Clinical Hold on Dynavax Drug

Dynavax Technologies Corporation (DVAX - Snapshot Report) just discontinued its Tolamba program for allergy and has only one late-stage product candidate, an investigational hepatitis B vaccine Heplisav, under phase III clinical development.

We are intrigued by Dynavax's proprietary ImmunoStimulatory Sequence technology, but disappointed with the clinical hold on its lead candidate Heplisav. The Food and Drug Administration has placed the clinical hold on Heplisav because of a serious adverse event that occurred in one subject outside the United States. Therefore, we maintain our Hold rating on DVAX shares.

The clinical hold on Heplisav will certainly delay the approval of this drug. In a worst case scenario, Heplisav may never reach the market. The clinical hold may also hurt the relationship with Merck (MRK - Analyst Report) the company established late 2007. With the delay or elimination of Heplisav approval, we do not model any royalties on sales of the drug now until we get additional update on this issue. The death of the Tolamba program eliminated another value driver for the company.

We arrive at our target price of $2 using price-to-sales (P/S) multiple of 4 x multiplied by our estimated 2011 estimated revenue of $61.5 million, discounted at 30 percent for three years assuming 55 million shares outstanding. The 4 x P/S ratio is only half of the biotech industry average P/S ratio of 8 x. This discount is warranted due to the uncertainty of Heplisav.

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