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Shares of Dynavax Technologies (NASDAQ: DVAX) lost a third of their value yesterday (February 25th 2013) after the company announced that the FDA rejected the Heplislav BLA (Biologic License Application) that the company submitted in 2012. Heplislav is an investigational hepatitis B vaccine for adults between 18-70 years of age, and is the company's flagship product.

Although the actual FDA rejection of Heplislav was indeed damaging to Dynavax on an already bearish trading day in the stock market, it wasn't a huge surprise to investors who investigated the results of the FDA vaccines and related biological products advisory committee meeting that was held in mid-November 2012 to discuss the Heplislav BLA.

Although the committee voted 13 to 1 in favor of the efficacy of the vaccine, there was some disagreement over the validity of the safety data that was included in the BLA submission. The committee voted 8 to 5, with one abstention, that the data was insufficient to support Heplislav's safety profile. This result caused DVAX to decline by nearly 50% of its value on November 16th, 2012, and suppressed the stock significantly. Now that the market knows about the FDA's complete response letter, DVAX is trading nearly 60% lower.

Although the panic of the FDA rejection could result in further declines for Dynavax, it's important to realize that Heplislav is far from dead and has a higher chance at approval after the company addresses certain issues and resubmits the BLA.

More specifically, Dynavax has to address the FDA's concerns about the production of the biologic, as well as the immunologic adjuvants included in the Heplislav vaccine. These adjuvants are designed to maximize the efficiency of patients' immune system responses to hepatitis B antigens, although there is concern about the potential for these agents to cause autoimmune events. Furthermore, the FDA wants to restrict the Heplislav indication due to the lack of sufficient long-term safety data for the vaccine.

Although we have a pretty good idea about what the BLA was lacking at this point, Dynavax should be meeting with the FDA in the next few weeks to discuss the best route for Heplislav going forward. These meetings should provide some specifics, and we will hopefully figure out how long investors will have to wait before the BLA is resubmitted with data that can address the FDA's concerns.

Despite the fact that this CRL could simply end up as a delay of Heplislav's eventual FDA approval, the market had legitimate reasons to drop the value of DVAX.

Dynavax is operating at a loss of roughly $20 million per quarter, which becomes more significant the longer the company waits to resubmit the Heplislav BLA with the new additions. Although the company is currently cash rich, they will probably need to perform an equity financing later this year or in 2014 to continue their operations. If the company has to perform another safety study prior to resubmission of the BLA, the time delay could become significant enough to deter current DVAX shareholders from staying in their positions.

I think that this situation should keep DVAX suppressed for quite some time, although the FDA's rejection also reduces the stock's downside potential - at least for now. A significant portion of the 19 million shares short DVAX may be closed out in the coming weeks due to profit-taking motives from the bears. This provides some protection against further declines in DVAX, although I don't think this provides nearly enough upside potential to make DVAX an attractive short-term play on the long side.

Dynavax has other products in development, but investors interested in this company should consider Heplislav as the primary driver of the stock. Since the development program is temporarily on hiatus, expect DVAX to be quiet in anticipation of the next development.

Source: FDA Rejection Knocks Dynavax Down, But Not Out