Dynavax Surge Not Warranted

Dynavax: Surge on Heplisav Phase III or Swine Flu?

In early morning trading, Dynavax Technologies Corp. (DVAX - Snapshot Report) shares shot up dramatically (36%). However, we don't see a clear reason for that.

The surge may be related to two pieces of news: phase III Heplisav data and the swine flu breakout.

The first piece of news is about its phase III candidate Heplivsav. This morning, the company announced the oral presentation of additional phase III clinical data for Heplisav hepatitis B vaccine in a session for late-breaking abstracts at the 44th Annual Meeting of the European Association for the Study of Liver Disease (EASL) in Copenhagen, Denmark.

In the presentation, Heplisav met its primary endpoint in this phase III trial and demonstrated the vaccine's potential to provide more rapid and increased protection against hepatitis B viral infection and with fewer doses than the licensed vaccine.

This phase III trial referred to as PHAST (Phase III HeplisAv Short-regimen Trial) evaluated more than 2,400 adults. The seroprotection rate at the primary endpoint was 95% in subjects receiving 2 doses of Heplisav at 0 and 1 month, compared to 81% in subjects receiving 3 doses of licensed vaccine Engerix-B at 0, 1 and 6 months. At each time point, there was a statistically significant (p < 0.0001) difference in the seroprotection rate for subjects receiving Heplisav or Engerix-B.

As previously reported, safety results from this trial demonstrated the safety profile of Heplisav and Engerix-B appeared similar. Subjects were randomized 3 to 1 to receive Heplisav or Engerix-B and one case of vasculitis was reported in each of the treatment groups. Following the report of the severe adverse event of Wegener's granulomatosis, an uncommon form of vasculitis, Heplisav was placed and remains on clinical hold by the FDA.

Even though the company believes that it can provide the data requested by the FDA, we think that the demise of the agreement with Merck (MRK - Analyst Report) coupled with the clinical hold on the two INDs is a severe blow to Heplisav getting approved by the FDA. Theoretically the company can still develop Heplisav for patients with renal failure. However, we don't think it to be a likely occurrence. Even if the company develops the drug for that sub-population, the market is too small for Heplisav to make a significant contribution to top-line growth.

Therefore, the surge of the company's share price is not justified by the news about the phase III trial.

The second piece of news for the surge is probably the swine flu in Mexico and the potential breakout worldwide.  In reaction to the swine flu news, biotech companies which are engaged in the research and development of flu products are all lifted up this morning.

DVAX is also developing a flu vaccine, but it's only in preclinical development. Its flu vaccine confers immunity to widely divergent viral strains and has potential as a universal flu vaccine. In mice and primates, co-administration of Dynavax's flu vaccine with standard vaccine enhances the immune response to the standard vaccine, and may allow reduction of dosage while inducing comparable protective immunity.

In addition, the enhanced immunogenicity and cross-protection of the Dynavax vaccine may provide immunity that can last for more than one year, potentially enabling the elimination of annual vaccination and stockpiling of vaccine for pandemic use. Standard flu vaccines are designed to generate neutralizing antibodies against viral surface proteins (hemagglutinin, or HA and neuraminidase, or NA). These proteins mutate rapidly and a match between vaccine and current circulating virus is required to generate immunity.

In contrast, the Dynavax Universal Influenza Vaccine combines a proprietary second-generation TLR9 agonist immunostimulatory sequences (ISS) with two conserved influenza antigens, nucleoprotein (NP) and the extracellular domain of matrix protein 2 (M2e) and a trivalent influenza vaccine.

M2e/NP-ISS induces a potent NP-specific cell mediated immune response and M2e-specific humoral response. The Dynavax vaccine is designed to be differentiated from other influenza vaccines by providing both an adjuvant effect to enhance the immunogenicity of the seasonal vaccine and cross-strain protection via conserved influenza antigens. The conjugates can be combined with the standard flu vaccine to confer cross-protective effect and to generate antigens capable of inducing potent immune responses.

Dynavax has an agreement with Novartis Vaccines and Diagnostics, Inc. for the supply and development, and possible commercialization, of Dynavax's novel Universal Influenza. Under the agreement, Novartis (NVS - Snapshot Report) will provide Dynavax a supply of trivalent influenza vaccine, an essential component of Dynavax's Universal Influenza Vaccine, for both clinical trial use and vaccine sales. Novartis receives an exclusive option to negotiate a Joint Development and Commercialization Agreement with Dynavax.
 
Apparently, the 36% surge in share price is not justified by the swine news either, in our view, considering the company's universal flu vaccine is only in preclinical studies. Therefore, we are cautious on the surge and remain neutral for DVAX.