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The Dynavax story



November 21, 2012 – Comments (0) | RELATED TICKERS: DVAX

I initially entered this as a pitch then realized that like my Sarepta pitch, it really belonged in the blog.

In July 2011 Dynavax reported topline results from the HBV-16 phase III trial of their Hepatitis B vaccine Heplisav in adults aged 40-70. They found that two doses of Heplisav administered one month apart conferred 90% seroprotection 8 weeks after the last dose and 92% seroprotection 52 weeks after the first dose, while standard of care vaccine Engerix-B conferred 70% seroprotection 8 weeks after the last dose and 59% seroprotection 52 weeks after the first dose.

Despite this seemingly indisputable efficacy benefit for Heplisav, the share price actually dropped significantly after the results were released for three reasons:

1. The company reported that the Heplisav group did not meet pre-specified consistency criteria for antibody production after 8 weeks, thereby technically failing the primary endpoint.
2. Three new onset autoimmune events occurred in the Heplisav group and none occurred in the Engerix group. The company claimed this could be attributed to chance given the 4:1 randomization of patients to Heplisav vs Engerix.
3. Many traders sold on the news as Dynavax stock had risen dramatically from 2008 lows and the commercial prospects for Heplisav seemed questionable at that time.

The share price did rebound after the company reassured investors that according to FDA standards, consistency criteria were met. However, ongoing nervousness about Heplisav's revenue potential resulted in a severe downturn during the broad market instability of late 2011 and a low of 1.82. This, as it turns out, was a very good time to buy and I came close to capturing the low with a green thumb, but I felt the stock was too risky for real money. From October 2011 to May 2012 the share price nearly tripled to a high of 5.26. Only another monster dilutive financing of 70M was able to dampen the upward momentum.

I have to admit I'm still very confused about what happened to Heplisav in late 2011 and early 2012, and went deep into negative points territory with my red thumb. I based my long-term pessimistic view of Dynavax on the results of the PHAST phase III trial of Heplisav in 2008. After the FDA severely restricted the potential population for Heplisav in 2008 due to a single case of Wegener's granulomatosis in a test subject, the share price dropped as low as 0.16 and Merck terminated the partnership on Heplisav. It is possible that the only thing that saved Dynavax from the 2008 lows was the announcement of an unrelated partnership with GSK to develop inhibitors of Toll-like receptors for inflammatory diseases. This announcement resulted in a six-fold increase in share price and gave the company enough strength to restore their cash runway through dilution. Dynavax has subsequently gone on to take liberal advantage of the capital markets through private placements and ATM's, such that their common share count has ballooned from 55M in May 2010 to 179M as of the last quarterly statement. Dynavax's appreciation in share price was dwarfed by their appreciation in market cap.

In September 2009 the FDA lifted the clinical hold on Heplisav and Dynavax initiated a new phase III trial of Heplisav in patients with chronic kidney disease, as the FDA had indicated that Heplisav might have an acceptable risk/benefit profile in this subpopulation. The company initiated the HBV-16 trial in early 2010 as a "lot-to-lot consistency trial" which was also intended to expand the safety database. While this was not initially portrayed as a registrational efficacy trial, it appears that Dynavax used it as a Trojan Horse to sneak another phase III efficacy trial for general population past the FDA despite the previous clinical hold.

Subsequent to the latest phase III trial results, Dynavax announced their intention to submit an initial BLA for the general population of adults over 40, followed by a supplemental BLA for chronic kidney disease patients after the initial BLA was approved. This plan came despite what appeared to be a drastic and uncompromising view by the FDA in 2008 that Heplisav had an unacceptable risk/benefit profile except for specific hyporesponding subsets. Then in February 2012 Dynavax announced after a pre-BLA meeting with the FDA that the Heplisav submission would be expanded to adults aged 18-70. It now appeared that the FDA had completely retraced their position on Heplisav safety, abandoning all prior restrictions to Heplisav usage.

Fast forward to November 2012 and the FDA Advisory Committee meeting on Heplisav. Based on the buzz from the street, it seemed that any prior FDA concerns about autoimmune adverse events were forgotten and a strongly positive vote was practically a foregone conclusion. Never mind the 2008 clinical hold, never mind the prior drastic restriction on Heplisav usage handed down by the FDA, never mind the dramatic dilution Dynavax utilized to build a huge 160M war chest ahead of the meeting. Of course, it turned out that these were all warnings to dump the position ahead of an eventual 8-5 committee vote that Dynavax had not convincingly demonstrated Heplisav's safety.

The vote decimated the share price and was a great pick in after hours with a low around 1.7. The degree of the drop was excessive considering that a lot of large funds and institutions are now deeply underwater on the trade and will be working overtime to push the share price back up prior to the PDUFA on 2/24/13. We'll be hearing a lot between now and the PDUFA about how the FDA briefing documents didn't raise concerns about adverse autoimmune events, and how the Ad Comm chairman was conflicted by ties to GSK (maker of Engerix), and various other reasons why Heplisav will get first pass FDA approval.

Personally, I wouldn't bet on it. Heplisav represents a nice upgrade to the current array of hep B vaccines but it's far from indispensable. Historic measurements of seroprotection by Engerix B and Recombivax-HB are substantially better than the findings in Dynavax's trials. I think it's very unlikely that the FDA will go against a safety recommendation from their own Advisory Committee for a solution to a problem (hep B vaccine efficacy) that may not even exist. Dynavax has already enjoyed a substantial rebound from the lows after the Ad Comm vote and is likely to move even higher before the PDUFA. But if you're underwater on this stub I wouldn't cross my fingers and hold through the PDUFA. This time, head for the lifeboat. 

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