Dynavax Technologies (DVAX) has been making solid strides in its efforts to launch Heplisav-B, its novel best-in-class Hepatitis B vaccine, since it won FDA approval last year on the third attempt. We have written research notes in the past reflecting on the challenges of 2017 and celebrating its eventual triumph with the federal drug regulator.
Our most recent research note discussed the company’s Q1 2018 earnings report and conference call, which took place on March 8th. We highlighted the good progress being made on bringing Heplisav-B to market, as well as Dynavax’s strong financial position and solid pipeline. We have consistently highlighted the value of Dynavax’s approved product, as well as the accretive value we believe will be unlocked as more data emerges from the ongoing trials of SD-101, the company’s lead immuno-oncology pipeline candidate. For months, we have called Dynavax a solid buy, and have frequently referenced a 12-month price target of $30 to $35.
Yet the stock market has largely failed to heed our analysis, favoring a much grimmer outlook for the developmental-turned-commercial biotech firm. Closing at $16.05 a share on March 9th, Dynavax was down 3% since reporting earnings, and down 35% from its 52-week high reached shortly before the FDA approved Heplisav-B on November 9th, 2017.
The picture brightened a bit on May 10th off the back of JPMorgan (NYSE:JPM) initiating coverage with an "Overweight" rating and a $27 price target. Other analysts have likewise reiterated buy ratings with the expectation of considerable upside. The result of this analyst action was a spike in the share price to a close of $18.75.
While this is a welcome development, it is not the first time Dynavax shares have headed upward in recent months only to drift back down. And even after its scorching performance on May 10th, it is still trading well below where it was around the time of approval.
How is it that Dynavax could trade so far below where it was before it even had an approved product?
The answer to that vexing question lies in a fateful decision taken by Dynavax’s management: to forego a commercialization partnership in which a large and established pharmaceutical company would take over the marketing of Heplisav-B in exchange for an upfront cash payment, various sales milestone payments, and a percentage of all sales revenues. Instead, Dynavax has decided to go it alone. Such a strategy, if executed successfully, means the company gets to keep all the income from product sales. But it also means the company must foot the expenses involved in a commercial launch and must build and train a sales and marketing team, often from scratch.
The approach Dynavax has chosen is manifestly riskier, so it is understandable that the market would be skeptical, especially during the early phases of commercialization. But the steep haircut to the share price since management made its fateful decision looks radically overblown.
Is there something else behind the extreme market skepticism?
To answer this question, we engaged in an extensive historical analysis of price action before, during, and in the wake of FDA approvals, looking for patterns in market response generally, and between two subsets of companies: those that opted for a commercial partnership, and those that opted to go it alone.
While our analysis remains preliminary, we have observed a pattern: that the market has very little faith in developmental biotech firms" ability to transition into commercial-stage companies and punish them harshly, and that the harshness of this punishment has been magnified in recent instances.
So why does the market have less faith in transitional biotechs now?
The reason for the harsher treatment, we suspect, is the fair number of high-profile commercialization troubles, or outright failures, experienced by other companies trying to make the transition relatively recently. While there are quite a few culprits in this rogue’s gallery of mismanaged commercial rollouts, Synergy Pharmaceuticals (SGYP), which reported Q1 2018 earnings after hours on May 10th, has gotten the lion’s share of attention in recent weeks.
Synergy has burned through cash at an alarming rate in an effort to market Trulance, a therapy originally approved last year for the treatment of chronic idiopathic constipation, but with an expanded indication to treat irritable bowel syndrome with constipation. Many shareholders and analysts – including yours truly – gave Synergy’s management the benefit of the doubt, believing it could successfully commercialize Trulance due to a favorable profile making it a best-in-class competitor to market leader Linzess, which is sold by Allergan (AGN) under license from Ironwood (IRWD).
Unfortunately, Synergy’s commercialization efforts have proved extremely expensive, while managing to make progressive, but troublingly slow, headway into the market. Trulance continues to grow its market share and prescription numbers are rising, but not at a pace investors demand – and way behind Linzess when comparing their commercial launch trajectories head-to-head. The result of the slow ramp has been punishing dilution and subsequent share price deterioration as a large swathe of the market has lost confidence in Synergy’s ability to deliver on the true potential of Trulance, and does not believe it will ever reach the level of peak sales previously predicted.
But what does Synergy’s struggle have to do with Dynavax?
As we stated before, the market has become much less forgiving of developmental-stage biotechs trying to make the transition into full-fledged commercial ventures. Burned by the likes of Synergy, the markets seem to be saying loud and clear that they want developmental biotechs to keep developing drugs and leave the sales to the big boys.
So, when Dynavax opted to go it alone, the baggage of other fraught – or failed – transition attempts spring more readily into investors’ consciousness. Investors realize that valuable products may never reach their potential in the hands of incompetent management. They want their biotech investments to hand over the assets to companies that can credibly unlock their full value, while also shouldering the costs of marketing.
Did Dynavax make the wrong decision?
In listening to various conference calls and presentations conducted by Dynavax CEO Eddie Gray in the weeks and months after Heplisav-B received approval, it is easy to hear a tone of perplexity in his tone when talking about the company’s stock price action. Like many analysts, as well as investors who opted to hold their shares through the pivotal catalyst, the fairly rapid price drop and continued anemic trading price came as something of a surprise. To be sure, a bit of “selling the news” action was to be expected. But the persistent low share price has clearly been both perplexing and galling.
We argued in multiple research notes published before and after Heplisav-B was approved that Dynavax would be better off, and its shareholders better served, by accepting a commercial partnership. However, since deciding to take the plunge, Dynavax has shown considerable competence in building out a smart, lean commercialization strategy that looks like it will, in fact, succeed. But the market will not be satisfied until it sees the revenues start pouring in. The company is not quite at that stage yet, but we anticipate considerable revenues in Q2 2018, with rapid growth through the rest of the year.
Is Dynavax different?
One of the problems of market psychology is that it results in a degree of contagion. Specifically, when some companies stumble with a certain strategy in a given industry, the default assumption becomes one of skepticism to any similar attempts by other companies. That kind of heuristic is not wholly unjustified in a general sense, but its efficacy is diminished when discussing so heterodox an industry as developmental biotechs.
Here is the rub: Because these companies are dealing in vastly different drugs, with different price points, patient profiles, market sizes, and competitive environments, tarring all transitional companies with the same brush is a very bad idea.
Other than sharing a similar phase in their corporate life-cycles, there is very little similarity between what Dynavax and Synergy are selling. And those differences have immense impact on the likelihood of success for each. Yet, in the comments section of numerous articles, we have seen statements to the effect that Dynavax is on course to follow Synergy down the toilet. In our estimation, this strange conclusion could hardly be further from the truth.
Comparing Dynavax to Synergy
Interestingly, Heplisav-B and Trulance have very similar projected peak sales, amounting to about $500 million in annual peak revenue. Yet, on almost every other meaningful level, Dynavax faces a very different, and far easier, market. We will address the three major reasons for this in turn.
Product differentiation
Heplisav-B is the only approved two-dose Hepatitis B vaccine. This represents a huge advantage over incumbent vaccines, which rely on three-dose regimens and experience worryingly low levels of compliance. Existing vaccines also lack efficacy in certain vulnerable populations in which Heplisav-B has been shown to be effective. Diabetics are the biggest such population and present a virtual green-field opportunity for Dynavax to pursue in the coming years.
Synergy’s Trulance, on the other hand, does show modestly better efficacy than Linzess, but the difference is not massive. The limited superiority means it is relatively more challenging, though far from impossible, to get prescribers to switch from Linzess to Trulance, or to add Trulance to their arsenals.
Furthermore, there are many over-the-counter drugs and therapies for dealing with severe and chronic constipation issues, and many patients opt for this cheaper option even when it is manifestly less effective.
Cost of reaching decision-makers and prescribers
While Synergy has had to try to raise awareness among a vast universe of physicians, hospitals, clinics, and insurance providers, Dynavax is able to address the lion’s share of its market through a relatively limited number of engagements. This is because Hepatitis B vaccines are administered in a relatively small number of facilities.
The cost of market access, and of maintaining a competitive sales team, is thus much lower for Dynavax and reduces the risk of the sort of ruinous cash burn that has afflicted Synergy since its commercial launch of Trulance.
Competitive pressures
The relative challenges posed by their respective competitive landscapes also reveals a stark contrast between Dynavax and Synergy. Synergy has had to face off against two players in the market, with market leader Linzess backed by the marketing muscle of a massive, diversified pharmaceutical company with long experience in drug sales in a wide range of markets.
Television ads for Linzess are common, and appear to have become more ubiquitous in recent months in an evident effort to crowd out public awareness of the upstart competitor. Synergy simply lacks the resources to compete on the same footing, so it has to rely on manpower-intensive sales and marketing tactics to build awareness among prescribers.
Dynavax, conversely, faces a rather open field – and not merely because of its obvious status as the best-in-class vaccine. There are, in fact, two producers of a three-dose vaccine, Merck (MRK) and GlaxoSmithKline (GSK). But while these pharma giants might, under conventional circumstances, look like an existential threat to puny Dynavax, both have faced considerable manufacturing problems that have contributed to a shortage of Hepatitis B vaccine. Furthermore, the patents protecting these legacy vaccines are set to expire over the relative near term, which will likely have the added effect of diminishing these big pharma players’ desire to go head-to-head with the new best-in-class product.
Investors" Eye View
While it is still relatively early days for the Heplisav-B commercial rollout, things appear largely to be moving according to plan. Dynavax has enough cash on its books to get well into 2020, even without any revenues, and is thus set to reach the inflection point into positive cash flows – and it has a fair amount of wiggle room thanks to its cash pile and value accretion from an accelerating immuno-oncology pipeline.
Synergy, on the other hand, has been wracked with problems even as sales have grown. The cost of making sales has been enormous, and cash burn continues to raise red flags even after the company raised funds through a painful dilutive offering and accessed a substantial private loan facility.
Are we being too harsh on Synergy?
It is perhaps unfair to be entirely doom-and-gloom about Synergy. Yet, that has undoubtedly become the prevailing mood in the market. A nascent shareholder revolt has started in an attempt to force management’s hand to shift strategic direction and look for a commercial partner or outright buyer. But for all the negativity, the prescription growth rate, if it can be enhanced even moderately, could well be enough to get Synergy across the line of profit inflection before the bank runs dry.
Synergy is definitely not doomed, and the market may even be treating it overly harshly. But it lacks both Dynavax’s room to maneuver and its promising pipeline. Synergy really only has the one shot, which means it cannot afford to miss.
Where to from here?
Coming to our conclusion at last, it should be clear now that not all transitions from developmental-stage to commercial-stage biotech are created equal. Dynavax is well-positioned to triumph, and its share price will undoubtedly begin to perk up once investors are finally shown the commercial success. Synergy too can still deliver for shareholders, though its path remains a tougher one.
Dynavax is being tarred unfairly with the same brush as similar-stage companies that stumbled at the post. It deserves a chance to deliver, and it appears to be solidly on track to do so.
Disclosure: I am/we are long SGYP, DVAX.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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