The first rule of running a biotech company: Don't run low on cash. Once investors smell a cash squeeze coming, they'll hammer shares mercilessly.
That was the painful lesson learned by the executives at Dynavax Technologies (DVAX). Though DVAX was pursuing the development of a very promising new vaccine, the company was burning through more than $15 million in cash every quarter, and was at risk of not making it to the FDA finish line. Shares, which traded around $5 in October 2012, skidded all the way to $1.
The good news is that the company shored up its balance sheet late last month, and shares have finally begun to rebound. And, with a few breaks, DVAX looks poised to rise from a recent $1.45 to $3, $4 or even $5.
Little Company, Big Target Market
DVAX has spent years developing Heplisav, which is a vaccine for hepatitis B, a disease that currently afflicts 240 million people around the world, according to the World Health Organization.
Though there are existing vaccines on the market, DVAX believes that Heplisav offers the promise of earlier and better protection with fewer doses than current vaccines.
It appeared it was going to be smooth sailing through the FDA approval process until late last year. The FDA seeks two virtues from any new drug: higher efficacy and a comparable or improved safety profile compared to existing drugs.
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On the first count, the FDA gave a resounding thumbs-up, as an advisory panel voted 13-to-1 in favor of the drug's increased effectiveness. But the FDA also decided that DVAX had not sufficiently proved that Heplisav was safe.
The FDA did not say that Heplisav was unsafe, only that the clinical trials thus far couldn't conclusively prove that the drug was safe. And the company has been scrambling ever since to deliver better data, essentially conducting a completely new Phase III clinical trial. For much of 2013, DVAX has been designing that new trial, and the company recently announced that it will get under way in a few months.
Though that Heplisav trial will not be completed until sometime in 2015, management is likely to deliver interim results throughout 2014, which should serve as catalysts for the stock.
Meanwhile, Heplisav is also in front of the European Medicines Agency (EMA), and the company is expected to respond to the EMA's final information queries later in the fourth quarter and in early 2014. European approval of Heplisav would quickly push this stock toward the $2.50 to $3 mark, and shares would likely move higher from there as U.S. approval starts to come into focus.
So, what would this stock be worth if DVAX receives both European and U.S. approval for Heplisav?
The current hepatitis B vaccine market is around $700 million, led by vaccines offered by GlaxoSmithKline (GSK) and Merck (MRK), which require three doses. But, according to DVAX, poor compliance is an issue, with only 30% of the people that should get all three required doses doing so. Also, the current vaccines have a slow onset of protection and aren't always effective, especially in people over 40, or those that also have other ailments such as diabetes.
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DVAX's Heplisav, which provides more rapid protection, has also been shown to have high levels of efficacy in those who are less responsive to currently licensed hepatitis B vaccines, such as males, people who are obese, and smokers, as well diabetics. This could lead to greater demand for DVAX's vaccine compared with others.
Moreover, Heplisav may come with a higher price tag than current vaccines. As a result, the $700 million market may expand beyond $1 billion if Heplisav gets approved.
Assuming a $1 billion sales base and 15% operating margins, DVAX would be poised for $150 million in annual profits. The company would likely be worth 10 times that peak profit forecast, or $1.5 billion. The company's current market value is below $400 million, so shares appear to have 200% to 300% upside if both the U.S. and Europe approve Heplisav.
Understand that these are rough estimates, and the ultimate market value will be easier to determine once the company's pricing strategies are better articulated. (More than likely, DVAX would be acquired by a large drug company before actual drug sales took place.)
For now, it's safe to say that the current market value sharply discounts future success, as shares are only starting to recover from the balance sheet issues discussed earlier. Notably, trading volumes now exceed 5 million shares in many sessions, up from around 1 million shares per day earlier this year, reflecting a dramatic increase in investor interest.
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Another bullish sign is that since Nov. 6, shares have risen in every trading session (though they still remain well below the $5 levels seen a little more than a year ago. I think longer-term shareholders could see the stock move beyond the $5 mark, a more than 200% gain from current levels.
Recommended Trade Setup:
-- Buy DVAX up to $2
-- Set stop-loss at $1
-- Set initial price target at $3 for a potential 50% gain in six months