Will Dynavax Technologies Corporation Bounce Back in 2014?

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2013 was a rough year for Dynavax Technologies Corporation (DVAX +0.00%).

The company has lost nearly 30% of its market value since the beginning of the year, following two major setbacks for its lead drug candidate, the adult hepatitis B vaccine Heplisav.

Let's take a look back at Dynavax's trials and tribulations over the past year, and see if investors can expect the stock to bounce back in 2014.

Source: Ycharts.

What Dynavax does

Dynavax uses its proprietary ISS (immunostimulatory sequences) and IRS (immunoregulatory sequences) technology to develop treatments for hepatitis, asthma, autoimmune disorders, and inflammatory diseases.

Dynavax's pipeline consists of five drug candidates: Heplisav, DV1179, AZ1419, SD-101, and DV230.

Source: Company website.

It's pretty clear that Dynavax's near-term future is highly dependent on the success of Heplisav. If approved, Heplisav could generate peak sales of $775 million by 2020. Although Heplisav is not expected to be a blockbuster, it would still provide a huge boost for Dynavax, which only reported $9.7 million in revenue in 2012.

Last quarter, 62% of Dynavax's revenue came from grant, service, and license fees. The remainder came from its collaborations with GlaxoSmithKline (GSK 0.11%) and AstraZeneca (AZN +0.00%), which are partnered with the company in the development of DV1179 and AZ1419, respectively.

If approved, Heplisav will have to directly compete against two other hepatitis B vaccines -- GSK's Engerix-B and Merck's (MRK +0.59%) Recombivax HB.

Dynavax has tested Heplisav in two phase 3 trials -- HBV-10 (18-55 year olds) and HBV-16 (40-70 year olds). Both trials achieved their primary efficacy endpoints, defined by seroprotection (an anti-hepatitis B concentration of 10 mIU/mL or greater) rate.

Dynavax definitively proved that Heplisav is more effective than Engerix-B in both trials.

Source: Phase 3 data, industry websites.

Heplisav also exhibited a slightly better overall safety profile than Engerix-B, with a 2.7% rate of serious adverse events, compared to 3.7% for Engerix-B.

Considering that Heplisav appears to be both more effective and safer, why has it apparently stalled out after phase 3?

The FDA repeatedly raises safety concerns

The looming problem is that Dynavax hasn't convinced the FDA that the novel adjuvant in Heplisav, known as a TLR9 agonist, is actually safe. Adjuvants are agents which enhance a vaccine so less foreign material has to be injected.

By comparison, the most commonly approved novel adjuvant is aluminum. In fact, only one other vaccine containing a novel adjuvant other than aluminum -- GSK's HPV vaccine Cervarix, which uses a TLR4 agonist -- has ever been approved. Cervarix, however, was hit by safety concerns earlier this year in Japan, which withdrew its recommendation for the use of the vaccine on young girls due to safety concerns.

In November 2012, an FDA advisory committee voted against Heplisav's approval. The FDA then rejected it in February on grounds that the safety data, specifically in the broad 18 to 70 age group, was not sufficient for approval.

The FDA was particularly concerned about the risk of rare autoimmune conditions such as Wegener's granulomatosis and Guillain-Barre syndrome, which two patients developed during clinical trials. However, the Guillain-Barre case could also have been attributed to an influenza vaccine previously given to the patient.

The FDA was also concerned about the elevated risk of ANCA vasculitis, a type of autoimmune swelling. During the HBV-10 trial, there was one reported case in the Heplisav arm and another in the Engerix-B arm. However, the trial determined that the case in the Engerix-B arm was not related to the treatment, whereas the case in the Heplisav arm was possibly caused by the vaccine. This led to HBV-10 being placed on a temporary clinical hold in September 2009.

In June 2013, the FDA requested additional safety data from Dynavax, again delaying its potential approval. All these setbacks took a hefty toll on Dynavax stock, which lost over half of its value since the committee's negative recommendation last November.

Will things get better in 2014?

Looking forward, Dynavax is moving on to HBV-23, a new trial which will consist of 8,000 patients -- more than the 5,845 patients who took part in the HBV-10 and HBV-16 trials.

HBV-23 will be focused on two objectives -- to prove once more that it is more effective than Engerix-B, and to carefully evaluate adverse events. The first objective should be simple to achieve, but the second objective will be the decisive one.

Dynavax will start enrolling patients for HBV-23 in the first quarter of 2014, and will require eight months to complete. That pushes a potential advisory committee recommendation and FDA approval back to 2016. To gain the necessary funding for HBV-23, Dynavax issued a secondary offering in late October, which raised $125 million but caused the stock to plummet to nearly $1.

Meanwhile, Dynavax will also pursue an approval in Europe for Heplisav for both hepatitis B and chronic kidney disease, an additional indication which it does not plan to pursue in the U.S. However, that's another long-term goal which could possibly face the same problems that the vaccine faced with the FDA.

The Foolish bottom line

In closing, there's not much to look forward to in 2014 for Dynavax. However, it's hard to see much downside for the stock at current prices for three reasons:

• Heplisav is out of the picture until 2016.

• Dynavax now has enough money to fund HBV-23, and won't likely issue additional stock offerings.

• Continuing collaborations with AstraZeneca and GlaxoSmithKline are promising, and will continue to provide Dynavax with stable revenue.

Therefore, Dynavax is a stock that requires a lot of patience. However, at $2 per share, it could be a good long-term speculative play on a promising new vaccine for hepatitis B, which still affects up to 1.4 million people in the United States.

Will this be the top stock of 2014?