Dynavax Technologies Corporation (DVAX) recently received some unfavorable news from the FDA in that the agency refused to accept its Hepatitis Drug Heplisav. The CRL was a blow to shareholders, but it was not entirely unexpected after the negative panel vote. Remember that the FDA follows its panel's recommendation a very large amount of the time (around 90%).
The FDA wanted some additional information, however, it is not clear what this additional information would entail. There is a possibility that Dynavax would have to run another study. This additional study would be detrimental to the stock as it would cost money, and more importantly time. Even if DVAX does have to hypothetically run a study, DVAX would still be a buy at current levels.
Let's say that DVAX has to run the study, and then they will probably have to dilute the shareholders in order to pay for the study (which would provide a compelling entry point.) Dynavax according to its recent filings is sitting on $125.1 million. It looks as though Dynavax went through $67.6 million last year. Even though Dynavax has a relatively high amount of cash on hand and in short term investments, dilution might be possible. This dilution is possible because investors are not sure exactly what the trial would entail. Investors are also not sure about exactly this hypothetical trial would cost, or how long it would take. Given the information by Dynavax this is a very real possibility, however, there is also a possibility that there will simply need to be further statistical analyses. The latter scenario would be the best scenario for Dynavax. Dynavax should have a meeting with the FDA in a few months, which will help to clear up for shareholders exactly what Dynavax will have to do in order to obtain the coveted FDA approval. Dynavax's drug presents an outstanding profile, and will likely be approved by the FDA. Further, Dynavax's Heplisav is a compelling opportunity, as it can maintain a higher level of care after fewer doses than current vaccines.
Dynavax also has some other products in its pipeline, which are partnered with big pharmaceutical companies. Unfortunately, these products are not that advanced yet, and should not advance the shareholder value a great deal in the near-term. Over the next few years sure these products will advance shareholder value as they progress through the requisite clinical trials. These products are an asthma product partnered with AstraZeneca (AZN) and some autoimmune products partnered with GlaxoSmithKline (GSK). While these products are not being currently valued into Dynavax's valuation, I believe that over the long term they could be a major driver of growth. The fact that Dynavax is partnered with strong pharmaceutical partners also leads to the idea that large pharma has not abandoned this company. In fact they want DVAX's help to develop the next generation of pharmaceuticals.
But why would Dynavax be a compelling buy right now? Well, for an example take a look at Arena Pharmaceuticals (ARNA). When its drug was initially rejected by the FDA, the stock took a huge nosedive, going from trading in the $2 range to the $7 range. However, anyone who bought in at that point in time and held until today would have made some serious money, as Arena is currently trading at a price of $8.40, and had a 52 week high of $13.50. Arena is a good example of a rebound story, Arena had a problem with the FDA and fixed the problem relatively quickly. This lead to very nice gains for patient shareholders, just like I am confident that Dynavax will be a nice rebound story.
So, what does this Arena example prove? It shows that for people who are patient, if they are actually confident that the drug will eventually be approved (as I am), investors would stand to make a large amount of money off of buying from now or a little bit later while awaiting the final meeting with the FDA. If Dynavax does not have to run any more clinical trials, expect a pop in stock price as they will be able to resubmit relatively quickly. If Dynavax has to run more trials, the stock will take another hit depending on how long these trials will take to complete, presenting another opportunity. Buying in now would present an opportunity to make very good profits, as if you are confident that in a year or two the drug will be approved, then you could easily double or triple your money from the current price point. At a market cap of $395 million, if we take out the current cash that Dynavax has of $125.1 million, the market is essentially valuing the entire pipeline and all of the intellectual property of Dynavax at $269.9 million. This figure is miniscule compared to the sales potential of its Hepatitis drug. This number is also incredibly small when compared to the potential revenue derived from the partnerships with large pharmaceutical companies. The positive parts about these partnerships is that they will provide a steady stream of income, and that the pharmaceutical partners have taken over development of the drugs. This would mean that Dynavax does not have to spend on a quarter by quarter basis to advance that part of its pipeline. Investors got some bad news on the CRL, but I would imagine that the longs who buy in now will eventually be rewarded once the FDA decides to approve DVAX's drug. Remember, given the good phase III results, it seems to be a question of not if it is going to be approved but when it will be approved.
Dynavax also has the potential for a huge surprise for shareholders. As Dynavax notes in its announcement of the receipt of a complete response letter: "Dynavax's marketing authorization application continues to be under review in Europe." This would present a very interesting scenario for investors. While, unlikely, it is possible that Dynavax's drug will be approved in the EU. This would cause a large spike in the stock price. It would also help to negate the effects that the announcement of a new study would have on the stock price, as Dynavax will in that scenario always be able to count on Europe.
This is also, however, a third option in which Dynavax could surprise its shareholders. As noted in the press release announcing the CRL: "the Agency (FDA) indicated its willingness to continue discussions regarding a more restricted use of HEPLISAV." This quote would imply that there is a possibility that Dynavax would be able to re-file very shortly for a smaller age range. This would allow for Dynavax to get the drug to the market for those people who would have the most benefit from the drug, while conducting clinical trials to broaden the label. This could be considered similar to the strategy that Amarin (AMRN) has taken in regards to its drug. First Amarin had its drug approved for a population with extremely high triglycerides, and is finishing up the studies to have their drug in patients with high triglycerides. In the third scenario, Dynavax would be taking a similar approach of expanding the patient population after initial approval.
There are many opportunities presented by Dynavax. Dynavax is able to weather the storm, and has many positive scenarios. These scenarios are looking like potentially very nice stock price increases for shareholders. The downside risk is largely known for Dynavax - the risk of having to run a new trial - while the upside is largely unknown. Many different scenarios could play out, which would make this CRL not nearly as bad as it initially appeared to be. All that is required is patience, which is the hard part. The shorts will likely continue to win the battles over the short term, however, the longs will ultimately win the war.