Sometimes during the lifetime of a company significant shifts in priorities and resource allocation are made. I believe the ability to recognize the need for such changes and the wherewithal to carry them out is crucial for a business to succeed. However, willingness to change is not enough on its own. What matters is that the new strategy fits the circumstances and is executed effectively. In this article, I m going to explore if that appears to be the case with Dynavax Technologies Corporation (Nasdaq: DVAX), and my perspective on DVAX as an investment.
DVAX announced Thursday May 24th, 2019 AH (after hours) a strategic restructuring of the company to focus on its vaccine business. Additionally, Dynavax CEO and director Eddie Gray informed investors he would be retiring. As a result, DVAX will explore “strategic alternatives” for its immuno-oncology (I-O) clinical assets (SD101 and DV281). The market reacted to the news with mixed sentiments. Some welcomed the change and were happy to see Mr. Gray leaving in hopes he’d be replaced by someone keener on partnerships or acquisition. Others were more pessimistic projecting a long and slow road back to the double digit share price DVAX enjoyed not long ago. Immediately, DVAX’s share price dropped 8% AH Thursday and preceded to fall 9% to $5.78 by Friday’s close.
In moving away from its I-O platforms DVAX plans to concentrate money and manpower on growing the commercial reach of its Hepatitis B vaccine, HEPLISAV-B®. Approximately 37% of the workforce will be eliminated; the majority of whom hold R&D and administrative positions supporting I-O product development.
Restructuring costs associated with severance and retirement compensation, not including stock-based compensation, are around $5.5 million. Soon to be ex-CEO (effective August 1st) Eddie Gray is getting an ample retirement package in excess of $2 million. To fill his shoes the board tapped David Novack (Senior VP, operations) and Ryan Spencer (Senior VP, commercial) to serve as co-presidents until a new CEO is hired (DVAX is considering internal and external candidates).
Dynavax Technologies (DVAX) is a commercial stage biotechnology company located in Berkeley California. Their proprietary technologies target toll-like-receptors (TLRs) to stimulate parts of the innate immune system thereby enhancing the adaptive immune response. The company has high institutional ownership at 85%. In contrast, insider ownership is low at 1.19%. The top three stakeholders Blackrock, Federated Investors, and State Street Corporation hold 6.51%, 5.8%, and 5.7% of the float, respectfully. Notably, DVAX has a relatively low dilution rate of only 3.3% YOY (year over year) with 65,066,944 shares outstanding. I feel investors should be aware that in 2014 DVAX underwent a 1-for-10 reverse stock split (RS). After the RS shares outstanding was 29 million meaning the share price has been diluted by ~7 million shares a year since then.
In the past year DVAX has traded between $5.12 and $17.05. Shareholders and prospective investors can find some comfort in knowing DVAX has $183.2 million in cash, cash equivalents and marketable securities.
During this time there’s been a lot of hype around the company’s I-O pipeline. Oncology product candidate SD101 has been tested in multiple phase 1/2 clinical trials with Merck’s (NYSE: MRK) blockbuster cancer drug Keytruda. A second clinical stage candidate DV281 has a similar mechanism of action as SD101, but is optimized for treating lung cancer via inhalation. The bread winner, however, is HEPLISAV-B which is the only commercial two-dose Hepatitis-B vaccine. HEPLISAV-B was launched in January 2018 supported by 60 sales reps. Since hitting the market HEPLISAV-B has earned $12.4 million. Moreover, sales growth has been ample with revenue increasing 44% between 4Q18 and 1Q19 from$3.9 M to $5.6 M.
HEPLISAV-B In The Marketplace
The two most critical things when evaluating a biotech product for commercialization is safety and efficacy. In a detailed review of HEPLISAV-B, including data from four clinical trials, the Advisory Committee on Immunization Practices (ACIP) found that 90-100% of people who took HEPLISAV-B were successfully vaccinated, compared to 70-90% for patients taking Engerix-B [owned by GlaxoSmithKline (NYSE: GSK)]. Whats noteworthy is that HEPLISAV-B achieves this level of efficacy in two doses whereas Engerix-B requires three. On the safety front, the frequency of adverse were similar (both low).
In the U.S. market HEPLISAV-B competes with Engerix-B, Twinrix (GSK product which is a dual Hepatitis A and B vaccine), and Recombivax-HB (MRK product). Touting an efficacy in the 90th percentile DVAX has a shot at becoming the leader in the Hepatitis-B adult vaccine market. However, MRK’s Recombivax-HB has a comparable efficacy profile in healthy adults, and costs half as much as of July 2018. So, while the convenience of a two-dose regimen may appeal to patients and physicians I am skeptical it warrants a 100% mark-up. Luckily for DVAX, that is not a decision healthcare providers are having to make right now. Moreover, pricing of all three products is subject to fluctuate with shifts in supply and demand.
From my research it sounds like supply is having a tough time fulfilling demand. MRK’s Recombivax-HB has long-standing backorders due to increased global demand. As it stood in November 2018, MRK was not in the adult hepatitis B vaccine market, and allocated all of its supply for adolescent/pediatric patients. A quote from the CDC confirms this:
Adult hepatitis B vaccine: Merck is not currently distributing its adult hepatitis B vaccine and does not expect to be distributing adult hepatitis B vaccine or dialysis formulation throughout the remainder of 2019. GSK and Dynavax have sufficient supplies of adult hepatitis B vaccines to address the anticipated gap in Merck’s supply of adult hepatitis B vaccine during this period; however, preference for a specific presentation (i.e., vial versus syringe) may not be met uniformly during this time. Updated Nov 2018CDC Website
The two options for adults, therefore, are HEPLISAV-B and Engerix-B. HEPLISAV-HB is 40% more expensive, but as we saw it performed significantly better. If that 10-30% difference in vaccination success rate observed in clinic trials translates to the same level of efficacy in the market place then I think HEPLISAV-B could command a significant market share in the U.S.
Patients with comorbidities (multiple disease occurring at once) like diabetes and kidney disease respond worse to vaccination. HEPLISAV-B outperformed Engerix-B in adults aged 60-70 with diabetes and is being studied in phase 1 in adults with End-Stage Renal (kidney) Disease (ESRD) undergoing Hemodialysis. Additionally, impressive sales growth since HEPLISAV-B’s commercial launch and 1Q19 business highlights support the notion of a bright outlook.
The Opportunity Ahead
The decision to pivot away from cancer product development and towards commercialization of HEPLISAV-B is a big one. My impression is that this is a bullish signal from the company. SD101 showed promise in head and neck cancer as well as advanced melanomas. To abandon it and DV281 to focus solely on the HEPLISAV-B opportunity gives us some insight into managements thought process.
My interpretation is “why split time and resources between two sets of assets with unequal value propositions”. What I mean by that is the I-O assets could fetch high revenues if they were successful; the key word being “if”. Most drug and biolgic candidates fail to succeed. The regulatory approval process is expensive and time consuming. It makes sense to devote resources completely to an approved product with superior efficacy competing in an under-served market.
According to Credence Research the global Hepatitis-B vaccine market is poised to reach $1.89 billion in value by 2025. For now, DVAX is vying for a $300 million-a-year pie in the U.S by targeting 25% of the vaccination outlets representing $225 million. If HEPLISAV-B gains approval for use in patients with ESRD that would open the door to additional revenue. Ninety-six percent of DVAX customers have repeated their orders signifying satisfaction. Analysts are projecting sales revenue around $43 million in 2019 (up 420% YOY) and $97 million in 2020 (+127% from 2019 expectations). Earnings per share is expected to improve as well. The average estimate is -$1.92 and -$1.14 for 2019 and 2020, respectfully.
Research and development expenses in 1Q19 were $21.2 million compared to $18.9 million in 1Q18. With the proposed structural changes those figures should come down significantly. The analysts estimates discussed above were calculated assuming stable, or increasing, R&D expenses related to DVAX’s I-O development programs. A revision incorporating the 37% slash in the workforce should boost EPS and help the company become profitable b 2023. Based on a cash burn of $43.6 million in 1Q19 and $183.2 million in cash, cash equivs and marketable securities DVAX could sustain operations for 2.5 years. Probably longer after restructuring.
In terms of liabilities, DVAX has $175.6 million in long-term debt. Furthermore, the company has a term loan agreement for $177.3 million from CRG Servicing LLC that matures December 31st, 2019. The remaining $75 million from the loan was drawn down in March 2019.
Collectively our research indicates that the DVAX is making a risky, but understandable structural change. Sales performance to date has shown robust demand for HEPLISAV-B and has been in line with guidance. Management stated in the latest earnings report that its focus was to make “HEPLISAV-B the standard of care Hepatitis-B adult vaccine in the U.S”. Success is certainly possible. HEPLISAV-B is one of two Hepatitis-B vaccines available for adults in the U.S. It has the superior efficacy rate, a comparable safety profile, and only takes two doses. The paradigm could change, though, if MRK’s Recombivax-HB reemerges in the adult vaccine market, but per guidance from MRK that is unlikely to happen in 2019. If it did it would be interesting to see if DVAX reprices HEPLISAV-B.
A couple unknowns make me nervous. How much cash can DVAX leverage their oncology assets for? What will OpEx be after the restructuring plans are implemented? Once the answer become clearer I will feel more confident in the long-term outlook for DVAX. On Thursday the company went all in placing their bet on HEPLISAV-B to carry the business forward. Until hard-data proves that was the right decision I would exercise caution investing in DVAX.
To answer the question posed in the title, we’ll see. If the commercial opportunity for DVAX’s vaccine business doesn’t pan out then the company will keep losing money for a long-time. Using our 4-point grading scale I assign DVAX with a B- rating. I’d wait before investing as more downside could lie ahead. The value proposition for investors is attractive considering the growth potential of HEPLISAV-B and the company is getting leaner. With a new CEO the prospects of DVAX partnering or being acquired seem better. I think it would behoove them to team up with big pharma to extend their commercial reach and alleviate financial strain.
I/we have no position in DVAX.
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