My goal is to highlight biotech firms that I believe are offering compelling risk/reward opportunities at current market levels. This led me to pursue an interview this week with MLV & Co analyst Dr. Megan McCloskey Dow, to discuss Dynavax Technologies (DVAX).
Dynavax Technologies is a clinical-stage biopharmaceutical company that discovers and develops novel products to prevent and treat infectious and inflammatory diseases. The Company's lead product candidate is Heplisav, a Phase 3 investigational adult hepatitis B vaccine designed to provide higher and earlier protection with fewer doses than currently licensed vaccines. Heplisav combines hepatitis B surface antigen with a proprietary Toll-like Receptor 9 agonist to enhance the immune response.
The U.S. Food and Drug Administration (FDA) has set November 14-15, 2012, to discuss Heplisav's approvability at the Vaccines and Related Biological Products Advisory Committee panel. A two years data set shows that when a committee recommended approval, in 80% of cases, the FDA agreed. The FDA has established February 24, 2013, as the PDUFA date for Heplisav. If approved, Heplisav would be the standard-of-care hepatitis B vaccine.
Dynavax estimates the worldwide market for adult hepatitis B vaccines at approximately $700 million annually. This market is primarily comprised of GlaxoSmithKline's (NYSE:GSK) Engerix-B and Twinrix, as well as Merck's (NYSE:MRK) Recombivax-HB, which are the primary players in the hepatitis B prophylactic vaccines market. Dynavax has worldwide commercial rights to Heplisav.
The company also recently announced that the European Medicines Agency has accepted the filing of the Marketing Authorization Application for Heplisav, pursuing an indication for immunization against infection caused by all known subtypes of hepatitis B virus in adults 18 through 70 years of age, and in patients with chronic kidney disease.
I would like to introduce Dr. McCloskey Dow, an Equity Analyst and member of the Life Sciences equity research team at MLV & Co. Dr. McCloskey Dow's scientific work focused on immunology and pathology, and she brings direct scientific discovery and development experience to her analysis.
Ben Yoffe: Dr. McCloskey Dow, what are the differences between Heplisav and the current standard-of-care Engerix-B of GlaxoSmithKline? Does Heplisav have any safety or efficacy advantages?
McCloskey Dow: There are several key advantages to Heplisav over Engerix-B. In four head-to-head Phase III trials and a total of 5,770 patients, Heplisav demonstrated superiority over Engerix-B. Seroprotection following two immunizations of Heplisav was achieved in 95% of adults aged 18-55 and 89% of adults aged 40-70. In contrast, seroprotection after three immunizations of Engerix-B was achieved in 81% in adults aged 18-55, and only 69% in adults 40-70. Importantly, patients were protected from HBV following the second immunization of Heplisav, given one month after the initial vaccination. In all patient age groups, Engerix-B was shown to offer limited protection without the third dose, administered six months following the initial immunization. Heplisav was also recently shown to provide protection to patients suffering chronic kidney disease (CKD) in three doses and to a greater extent and more rapidly than eight doses of Engerix-B.
Both vaccines were shown to be safe, and the FDA has seen safety data from each patient dosed with Heplisav to ensure that the new adjuvant in the vaccine does not induce autoimmune events. Heplisav is adjuvanted with an ImmunoStimulatory Sequence that activates the immune system through Toll-like receptors.
Yoffe: Can you share with us your forecast for the upcoming meeting of the Vaccines and Related Biological Products Advisory Committee, which will decide by November 14-15, 2012 whether or not to recommend approval of Heplisav?
McCloskey Dow: We are confident that the Advisory Committee will give a positive recommendation to approve Heplisav because the vaccine could increase vaccination compliance and coverage, in addition to the data demonstrating Heplisav's superiority over Engerix-B.
Yoffe: In February 2012, the FDA agreed that Heplisav's label could be expanded to include healthy adults between the age of 18 and 70. Do you think that this agreement may increase the odds of approval?
McCloskey Dow: Absolutely. The company had originally intended to file a BLA for adults aged 40-70, but the FDA had the opportunity to see all of the data, including vaccinated adults aged 18-55, and the agency acknowledged that an expanded BLA would be appropriate for Heplisav. We view this as a strong indication that the FDA will look favorably on the vaccine during its review.
Yoffe: How many sales from Heplisav, if approved, you expect to see in the U.S.?
McCloskey Dow: Currently, Dynavax is intending to launch Heplisav initially in the U.S. for healthy adult vaccinations with a marketing team of 60 reps on the ground, and 10 sales managers for a proprietary launch. The company is weighing partnership options and co-promotion plans to specifically target the diabetes market. We project sales through 2015, our discount year, to be approximately $177 million in the US, but we see this number growing substantially in the years following. After launching into the healthy adult market in the U.S, we anticipate that Dynavax will formalize a partnership to specifically target diabetics, and we believe a successful launch with their own team will improve their negotiating position so as to not undervalue Heplisav early in its lifecycle.
There has been renewed interest in protecting the American public from hepatitis in recent years, and while hepatitis C virus (HCV) has garnered most of the attention, the CDC's Advisory Committee on Immunization Practices (ACIP) voted in October of last year to recommend hepatitis B virus (HBV) vaccination for diabetic adults. We believe this recommendation will change the HBV vaccination market significantly over the coming years. The CDC estimates that 4.3-5.6% of us have been infected at some point with HBV, and the risk of chronic infection, liver failure, and hospitalization increases when patients suffer co-morbidities such as concomitant infection or chronic disease (e.g., diabetes).
In our discussions with healthcare professionals, the CDC's mission to increase HBV vaccination coverage in adults (currently self-reported data indicate 45% of adults have been vaccinated) should get a big boost from Heplisav, which has a vaccination schedule that only requires two clinic visits, only one month apart, as opposed to that of Engerix-B, which requires three clinic visits over six months. Furthermore, American adults battling obesity, smoking, disease, and the elderly have low seroprotection rates when vaccinated with the currently approved vaccine Engerix-B, and the FDA is aware of that.
Dynavax knows that the recommendation from the CDC last year for diabetics to be vaccinated against HBV is a potential market changer, not only for them, but for the HBV vaccination market as a whole. Whereas the traditional adult HBV vaccination market was limited to those at risk from sexual activity or drug use, healthcare workers, or adults who were traveling to HBV endemic regions of the world, the recommendation now creates demand for the nearly 2 million adults over 20 diagnosed with diabetes each year in the U.S. As the first commercial product for the biotechnology company, they do not have the manpower to launch the vaccine immediately into the diabetes market.
Yoffe: What is the potential market for Heplisav in Europe?
McCloskey Dow: The European market is changing, given the economic struggles and healthcare burdens therein. As a smaller market to begin with, a European launch is not a top priority for Dynavax in the first year of sales. We project that the company will seek a European or several European partners, but again, like the diabetes market in the U.S., we think the potential value of those deals to Dynavax can be greater when the company gets a handle on how the current HBV market is impacted by Heplisav. We therefore project a European deal(s) after sales data for Heplisav has been generated from Dynavax's own team, which we think will strengthen its negotiation position.
Yoffe: Are there any other significant products in Dynavax's clinical-stage pipeline?
McCloskey Dow: Although they are much earlier in development, we look to the company's collaboration with GlaxoSmithKline on developing Toll-like receptor antagonists for systemic lupus erythematosus, and to a renewed collaboration with AstraZeneca (NYSE:AZN) as potential milestone generators. However, the focus for Dynavax is Heplisav at this moment.
Yoffe: What is the financial picture for Dynavax? Does the company have sufficient liquidity to get through the PDUFA date?
McCloskey Dow: Dynavax finished 2Q12 with $160.2 million in cash, and we calculate an adjusted annualized burn rate of $52.2 million. Dynavax has more than enough cash to launch Heplisav and see it past the PDUFA date.
Yoffe: What is your one-year price target for DVAX?
McCloskey Dow: We use a discounted P/E model applied to our projected 2015 EPS to arrive at our one-year price target of $10.00 per share (146% upside on today's closing price). In our view, a 20% discount rate is appropriate for post-BLA filing and current uncertainties regarding the timing and outcome of the ongoing regulatory review and market penetration following launch. We believe a 25x P/E multiple is appropriate for our projection of the company's growth.
My opinion on DVAX:
- A positive Advisory Committee recommendation for Heplisav will be a significant milestone for DVAX. The chances are positive, and a run-up prior to the meeting on November 14-15 is expected.
- Analysts are highly bullish on DVAX based on their latest research notes, and believe that Heplisav will be approved.
MLV & Co
- The company has a solid cash position. As of June 30, 2012, the company had $160.2 million in cash and cash equivalents. This fact should reduce the fear from near dilution.
- 83% of the company's shares are owned by institutions and mutual funds. It is a good indicator, since institutional investors (a.k.a. the "smart money") have access to sophisticated research and have a great deal of information on the companies they trade.