Sell DVAX Despite Analysts’ Prayers; Reconsider Closer To Cash Value

While shares of Dynavax Technologies (DVAX) were crushed Friday morning due to Thursday's negative FDA Panel vote on lead candidate Heplisav, additional downside on the stock is likely. Even after Friday's fall out, DVAX still trades at a $420 million market cap, of which about 32% is in cash. However, the company burned roughly $42 million in cash last quarter, indicating less than one year of cash left, and if the FDA listens to the Panel and rejects Heplisav, the company could need at least three years to re-test the drug, in addition to a lot more cash. We note that initial reaction to the negative vote took the stock down under $2.00 per share, and therefore, DVAX shares could slide back to those levels or worse after Friday's trading noise dies down.

The FDA panel voted 13 to 1 that Heplisav demonstrated adequate immunogenicity for the prevention of Hepatitis B. However, the committee voted 8 to 5 (1 abstention) that there is insufficient safety data to support approval of the vaccine. Based on comments at the Panel meeting, the issue appears to be related to autoimmune events. Recall that in March 2008, Heplisav was put on clinical hold by the FDA because of an inflammatory reaction (vasculitis) in one patient. Several months later, partner Merck (MRK), returned rights to the drug to DVAX. In September 2009, the clinical hold was lifted and the company restarted clinical development on its own. Clearly, this vaccine candidate had issues that a major pharmaceutical company in the vaccine business could not get over, indicating that the Panel's concerns may not be unique.

DVAX has stated that after the input of the Panel, it will now work with the FDA toward a final decision. Note that the FDA action date (PDUFA date) is set for Feb. 24, 2013. While it's always possible that FDA could approve the product and require a post-marketing safety study, the current availability of alternative safe and efficacious vaccines (Merck and GlaxoSmithKline [GSK] both offer hepatitis B vaccines) suggests that the FDA would rather wait to confirm safety before approving Heplisav. This is especially true because hepatitis B vaccines are widely used in infants and children. So while the analysts have not yet thrown in the towel on the chance for approval, we would sell the stock or wait for the shares to be valued much closer to cash before stepping in. If one figures that the company will end the quarter with about $100M in net cash (~$0.60 per share), then waiting for DVAX to get close to this level makes sense for those willing to risk owning the stock into the FDA decision in February. Recall that the significant cash burn for DVAX means an unstable base, so it is recommended to trade this one with as little risk as possible. We note that major shareholder Symphony Capital sold 6 million of their 9 million share position in October. Perhaps these investors knew more about the future of Heplisav than investors gave them credit for.