Dynavax (DVAX) will require a lot of patience. The stock will require about as much patience as has ever been asked of you as an investor. The first big catalyst - a decision from Europe - likely won't come until 2015, and the second big catalyst - an Advisory Committee (AdCom) panel, followed by a decision from the FDA - likely won't come until 2016. However, as the stock enters 2014, its timeline over the next year features a number of price-moving events - the start of a new trial in the US and regulatory interactions with Europe - that will mark progress toward earning approval, and subsequently push the stock to the levels at which it traded before a complete response letter (CRL) and FDA request for more data sank it earlier this year.
As follows, we will examine Dynavax's past, present, and future, and chronicle a stock with a low floor in the near-term that is on the brink of a meticulous run that could culminate in a 200% return in two years and a 500% return in three years.
Dynavax's lead candidate is Heplisav, a vaccine for hepatitis B for adults between 18 and 70 years of age. Heplisav has already been through the FDA regulatory process. In November 2012, an AdCom voted 13-1 in favor of the vaccine's immunogenicity, but then voted 5-8 against its safety. In February 2013, the FDA rendered the final verdict - a CRL.
Why the CRL? Was the data not good enough?
The AdCom and FDA's decisions were surprising. To better understand why their decisions were surprising, we'll take a thorough look at the data from Heplisav's phase 3 trials.
Dynavax conducted two phase 3 trials comparing Heplisav to GlaxoSmithKline's FDA approved Engerix-B. The first trial, called HBV-10, was comprised of adults between 18 and 55 years of age. The second trial, called HBV-16, was comprised of adults between 40 and 70 years of age. Both HBV-10 and HBV-16 met their primary endpoints for efficacy - noninferiority with respect to seroprotection (SPR). Seroprotection is defined as the proportion of individuals achieving an anti-HBs concentration of 10 mIU/mL or greater after vaccination.
In HBV-10, the SPR after vaccination with Heplisav was 95.0%, while the SPR after vaccination with Engerix-B was just 81.1%. In HBV-16, the SPR with Heplisav was 90%, while the SPR with Engerix-B was just 70.5%. In both trials, Heplisav was superior to Engerix-B with respect to the primary endpoint of SPR.
In addition to being statistically superior with respect to SPR, Heplisav also proved to be statistically superior to Engerix-B in every other measure of immunogenicity. Heplisav registered a higher peak SPR than Engerix-B (HBV-10: Heplisav - 98.3%, Engerix-B - 81.1%; HBV-16: Heplisav - 95.1%, Engerix-B - 72.8%). Also, Heplisav worked better earlier, registering a higher SPR eight weeks after vaccination (HBV-10: Heplisav - 88.5%, Engerix-B - 26.4%; HBV-16: Heplisav - 76.6%, Engerix-B - 20.3%). Further, Heplisav achieved a statistically superior peak SPR in every patient age group - 18 to 29, 30 to 39, 40 to 49, 50 to 59 and 60 to 70 years of age. Also, Heplisav's SPR was statistically superior (89.3% vs. 61.8) in patients with Type 2 diabetes. And finally, Heplisav recorded "significantly higher peak SPRs than Engerix-B" with respect to hyporesponsive groups (older adults, the obese, smokers, etc.) - populations that don't respond well to treatment.
Accordingly, and as previously mentioned, the AdCom voted positively 13-1 with respect to immunogenicity. Heplisav was statistically superior to Engerix-B across the board and the evidence was overwhelming.
Immunogenicity looked great. What happened to safety?
This is where the controversy lies. The safety data looked good, the AdCom briefing document confirmed that it looked good, and yet the AdCom voted negatively and the FDA issued a rejection. What happened? Well, the concern centers on two words - autoimmune disease.
Heplisav consists of two components - a hepatitis B surface antigen (HBsAg) and a novel adjuvant called 1018 ISS. It is this novel adjuvant, its ability to enhance the immune system and the potential for it to cause autoimmune disease that is the cause of the regulators' concern.
During HBV-10, there were two cases of autoimmune disease - one in the Heplisav arm and one in the Engerix-B arm. In the Heplisav arm, there was one case of c-ANCA vasculitis that emerged five months after the subject received a Heplisav injection and just one month after that subject received a placebo injection. In the Engerix-B arm, there was one case of p-ANCA vasculitis that emerged three months after the subject received an Engerix-B injection. Interestingly, the site investigator deemed the case of p-ANCA vasculitis in the Engerix-B arm as being not related to treatment. However, the case of c-ANCA vasculitis in the Heplisav arm was deemed as possibly related to treatment. Consequently, the FDA put HBV-10 on clinical hold.
Heplisav under investigation
The investigation that transpired as a result of this clinical hold turned out to be a sort of blessing in disguise. It forced Dynavax to go back and re-examine all of the safety data up until that point, and what emerged was data that actually showed Heplisav to be as safe as Engerix-B, if not safer.
The first thing Dynavax did was examine the adverse event data from every single patient up to that point in time. This process consisted of nearly 700 patients from the seven supporting trials (pre-phase 3 trials), and 1,809 patients from HBV-10 that had received Heplisav injections. As summarized in the briefing document, there was no other evidence of autoimmune disease in any of the other patients. "Cases of possible vasculitis or associated conditions were investigated, but no additional cases of ANCA-vasculitis were identified." Thus, whereas the site investigator said the case of c-ANCA vasculitis may be related to treatment, this part of the investigation did not uncover any additional cases of ANCA vasculitis and seemed to put a divide between treatment and disease.
The investigation bolstered Heplisav's case for safety. It showed that the rate of autoimmune disease was actually lower for Heplisav than it was for Engerix-B. Per the briefing document,
"The rate of ANCA-associated vasculitis in HBV-10 was 1 of 1809 (0.06%) subjects for Heplisav recipients and 1 of 606 (0.17%) subjects for Engerix-B recipients. In the entire Heplisav program, the rate was 1 of 2,500 (0.04%) subjects for Hepisav recipients and 1 of 930 (0.11%) subjects for Engerix-B recipients."
In the next step of the investigation, Dynavax evaluated all available serum samples from various points in two previous supporting trials and in HBV-10. Positive samples were tested further. This test, like the one preceding it, found no other evidence of ANCA-vasculitis. "There were no c-ANCA or p-ANCA positive samples by IFA (immunofluorescence assay) in any of the subjects tested other than the 2 initially reported."
In a third test, Dynavax evaluated the presence of biomarker, anti-double-stranded Deoxyribonucleic acid antibodies (anti-dsDNAs). In HBV-10, the rate of patients that converted from anti-dsDNA negative to anti-dsDNA positive was the same in both the Heplisav arm and Engerix-B arm, .52%.
These test results, amongst several others, demonstrated "a similar profile for Heplisav when compared to Engerix-B," and were strong enough to compel the FDA to lift the clinical hold. Dynavax proceeded into HBV-16 under "enhanced surveillance for autoimmune diseases," but completed the trial without incident.
The briefing document points to approval
In all, the clinical development program consisted of seven supportive trials and two pivotal trials, in which a total of 4,425 subjects were injected with Heplisav. The Engerix-B arm of the trial countered with 1,420 patients. Heplisav bested Engerix-B in most every measure of immunogenicity and safety. In addition to the rate of autoimmune events, these safety measures also included post-injection reactions, adverse events, and adverse events of special interest (neuroinflammatory disorders, musculoskeletal disorders, gastrointestinal disorders, metabolic disease, skin disorders, etc.).
The briefing document echoed this sentiment - that Heplisav has a safety profile similar to, if not better than, an already approved vaccine. The combination of superior immunogenicity and comparable safety culminate in Heplisav's benefits outweighing its risk. Per the briefing document,
"Heplisav has a favorable benefit/risk profile for the vaccination of adults at risk for hepatitis B infection. The immunogenicity is consistently higher than that of Engerix-B and the 2-dose, 1-month regimen has the potential to improve adherence. The combination of the higher immunogenicity and potential to improve adherence should result in higher seroprotection rates in actual use across all populations at risk for hepatitis B infection. The similarity of the safety profile of Heplisav to Engerix-B has been demonstrated in an integrated analysis of the Heplisav clinical studies. A comprehensive analysis of autoimmunity showed no increased rate of autoimmunity over Engerix-B."
The conclusion of the potential benefits portion of the briefing document says it all -
"The benefits of Heplisav over Engerix-B are notable, and they are achieved without increased risk."
So why the rejections?
Dynavax essentially received two rejections - one from the AdCom and one from the FDA. We'll tackle one at a time.
The AdCom review was rife with controversy. For starters, the AdCom committee chair was a man named Dr. Robert Daum. Daum's appointment as chair was suspicious, because he had received $4,600 in 2009 from GlaxoSmithKline as compensation for being a consultant. GlaxoSmithKline was and still is Dynavax's competitor and the manufacturer of Engerix-B, so his position on the panel seemed like an obvious conflict of interest.
As if his appointment to the committee chair wasn't suspicious enough, his voting decisions during the hearing certainly raised eyebrows. As previously mentioned, the AdCom vote regarding immunogenicity was a positive 13-1. The only negative vote came from whom? You guessed it - Dr. Daum.
Daum raised further suspicion when he questioned the demographics of the trial. Daum said, "I'm concerned that there are not enough data [from] different ethnic groups." However, this concern has since been refuted by current Dynavax CEO Eddie Gray. During a conference call on October 17, 2013, Gray alluded to race/ethnicity not being an issue in the previous trial or in the new one. Gray said that it was not addressed as being an issue in the FDA's CRL, so it is not an issue for the FDA.
Daum aside, other panel members were more bent on the size of the database. To that point, Melinda Wharton said the following:
"I don't think the safety database is sufficiently large to support a recommendation for use in the general adult population, given that this vaccine contains a new adjuvant."
Thus, given these concerns about the size of the database, and presumably how the rate of autoimmune disease might extrapolate to a larger population, the AdCom handed out a 5-8 negative vote regarding safety.
The FDA's perspective
The FDA shared Wharton's concerns. First, the FDA did have an issue with the size of the safety database. However, and perhaps more so, the FDA was hesitant to approve a novel adjuvant given the incidence of c-ANCA vasculitis during the HBV-10 trial and the further potential for autoimmune disease.
Simply put, the FDA does not approve vaccines that contain adjuvants other than aluminum. In fact, the FDA has approved just one other vaccine that does not contain aluminum. Ironically (or maybe not), that one vaccine is GlaxoSmithKline's Cervarix for the treatment of HPV.
In submitting Heplisav to the FDA, Dynavax was asking the regulatory body to do something it simply does not do - approve a vaccine with a novel adjuvant. The FDA is too concerned about the potential for autoimmune disease. Thus, from this perspective, the CRL makes sense. However, in recently conferring with Dynavax on a new phase 3 trial - HBV-23 - the FDA is perhaps telling Dynavax that the agency is open to changing its ways, although the company will still have to earn that change.
The path forward
This is exactly what Dynavax is going to do. The company recently announced the details of HBV-23. The trial will consist of 8,000 patients, 5,500 of which will be injected with Heplisav. This new cohort of 5,500 patients is larger than the Heplisav patient population in the last phase 3 trials, which will go a long way toward expanding the safety database, and it will give the FDA more comfort in evaluating the adjuvant's potential for autoimmune disease.
From an investor's perspective, the path forward is very bullish. To begin with, the primary objective for immunogenicity for HBV-23 is extremely attainable. It is "to demonstrate the noninferiority of the peak seroprotection rate (SPR) induced by HEPLISAV to Engerix-B in subjects with type 2 diabetes mellitus." Heplisav blew the doors off this metric in the previous trials. Per the briefing document,
"In subjects with type 2 diabetes, the peak SPR induced by Heplisav, which occurred at Week 28, was 89.3% and the peak SPR induced by Engerix-B, which occurred at Week 28 was 61.8% with a difference in SPRs of 27.5% (95% CI: 15%, 41.1%)."
The primary objective asks for just non-inferiority. In this patient subgroup, Heplisav was statistically superior to Engerix-B. Heplisav seems on track to knock this primary objective out of the ballpark.
The second primary objective will "evaluate the overall safety of Heplisav with respect to clinically adverse events." This will presumably focus on the emergence of any other autoimmune events. If HBV-23 goes as the last phase 3 trials went, Dynavax should be ripe for approval. Even another autoimmune event in each arm of this trial should not discount Heplisav from approval, as comparable safety, combined with the superior immunogenicity and more convenient dosing should be enough to compel the FDA to approve the vaccine.
HBV-23 will begin enrolling patients in Q1 2014. According to Gray, enrollment will take eight months to complete. Patient visits should be complete by the end of 2015, which places the AdCom, PDUFA and potential approval in 2016.
In the interim, however, Dynavax is also seeking approval in Europe. The company has guided that it will reply to the 120-day questions by the end of this quarter and that it will receive the 180-day list of issues in Q1 2014. While Gray has conceded that the European Medicines Agency (EMA) also feels they have an incomplete picture with respect to Heplisav's safety, he did mention during the October 17 conference call that the EMA may allow for a post-approval study.
These two opportunities for approval are not without their concerns. One or both could fall through.
With respect to the first opportunity - approval in Europe - Gray has acknowledged several potential hurdles. First, Dynavax is also seeking to get Heplisav approved for the treatment of chronic kidney disease (CKD), in addition to seeking approval for hepatitis B. Dynavax is not seeking approval for CKD in the US. This caveat in the application in Europe has created for more red tape. According to Gray, "This has added further to the list of questions we must address." These questions were added in the summer to the EMA's 120-day questions, thus re-setting the clock and extending even further the approval timeline.
Also, Gray pointed out a significant difference in demand for a hepatitis B vaccine between the US and Europe. In the US, a regulatory body called the Advisory Committee on Immunization Practices (ACIP) recently recommended that all persons diagnosed with diabetes - type 1 and type 2 - "be vaccinated against hepatitis B as soon as possible after a diagnosis of diabetes is made." More subjects being tested for hepatitis B creates the potential for greater demand for a vaccine. The landscape is different in Europe. There is no regulatory body like the ACIP recommending vaccination for diabetics. Therefore, with fewer persons being tested for hepatitis B, there is a lesser demand for a vaccine. Per Gray, "No country, for example, has diabetes identified as a target population for vaccination. Additionally, there is no discernible groundswell of vocal demand for new therapies." This lack of groundswell means hepatitis B is less of an unmet need in Europe, and thus eliminates any urgency for the approval of an additional vaccine.
To piggyback on that thought, Gray also acknowledged that because there are already two approved vaccines in Europe, Heplisav will likely have to differentiate itself in order to earn an approval. In the October 17 conference call, Gray said, "Given that they have an incomplete picture of Heplisav's safety, and two vaccines that are well established, they want to see if there is a patient population where unmet need is most likely a problem and how this vaccine can address that." Dynavax intends on advocating Heplisav for a population with an unmet need in its response to the 120-day questions.
That's Europe. In the US, Dynavax has just one potential pitfall - an autoimmune event. A larger cohort of Heplisav-injected subjects in HBV-23 than in previous trials could increase the chances of an autoimmune event. Dynavax's communications with the FDA has revealed the following: If an autoimmune event does occur, an advisory committee will be asked to give its advice. A decision for approval will not be made solely by the FDA. Also, Heplisav will not be automatically disqualified from the approval process and will be given the opportunity to make its case for approval. However, any additional autoimmune events beyond the one case of c-ANCA vasculitis in the previous trials would obviously hinder the Heplisav campaign.
And finally, should Heplisav eventually garner FDA approval, Dynavax may have to contend with GlaxoSmithKline and Merck owning patent rights to the manufacturing of the HBsAg component of the vaccine. This did not affect the stock's performance in 2012, and will be evaluated further as the approval date nears in 2016.
Per the latest 10-Q, Dynavax had approximately $38.7 million in operating expenses for the nine months ending at 9/30/13. The company's quarterly burn rate therefore equates to approximately $12.9 million. With cash and cash equivalents on hand of $76.4 million as of 9/30/13, Dynavax had enough cash on hand to last approximately six quarters.
However, given the need to fund HBV-23, an 8,000 patient trial, Dynavax issued in late October a secondary offering, which netted the company $125 million. The company is well funded to run HBV-23.
With just weeks left in the calendar year, Dynavax looks to 2014 with great anticipation, as the company embarks on another journey toward approval. The first quarter will be exciting, as again, Dynavax begins enrollment for HBV-23 and as it receives the 180-day list of issues from Europe. The third quarter will mark the start of the HBV-23 vaccination process, and the quarter will draw the company closer to a decision from the EMA.
As a result of all of this news, the stock price will respond accordingly. And, price targets for 2014 reflect that. Jefferies Group recently issued a price target of $3, MLV Capital topped that with a $5 target and Cowen issued the most bullish price target - $6. With an average price target from these three figures of $4.67, Dynavax has nearly 200% upside from where it trades today. Positive news out of Europe in early 2015 will push the stock even higher and every day that HBV-23 progresses without an autoimmune event is another day Dynavax gets closer to FDA approval. A positive AdCom and an FDA approval would ultimately push the stock into the double digits or a return on investment of 500% for the most patient of investors.
The market has already awoken to these possibilities. The stock bottomed out in early November to about $1.10/share in response to the secondary offering. However, since the close of the offering, the stock has been on a tear, rising about 60% in that time. So now, with ample cash on hand, it's full steam ahead for Dynavax. The journey toward potential approval is set to begin.