescription Drug User Fee Act (PDUFA) for Heplisav scheduled for Feb. 24, 2013, is thus nearly certain to result in a dreaded Complete Response Letter (CRL), requiring the company to gather more data on Heplisav's safety profile. On the heels of this news, shares of the company dropped a mind-numbing 57% to $1.97 in after-hours trading on heavy volume (12,489,117).

The panel's vote on Heplisav's safety profile certainly caught the market by surprise. Institutional ownership of DVAX was at a princely 81% prior to yesterday's news, with nearly half of institutional holders having recently increased their stake in the company. With such a high institutional ownership and a pending CRL, I highly doubt $1.97 is the bottom. If the FDA requests substantially more data on Heplisav's safety profile, the stock could easily return to its 2009 lows of 30 cents a share. That is not meant to cause investors to panic sell, but it's a sober, realistic assessment. Simply put, institutions are not going to hang on to a biotech company that may have to take one to two more years to deal with safety concerns on its most advanced clinical candidate. The bottom, therefore, looks to be much lower than current levels.

The tape of other calamitous biotech sell-offs this year -- e.g., Horizon Pharma (NASDAQ:HZNP), Peregrine Pharmaceuticals (NASDAQ:PPHM), and Talon Pharmaceuticals (OTC:TLON), among many others -- should prove useful to traders stuck in this position this morning. Like these earlier biotech implosions, I fully expect DVAX to exhibit a rapid, albeit short-lived, rally during today's trading session. The stock is in deeply oversold territory according to the Relative Strength Index, which should allow traders/retail investors to exit DVAX at reasonable levels. Technical analysis is not going to be a particularly useful tool in such rapid declines, but the stock should cross the $2.10 mark today based on unrealistic optimism of retail investors with the belief that DVAX represents a great value stock at these levels. Experienced traders and retail investors alike will recognize this stock for what it is: a falling knife.

In conclusion, I strongly caution against holding out against hope that a miracle will occur with this stock. A CRL is inevitable now, and so is a major decline in PPS in the coming months. For traders/investors new to biotechs, one of the best lessons to learn early on is when to take a loss, no matter how large. And DVAX looks ready to teach that lesson today. The goal, after all, is to stay in the game by preserving capital.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.