You've probably heard the old investing phrase "buy the rumor, sell the news." The idea is that anticipation of a positive development will cause a stock price to move higher, but there's a good chance the stock will fall after the positive development is a sure thing.
For Dynavax Technologies Corporation (DVAX +0.00%), this old adage was spot-on. Between Jan. 1 and Nov. 8, 2017, the biotech stock increased more than fivefold. Investors eagerly awaited FDA approval of Dynavax's Heplisav-B hepatitis B vaccine. After two unsuccessful attempts at approval, Heplisav-B finally won a green light from the FDA on Nov. 9. Since then, Dynavax's share price has dropped 37%.
There aren't any rumors swirling about Dynavax now. But should investors consider buying the beaten-down biotech stock?
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A slow process
Probably the biggest reason behind the significant drop in Dynavax's share price is that the commercial launch of Heplisav-B appears to be moving along as slow as molasses. The company launched the vaccine in January 2018. Dynavax reported Heplisav-B sales of around $200,000 in the first quarter and $1.3 million in Q2.
The reality in the medical world, though, is that it takes time for a new vaccine to be accepted when other vaccines are already available. GlaxoSmithKline's Engerix B and Merck's Recombivax HB have been on the market for years, although Merck's vaccine shortage has worked to Glaxo's benefit in 2017 and 2018.
One challenge for Dynavax in launching Heplisav-B is that healthcare providers typically already have contracts in place to purchase these existing vaccines. An even bigger issue is that providers go through a multi-step process before going with a new product. They usually have a pharmacy and therapeutics (P&T) committee review, which often follows sub-committee reviews. To make the situation even more difficult, some providers greatly limit any contact between companies like Dynavax and the members of the P&T committee.
Another hurdle is securing reimbursement for a product. It doesn't mean a thing if a healthcare provider agrees to use a new vaccine but insurers and government agencies won't pay for it.
Dynavax did report good news on these fronts in its Q2 update, though. The company is targeting in the ballpark of 2,000 key potential customers and has established contact with 90% of them. Of these, 219 customers have completed their P&T committee reviews, with 91 ordering Heplisav-B already. Another 198 customers have P&T committee or sub-committee reviews scheduled. Dynavax CEO Eddie Gray said that so far very few customers have said "no" to using Heplisav-B.
The company also gave a good report on reimbursement. All patients on Medicare are now covered for reimbursement of Heplisav-B. Ninety-four percent of individuals with commercial insurance are now covered. The lowest coverage rate is for state Medicaid plans, with 73% coverage.
Looking at the numbers
I think it's a matter of when, not if, most healthcare providers implement the use of Heplisav-B and most of the remaining state Medicaid plans provide coverage for the vaccine. In clinical studies, Dynavax's vaccine achieved higher rates of protection than market leader Engerix B with a similar safety profile. And it required only two doses instead of the three doses required for GlaxoSmithKline's hep-B vaccine. Healthcare providers know that many patients never take that third dose.
My view is that over time Heplisav-B should become the standard of care, displacing Engerix B as well as Recombivax HB and likely expanding the market. If this happens as I expect it will, Dynavax should be able to rake in revenue in the neighborhood of $500 million annually from U.S. sales of its vaccine.
Dynavax's market cap currently stands at close to $790 million. It definitely doesn't look like the full potential of Heplisav-B is being factored into the biotech stock's price, especially considering the prospects for Dynavax to eventually win regulatory approval for the vaccine in other countries. It's also important to remember that Dynavax has other pipeline candidates that don't appear to be fully baked into the stock valuation.
The biotech reported positive results earlier this year from a phase 1/2 study evaluating TLR agonist SD-101 in combination with Merck's Keytruda in treating advanced melanoma. Dynavax hopes to advance SD-101 to phase 3 in the near future. In addition, the company is evaluating DV281 in a phase 1 study targeting the treatment of non-small-cell lung cancer with a phase 2 study potentially starting up in early 2019.
Buy the reality?
Yes, Heplisav-B has a long way to go to get to anywhere close to $500 million in annual U.S. sales. Maybe it won't even make the roughly $270 million that existing vaccines generate. But for that to happen, healthcare providers will have to choose to continue using older vaccines that aren't as effective and require an additional dose that many patients never take. Is that a good bet? I don't think so.
It could take a while, though. Wall Street projects Dynavax will make around $15 million in revenue this year and $84 million in 2019. However, I suspect the floodgates will open after that.
I don't think you have to buy the rumor with Dynavax anymore. My view is that the reality looks like a good enough reason to buy this biotech stock.
