Dynavax Technologies: Lost Cause Or Time To Roll The Dice?

| About: Dynavax Technologies (DVAX)


Dynavax Technologies dropped some 65% in trading Monday thanks to the latest obstacle thrown up to its hepatitis B vaccine by the FDA.

So is this small biotech concern now a "lost cause" or is it time to "double down"?

A "sum of the parts" investment analysis tells all below.

Courage is being scared to death... and saddling up anyway.
—John Wayne

There are few more high beta parts of the market than small biotech stocks, especially developmental concerns. For every home run like Exelixis (EXEL) that quadruples, you are going to have a strike out and see a stock plunge 50% to 75% in one day as the result of poor trial results or unexpected FDA action. Unfortunately, those are just the rules of the road. Great reward must always be accompanied with great risk. That is the nature of the markets.

When one of these frequent implosions occurs, properly assessing the situation and making the right decision on whether to fold, stay put or double down will be critical to whether you outperform the market over the long term.

With "one shot" lottery tickets like Mast Therapeutics (MSTX), it is easy to sell and get what you can when their only high risk/high reward product candidate fails in trials. With "multiple shots on goal" plays it gets a little trickier. Sometimes you just "hold" when a company like Novavax (NVAX) has their lead RSV vaccine candidate fail in trials. It has other assets and pipeline candidates that have some value, not enough to double down but enough to warrant staying the course.

Once in while, the market overreacts to bad news and that brings a rare opportunity to double down and turn a losing bet into a winning one over time. Monday, Dynavax Technologies (DVAX) lost 65% of its value after it received a complete response letter {CRL} from the FDA around its application for a hepatitis B vaccine "HEPLISAV-B".

So is now the time to fold, stay the course or double down on Dynavax? Below we do a sum of the parts analysis on this developmental concern to determine the answer.

After Monday's thrashing, Dynavax started Tuesday with a market capitalization of approximately $160 million. Let's do a quick back of the envelope "sum of the parts" investment analysis on DVAX.

  • The Company had $109.6 million in cash, cash equivalents and marketable securities as of the end of the third quarter or about two thirds of its current market value. Given the current pace of development this will last only three or maybe four quarters.
  • It has an asthma drug in Phase II development with partner AstraZeneca (AZN). Dynavax could potential earn ~$100 million in milestone payouts and single digit royalties on all sales should this compound move through the rest of the developmental process successfully.
  • SD-101 - a promising oncology product that is being given no value in the current market. We should start to get considerable trial data in 2017 and the company plans to move an inhaled version of the drug into clinical work for lung cancer shortly. Dynavax will present SD-101 at its R&D day on December 9th. The presentation could bring positive analyst comments which could improve sentiment on the stock.
  • Heplisav - B - Prior to this latest CRL I had a 80% to 90% chance of approval on this vaccine that has shown clearly superior attributes to the current standard on the market in a 14,000 person trial. I now have the odds of eventual passage at 60% to 70% and the company will need to find a partner to continue development in all likelihood.

It is important to note two things. First, the FDA is requesting additional data but not a new study. Second, the FDA hasn't even processed the data Dynavax has previously gave it. A SeekingAlpha contributor articulated this week that Heplisav-B could be targeted at the diabetic population pretty much as is and he has a fair value of $16.75 now on Dynavax.

This aligns with the $17 price target (down from $45) William Blair put on Dynavax Tuesday after the latest piece of disappointing news from the FDA. Blair's analyst noted "We have decided to maintain our Outperform rating at this juncture because we believe there is still a good chance for Heplisav to garner eventual approval, and because the immuno-oncology program SD-101 is reading out substantial data starting in 2017, which if successful should start to be ascribed value by the Street. We have updated our model and as a result, we lower our price target to $17 from $45. Currently, our valuation does not include SD-101 or the oncology pipeline. We lowered our estimate of probability of commercialization for Heplisav from 90% to 70%, assumed a partnership for Heplisav that pays 45% royalty plus milestones, and pushed out launch timeline by a year. We maintain our estimate of $650 million in peak sales in the United States eight years into launch"

Whether DVAX is worth in the high teens like these two analysts believe or a more conservative price target in the high single digits, one thing is clear. A sum of the parts analysis gives an investor a much higher value than the four dollars and change Dynavax is currently selling at. I chose to double down at $3.60 a share in early trading Monday as I am willing to roll the dice on this name despite its recent bad news.

Author's note: To get these types of articles on attractive biotech and pharma stocks as soon as they are published, just click on my profile and hit the big orange "Follow" button and choose the real-time alerts option.

Thank you and happy hunting,

Bret Jensen

Founder, Biotech Forum

Disclosure: I am/we are long DVAX, EXEL, NVAX.

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.