The Market Completely Misunderstood The Dynavax SD-101 Data

On May 16th, Dynavax Technologies (DVAX) released its abstract for its forthcoming presentation at the June meeting of the American Society for Clinical Oncology, or ASCO. The abstract featured data from its ongoing Phase 1b/2 trial studying a combination therapy of Dynavaxs SD-101, an intratumoral TLR9 agonist, and Mercks (MRK) anti-PD-1 therapy Keytruda for the treatment of advanced melanoma. The abstract offered incomplete data, featuring just 25 patients, whereas the poster presentation at ASCO will show data from over 50 patients and compares SD-101 at two dose levels.

The abstract highlighting data from the 25 patients showed an overall response rate of 60%, a fair bit below the 100% ORR observed in the smaller patient sample in a Phase 1 human trial. The market reacted negatively to the data, driving the share price down 13%. It has since recovered slightly, but remains well below where it was trading in advance of the abstracts release.

The markets reaction is rather odd. It fails to acknowledge that the interim results shown thus far are still positive, if not quite as good as those seen in the tiny Phase 1 study. It also fails to realize that a fuller data set will soon be presented at ASCO and could paint a far clearer, and better, picture. Dynavax remains extremely confident in SD-101s prospects, and the negative market sentiment appears severely overblown.

Why All the Negativity?

It is true that a 60% ORR is hardly going to shake the Pillars of the Earth. But it is still solid data and further highlights SD-101s utility as a combination therapy. The negative market reaction is actually quite surprising, considering that Dynavaxs management has been working hard since the eye-popping triumph of the Phase 1 study to manage the markets expectations. Apparently that did not work out too well, since a 60% ORR sent share crashing.

It probably did not help that Adam Feuerstein, a biotech analyst and Twitter gadfly, took a shot at the SD-101 data abstract, objecting to the exclusion of patients who dropped out of the study from the results:

DVAX reporting SD-101 ORR 60% but that’s excluding 5 patients who dropped out early. Add those patients back (which you should do) and ORR drops to 50%. Meh.

Feuerstein is notorious in biotech circles for his frequently off-putting attacks on companies data releases. Sometimes he has a point; other times he seems merely to have an ax to grind. In this particular instance, it smells more like the latter. However, it is always worth looking at the full data set and patient population, as Feuerstein insists. While it would result in a 50% result, even that is not a bad outcome.

Making Mountains of Molehills

In my recent article on Dynavaxs Q1 2018 earnings report, I reflected on Dynavaxs own benchmarks of success to carry their SD-101 trials into pivotal Phase 3 studies:

An analyst question during the call asked whether Dynavax had set any efficacy benchmarks to determine whether to advance its various early-stage SD-101 trials into pivotal studies. The company opined that a 50% ORR would be considered an appropriate benchmark. Data from a much larger cohort study will be presented at the ASCO conference in early June; the results will likely do much to color the outlook of the various SD-101 applications.

Dynavax also gave some indication as to how it wants to proceed in late-stage clinical trials for SD-101, with a clear preference for a large partner. The company was not willing, however, to opine on the scope of such a deal, such as whether it would be comprehensive or indication-specific. Such reticence is likely wise, since any negotiations could yield substantial near-term rewards in addition to reduced costs. According to CEO Gray, the companys current thinking is this: Prefer a partnership, but always be ready to walk away.

50% is not an insanely high bar, but it is reasonable in the context of a study for the treatment of advanced melanoma. The SD-101 and Keytruda combination therapy is not a frontline treatment. It is specifically designed to combat advanced cancers, and such cancers are inherently more difficult to combat even with the best therapies.

The 25 patients included in the abstract were simply the only ones available at the time of abstract submission in February. The full study cohort is more than double the size, and the results could well be different. Given Dynavax highlighted the ASCO presentation on its earnings call in May, months after submitting the abstract, it would seem like a safe surmise that the full results are at least as good as those shared in the abstract.

Dont Forget the Real Value Driver

It is also worth reflecting on the fact that SD-101 represents only a tiny piece of Dynavaxs value proposition albeit a growing one. Rather it is Heplisav-B, the companys FDA-approved 2-dose best-in-class Hepatitis B vaccine, that will be shaping the near-to-mid-term value of Dynavax. With projected peak annual sales of about $500 million in the United States alone, Heplisav-B promises to be a massively profitable asset.

Heplisav-B commercialization is only just getting underway, so there is still market skittishness about the success of the launch, but Dynavax has the resources necessary to see through the commercial rollout, probably on its current resources.

With $250.8 million in cash and marketable securities at the end of Q1 2018, as well as access to $75 million in non-dilutive debt financing, Dynavax looks well placed to reach its projected profit inflection point at the end of 2019. Indeed, it has enough cash or access to cash to reach Q2 2020, so its commercialization efforts could fall a two to three quarters behind schedule and still not run the risk of a dilutive capital raise. That does not mean a raise will not happen, but it makes the prospect of it happening anytime soon vanishingly small.

Investors-Eye View

The negative reaction to the SD-101 and Keytruda Phase 1/2 trial data is completed out of kilter with reality. The abstract, submitted in February and representing just half of the study population, is an out-of-date snapshot of the data that will be presented on June 4th.

So the markets skittishness looks fairly silly at this point. If the results are a flop at ASCO, then there will be reason to discount the prospects of SD-101. But at this stage, the therapy remains a very strong candidate. Indeed, even taken at their worst as Mr. Feuerstein would have us do, the results are sufficiently positive even at this stage for the planned pivotal Phase 3 study to commence before the end of 2018.

With Heplisav-Bs commercial rollout also underway, we should expect a heap of good news coming out of Dynavax over the next few quarters. Investors would be wise to not allow noise and fear to cloud the real picture.

Disclosure: I am/we are long 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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