Dynavax Technologies (DVAX, Financial) has been an agonizing stock for many investors, us included. The transition of a developmental biotech company into a commercial-stage business was always going to be tough. Yet, we believed -- like many others -- that Dynavax would surge following the likely approval of Heplisav-B, a Hepatitis B vaccine, with more growth to come as it rolled out a commercialization strategy.
As it turned out, we were only half right. Dynavax gathered steam in the run-up to approval, and remained strong afterward, but the subsequent quarters proved extremely unkind. Many investors have capitulated during the long, slow march downward.
So, is it time to give up on Dynavax at last? We think not. Not yet, anyway.
Back to square one
We first invested in Dynavax in January 2017, in the aftermath of a second FDA rejection of its lead product candidate, Heplisav-B. We saw an opportunity, as did many biotech traders, in light of the fact that the company would likely get another chance to convince the FDA that its two-dose Hepatitis B vaccine could be demonstrated to be both safe and effective.
At first, things seemed to be going great. A July advisory committee meeting resulted in a ringing endorsement for approval, which translated into a long-delayed FDA approval in November 2017. It seemed to us that the path to eventual profitability was clear, thanks to a best-in-class vaccine with projected peak sales of $650 million. On top of that, a promising immuno-oncology pipeline held out hope for future substantial catalysts.
As Dynavax the company muddled along with the expensive process of transforming itself into a commercial-stage biotech business, the wheels ended up coming off Dynavax the stock. After surging above $20 a share in the wake of FDA approval, the stock has melted downward as sales growth proved slower -- and costs proved higher -- than most analysts and investors had anticipated.
Dynavax closed at $3.81 per share on July 10, about where it stood after it received its second FDA rejection at the end of 2016. That also places it a hair under the price we paid for our initial core position. Hardly the sort of roundtrip travel one hopes for.
However, much has changed since the first time we were here. The company has an approved drug with a very substantial market opportunity. However, it has also piled on debt, diluted the equity, lost its CEO and effectively abandoned its immuno-oncology pipeline.
All about execution
With its immuno-oncology pipeline largely scrapped, Dynavax has become a pure-play execution stock. The overriding question is whether it can deliver on its long-standing promise of near-term profitability from Heplisav-B sales.
Dynavax has precious few chances left to impress. Critically, it must be able to demonstrate substantial revenue growth for Heplisav-B in the second quarter. If it can show solid sequential revenue growth, then the story deserves another chapter. If the company announces yet another quarter of anemic sales growth, then it might be time to consider pulling the plug. With profitability promised by the end of the year, investors should expect to see real progress in the near term.
Dynavax must be able to achieve the $30 million revenue target set by its private debt facility if it wants to survive at all. However, the company’s guidance calls for far more substantial sales growth throughout 2019. Merely surviving into 2020 by meeting revenue covenants will not be enough to keep us interested.
Investors should expect Heplisav-B to become profitable, or at least reach the cusp of profitability, in the second half of the year. If Dynavax cannot execute to that standard, then the stock is unlikely to return to glory, and investors should consider seeking opportunities elsewhere.
However, If Dynavax does indeed close the profitability gap, we see very substantial upside through 2019, with shares likely to at least double or even triple if profitability is unambiguously in sight.
The most conservative way to play Dynavax would be to wait on the sidelines until the second-quarter numbers come in. If revenues come in strong and costs appear to be coming under control, then investors might consider initiating a position. If the third quarter follows a similarly solid trajectory, then it would be time to consider a more substantive position. Obviously, the downside of this strategy is that one would lose out on the likely considerable gains following high-quality earnings reports.
For now, we are holding onto our position. But these next two quarters will be the fulcrum of this company’s future. If it can prove Heplisav-B’s viability, as all market research suggests it ought to, then Dynavax is a criminally undervalued buying opportunity. The only question now is whether management can unlock the value.
Disclosure: Author is long Dynavax.
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