Dynavax Investors Not Immune to Risk

As shares of this biotech soar, it's wise to question the hype.
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After

Dynavax Technologies

(DVAX) - Get Report

announced strong research data for its hepatitis B vaccine last week, investors reacted like shoppers in heavy pursuit of the PlayStation 3, tripping all over each other to get in and bid up the stock.

The

phase III data from Dynavax were certainly impressive. The small-cap drug company compared its experimental vaccine Heplisav to

GlaxoSmithKline's

(GSK) - Get Report

Engerix-B. In individuals classified as difficult-to-immunize older adults, the Dynavax vaccine provided 98.5% protection after two doses, compared with just 25% for Engerix-B.

Within 24 hours of the news, the stock shot up from $7.40 to $10.66.

But before continuing to bid the shares higher, investors would be wise to take a close look at the market Heplisav intends to serve, the real potential for the drug and recent actions by the company's management.

Marketing a Vaccination Innovation

The big question to ask, assuming approval, is what kind of revenue can the vaccine generate? The answer might not be quite as exciting as the hype over the results.

The greatest need for a hepatitis B vaccine appears to be in poor nations, but Dynavax intends to market Heplisav in the U.S. and Europe. When asked about plans to offer the drug in other parts of the world, a Dynavax representative said the company's marketing plan hasn't been completed.

Currently, nearly all children in the U.S. and Europe receive a vaccine for hepatitis B. As of now, Heplisav isn't meant for young children or infants. The trial Dynavax discussed last week included more than 400 subjects, age 40 to 70 in Singapore, Korea and the Philippines. Phase III studies with a younger patient group are planned for 2007.

Hepatitis B is caused by a virus, transmitted through blood and bodily fluids, that attacks the liver. According to the Web site of the Hepatitis B Foundation, roughly 12 million U.S. residents have been infected, and up to 100,000 people will become infected every year.

The Centers for Disease Control and Prevention states that foreign-born individuals, particularly Asians and Pacific Islanders who have emigrated from countries in which hepatitis B is endemic, "contribute disproportionately to the burden of chronic HBV infection in the United States."

Dynavax's immunostimulatory-sequence technology apparently increases the body's immune response. Dr. Sharon Frey, associate professor of internal medicine at St. Louis University, said the company's work is "very exciting." Immunostimulatory-sequence technology is also being used in Dynavax's allergy and flu vaccines, which have shown positive results, as well.

Dynavax yesterday said data from a phase II trial comparing two different vaccination schedules of Heplisav showed that 100% protection was achieved regardless if the second dose was administered one month or two months after the first dose.

A Cycle of Cashing In on Spin

Though the technology appears to have potential, the company's behavior smacks of hype. Management held a conference call Wednesday morning to discuss the Heplisav data. The company also hosted a call after issuing a press release trumpeting a

New England Journal of Medicine

article that showed positive results with old data. The stock took off then, too.

To be fair, Dynavax isn't the only biotech firm to hold a conference call to discuss positive clinical developments, but it certainly never misses an opportunity to pat itself on the back. In my opinion, Dynavax may be trying too hard. I'm always skeptical of companies constantly shouting, "Look at me, look at me," rather than letting the research data stand on its own merits.

When the

NEJM

paper was published, I

took issue with the fact that the company sold stock ahead of the news, a move that seemed to leave a ton of cash on the table and to reward a few key investors. That offering seems even more ill-timed in the wake of the recent pop in shares, especially considering that Dynavax wasn't in dire need of cash.

As mentioned in the previous article, investors who bought the stock offering at $4.40 were handed a gift as the stock opened at $6.35 and closed at $7.70 the next day. Now, on the heels of last Tuesday's news, comes word that director Dennis Carson sold 20,000 shares for his family trust at an average price of $9.79 on Wednesday and another 50,000 shares at an average price of $9.15 on Friday.

The sale was part of a 10b5-1 plan, a program that allows insiders to buy and sell stock at all times, even when trading windows are usually closed because of the existence of nonpublic material news. The plan must state the date or a formula for executing the transactions ahead of time. For Carson, one of the company's founders, the sales were his fourth and fifth in November.

Before last month, he hadn't sold since March, when the stock was near an 18-month high. Dynavax shares have had clear peaks and valleys over the past several years. Going back to December 2004, Carson has sold near the top every time. The stock has declined an average of 50% peak to trough after Carson's past three sales.

Those transactions have come after positive data were released or in the instance of his September and October 2005 sales, immediately after Dynavax secured financing and proposed a stock offering, but before the offering was priced.

Deborah Smeltzer, chief financial officer of Dynavax, says that "oftentimes high prices are a trigger in these 10b5-1 plans. It's very normal. That's why these plans exist."

Some analysts believe that the stock's elevated market cap, which is currently about $350 million, reflects expectations that the company could be acquired. Alan Leong of the analysis firm Biotech Stock Research thinks, "Big Pharma can afford to wait." However, he's willing to bide his time as well. "They've got some excellent stuff," he says. "If they execute on the trials, then they'll deserve to go up to a half billion valuation." Leong owns shares of Dynavax.

On a final note, it may be worth noting one recent news item that Dynavax didn't publicize. Jan Leschly resigned from the board Nov. 30, but the company didn't issue a press release. The only way investors would have come across the information is if they checked regulatory filings. No reason was given for the resignation, though the company did say in the filing that, "Mr. Leschly did not have any disagreements with the company."

Leschly has been on the board since 2002. In a response to a request for more information on the cause of the resignation, a Dynavax representative said, "It's quite normal for board members to rotate off after that much time, especially

venture capitalists." Regarding the lack of a press release, she said the company felt the 8-K filed with the

Securities and Exchange Commission

was sufficient.

There are a lot of ifs with this company. If the vaccines are as good as the company says they are, my skepticism won't matter, and the stock will likely rise. However, I expect Carson's latest stock sale will prove to be another well-timed transaction.

Please note that due to factors including low market capitalization and/or insufficient public float, we consider Dynavax to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.

In keeping with TSC's editorial policy, Lichtenfeld doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships.

Marc Lichtenfeld was previously an analyst at Avalon Research Group and The Weiss Group and a trader at Carlin Equities. He holds NASD 86, 87, 7 and 63 licenses. His prior journalism experience includes being a reporter/anchor for On24 in San Francisco and a managing editor of InvestorsObserver, a personal finance Web site. He is a graduate of the State University of New York at Albany. He appreciates your feedback;

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