The Slow Motion Crash Of Dynavax

Declaration: I hold no position in Dynavax Technologies (DVAX) and have no intention of initiating a position over the next 72 hours.

  • Today’s near billion dollar market-cap will be cut by 50-75% in one year’s time.
  • Even if approval is granted in November the launch will be abysmal.
  • SEC docs and the CEO’s own words confirm my opinion.
  • A $125m public offering becomes $75m in a day’s time and the offering price is reduced by 19.5% over the August 8th closing price. Why?
  • Biotech CEO’s are today’s magicians – masters of the misdirect.  And Eddie Gray is no exception.

From Michael S Ostrach CFO/CBO Dynavax Technologies August 3, 2017 Regulatory Update Conference Call

Actual results or outcomes may differ materially due to the risks and uncertainties inherent in our business including, for example, the risks we cannot agree with the FDA on the post-marketing study or the label for heplisav-b; whether the FDA will ultimately approve heplisav-b, notwithstanding the advisory committee votes in favor of both safety and immunogenicity; and other risks detailed in the risk factors section of our quarterly reports on form 10Q filed with the SEC.

On a certain night, long ago, while driving the route 26 inbound on Westlake Avenue just north of downtown Seattle, I noticed a motorcyclist whiz by my driver’s side view mirror at some incalculable rate of speed. Such is the nature of frenzy when passion overrides all of our senses. Though he was safely a thousand feet from the bend in the road ahead forged by the lake’s shore, I could already tell that he wasn’t going to make it. Perhaps, he had no intention of navigating the curvature as death will always have the allure of freedom that the chains of suffering in this world lack. More likely, though, he was simply ignorant of the relationship between his speed and geography, captivated by some illusion, subject to distraction, buoyed by hubris, or heaving with emotion. All symptoms of alcoholic impairment and, ironically too, of biotechnology stock ownership in moments of great success.

To the Dynavax shareholder there is only one possible outcome in November – approval of heplisav-b with a follow on Phase-4 study to dismiss the notion of associated cardio or adverse event risks. I’ll identify a more likely and troubling outcome. Shareholders will readily point to the well documented efficacy of the vaccine; the recent adcom in which safety received an overwhelming 12-1 vote of approval (while remaining silent on the importance of the 3 abstentions); and refer you to the conference call following the FDA’s unexpected 3-month delay in which an unnamed agency rep spoke with company execs of a shared desire for expediency in resolving the application, hereafter known as, the head fake.  The most ardent among them will speak of an expanding population of Hepatitis B candidates from the pools of diabetic patients and of an imminent partnership or buyout on approval.  All bungled logic predicated upon wishful thinking.

Affix Oxygen Masks Please

I am now going to detail for you in the simplest possible terms why a short thesis is a far more logical approach in navigating the perilous road ahead.  Deconstructing rosy pictures is not something I like to do but I’ve been fooled by enough by them them over the years to appreciate the value of doing so sooner rather than later.

To reject any advance, saying “no” is only the most direct response.  Other avenues are available to achieve the same outcome.  Where the FDA is concerned, the label now becomes the vehicle upon which rejection, albeit, a temporary one can be implemented.  If it contains a warning of a possible, serious, adverse event risk, resolved only by positive data from a post-marketing study, then commercial uptake of Heplisav-B will be so slow that marketing the drug will be next to impossible.

Biotech CEO’s Are Linguistical Magicians

They have to be!  Their job is to enhance shareholder value.  Complete transparency would undermine that process.  Similar to an accomplished basketball player, they can’t telegraph their next move.  And the head fake becomes an integral part of their game.  Consequently, our job as retail investors is to keep our feet on the ground separating what’s impotant from what’s not in terms of what’s been said.

Can you identify the misdirect in this response by Eddie Gray at the regulatory update conference call regarding discussions with the FDA on the Heplisav-B label?

They seem to have taken two themes from the VRBPAC panel. They talked about how the panel had been very much in favor of the vaccine, represented, sort of, by the twelve-one vote and their other theme, really, was the fact that the panel had been ensuring that the FDA paid attention to the details of the study.

So, we raised the question of the label and I think it’s fair to say that they indicated it would just continue in parallel with our ongoing discussions on the study. We had, of course, been discussing the label with them before the VRBPAC so it’s a continuation of a, sort of, process.

It isn’t hard, is it?  When an adult child calls a parent in need of something, the very first positive statement is prelude to what’s really on their mind.  CEO’s are no different.  The real meat and potatoes of this statement are that the panel wanted the FDA to focus on the details of the application that left a full 25% of them (4 of 16) unable to say “yes” to safety and that these ongoing discussions have been relevant long before the panel convened.

Now, when it comes to head fakes, the one that had most retail investors leaving their shoes came at the 11:39 mark of the conference call when CEO Gray stated this.

Now, obviously, one of the things we want to be doing is working with the FDA to complete the review as efficiently as possible so that it’s not a question and, to be fair, I mean, the FDA, I think, were, you know, very much of a mind that they wanted to move this forward (laughing) Rob, correct me if I’m wrong here, but I think Rob was pressing them at one point on the issue of, sort of, timing and he was stopped by somebody at the agency who said; “No, no, you need to understand, we’re working to get this over and done with as well.”

I have no doubt that the above statement is true and accurately conveyed. But what exactly does it tell you? Who made the remark and is it not something that the agency could and would say regarding any application? Does the statement give you a clear indication of what their ultimate disposition will be? The answers to these questions are painfully obvious to the casual observer. But to those vested in the outcome, the answers can only suggest one thing – approval! Meanwhile, the company goes to the capital markets with shoeless investors holding an $18 share price firmly in place.

Seasoned investors at Cowen, RBC Capital Markets and William Blair, however, didn’t buy the narrative quite so much. They insisted on a near 20% discount on the secondary offering price and there weren’t enough of them requiring a 40% paring of the original $125m ask to $75m. And even then, the offering closed a day late.  I would further argue that the price per share decided upon doesn’t reflect their confidence in Dynavax, Heplisav-B or the FDA so much as their trust in retail investors to provide an early short-term exit point and put options to protect them from downside loss.

CEO’s Aren’t The Only Pump Fakers On The Court Of Biotech Play

Sell-side analysts are adepts at this as well. Take, for instance, William Blair analyst, Katherine Xu. On that euphoric day of adcom relief it was reported by Reuters that Xu tickled new initiates with a SOC market opportunity of $650m for Heplisav-B.

There are so many problems with her assessment that I’m not sure where to begin. So let’s start with Dynavax’s own assesment visa-vie its 2016 Annual Report 10-K filing which indicates a U.S. market of $270m. And while it’s swelling to include diabetics of both the types 1 and 2 variety, Heplisav’s problematic side-effect profile almost certainly precludes them from marketing to this compromised population without a supplemental application reflecting a positive Phase-4 outcome. Consequently, Xu has breached the boundaries of believability by $380m. No small amount.

Put a label on the box that indicates even a possible cardiovascular risk and you subvert the intentions of even the most professional, aggressive and wide spread sales force until such time as the post-marketing study resolves the question. And even if you argue against this conjecture, it’s difficult to argue against a painfully slow uptake of the vaccine when you realize that Dynavax has only an existing supply on hand for the 2018 rollout as manufacturing facilities were mothballed to conserve resources in the past.

From the previously sourced 10-K.

In order to maintain the ability to pursue HEPLISAV-B through the review period we enacted a restructuring plan to suspend manufacturing activities, commercial preparations and other longer term investment related to HEPLISAV-B. If the product is approved, we plan to use existing stockpiled inventory to support initial sales.

This was confirmed by CEO Gray at the regulatory update conference call.

A Cataclysmic Conclusion

Retail investors are banking on approval of Heplisav-B in November.  I haven’t directly argued against that contention because the FDA is loathe to swim against a steep wave of adcom approval.  That noted, they’re in complete control.  A father doesn’t have to say no to his son’s request to drive the car to school 30 miles away.  He just has to leave the tank near empty.

Similarly, if the cost to sell Heplisav-B exceeds projected revenues by too great an amount, Dynavax may choose to run the post-marketing study before attempting a first sale.  And any big pharma partner with the necessary infrastructure in place to sell Heplisav-B will want a clean label before offering an attractive partnership package.

The only remaining option that would provide an exit point higher than that achieved on the day of approval would be a buyout.  And, in the case of Dynavax, that remains a possibility, although, a remote one.

Always be well…

Thaumaturgical Disclaimer: I’ve utilized tarot card readings for over four decades to provide choice guidance in matters effecting my personal life and for three years in the analysis of biotecnology equities. You may not find this credible because it doesn’t meet with your bias towards all things logical, rational and scientific. But if a tarot card reading isn’t in sync with those three elements it is ignored. Too often, however, I’ve ignored a tarot card reading in favor of so-called scientific experts only to be left disappointed. Candle stick chart reading with its doji dragon fly, double hammer and morning star are an esoteric version of scrying utilized by investors in the mainstream to predict price movements. It’s application to biotech equities is often in error and no one complains. But mention a centuries old tradition affirmed by the great mythologist Joseph Campbell and people ready their canons for ad hominem attack.  Fire away!

Mental Illness Disclaimer: I’ve been diagnosed as suffering from manic depression.  Therefore, fire gently!  And never hesitate to contact me first about any factual errors so that I can correct them.

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