Questions Arise After Dynavax Offering

The timing and pricing of a stock offering just before positive research results raise eyebrows.
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Some investors in Dynavax (DVAX) - Get Report must be marveling at their good fortune, at least those who were able to buy shares of the Berkeley, Calif.-based biotech company at $4.40 in a hastily arranged stock offering on Wednesday, Oct. 4.

Imagine their glee when the stock opened Thursday at $6.35 and closed at $7.70 after a

New England Journal of Medicine

article was released Wednesday night stating that Dynavax's allergy therapy "appeared to offer long-term clinical efficacy in the treatment of ragweed allergic rhinitis." A 75% one-day gain. As my boss on the trading desk used to say, "That's some sweet corn!"

Who Knew What, and When?

Several questions come to mind when looking at this deal. If the company knew that the positive data were going to be released, why did management rush to do an offering on Wednesday?

The

NEJM

alerts the scientific media on Fridays to what it will publish in the coming week's edition, and journal subscribers get the news on Tuesdays, rather than Wednesdays. Dynavax acknowledged it knew as early as Friday that the positive article would be published Wednesday. It also acknowledged that the stock offering deal was put together overnight.

Dynavax sold 6.2 million shares at $4.40, grossing roughly $27 million. Had it waited a day and sold at Thursday's closing price, Dynavax could have taken in nearly $48 million -- quite a difference for a company with $60 million in cash and negative operating cash flow of $34 million over the past 12 months.

Dynavax's Chief Financial Officer Deborah Smeltzer says, "You never know what kind of impact a publication will have." The financing transaction occurred quickly because "we had very specific interest from key investors," according to the CFO.

She adds that the market was aware that Dynavax needed to raise money and that overhang was likely holding back the stock. "We knew we had buyers at a specific price," she states. "That's why it was done quickly and overnight, and it removed the risk of financing from the perception of the company's valuation."

Smeltzer points out that these deals are usually done at a discount, but the Dynavax offering was completed at Tuesday's closing price. The CFO would not disclose who the buyers of the offering were other than to say they were large institutions, some of which were existing shareholders and some new. However, regulatory filings show that James Flynn of Deerfield Management (which owns 15% of the company) purchased 950,000 of the shares on Wednesday and scored a nice $3.1 million one-day gain. Calls to Deerfield seeking comment were not returned.

"The deal smells fishy," says one institutional analyst who wishes to remain anonymous and who doesn't own shares of the company. "Obviously, they

Dynavax knew the study was going to be published," he says. "It seems funny to raise money the night before."

Does the Drug Work?

While Dynavax was thumping its chest like an NFL defensive lineman holding LaDainian Tomlinson to a three-yard gain, it's important to actually read the

New England Journal of Medicine

article that propelled the shares skyward.

The phase II placebo-controlled trial of Tolamba, a ragweed-pollen antigen vaccine, failed to meet its primary endpoint: a decrease in albumin in nasal fluid. Albumin is a protein that indicates vascular leakage and inflammation, and it is reduced by standard allergy immunotherapies.

The study did show a decrease in the number of sneezes and other rhinitis symptoms, many of which were reported by the patients themselves.

What is also surprising about the reaction to the study is that the data are five years old and that the trial consisted of just 25 patients, only 10 of whom actually received the drug and completed treatment. A follow-up a year later also showed fewer symptoms, although only six of the original 10 were still in the program.

Dynavax has already released more current data than what were published in the

NEJM

. In January, the company said patients benefited from Tolamba in phase II/III trials that took place in the 2004/05 ragweed seasons. Additionally, Dynavax expects to release new phase III data in the first quarter of 2007. The primary endpoints of the more recent trials are a reduction in the Total Nasal Symptom Scores (TNSS), which are a measure of mostly qualitative symptoms -- congestion, itchiness, runny nose and number of sneezes.

The company certainly can't control overzealous buyers who don't bother to read the results of the study. However, with a press release planned to trumpet the article, the company knew good news was about to hit the tape. Did it leave money on the table, enriching a few at the expense of its existing shareholder base? At best, the timing of the transaction appears irresponsible. Investors might want to think twice before casting their line into these waters.

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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