Shares of Dynavax Technologies (DVAX), the clinical-stage pharmaceutical company focused primarily on hepatitis B, have been on the move. Their flagship project, HEPLISLAV, is an investigational hepatitis B vaccine. 

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While it’s not a major problem that the 10-month review was granted (versus the 6-month review investors were hoping for), a priority review implies (to some greater extent) that the FDA sees HEPLISLAV as an important biologic to review rapidly for introduction into the market. Under the 10-month review, the FDA has establishes February 24, 2013, as the PDUFA action date.

Dynavax has been experiencing a steady multi-year rally, primarily on HEPLISLAV and its prospects in the hepatitis prevention market. If HEPLISLAV is deemed to be a significant improvement over GlaxoSmithKline’s Engerix-B, Twinrix, and Merck’s Recombivax-HB, it could penetrate into a ~$700 million hepatitis-B vaccine world market with ease (penetration rates remain highly speculative though). The company is valued at $631 million after its recent public offering of common stock, so we could see shares preemptively reflect HEPLISLAV’s potential upon approval.

Dynavax’s other prospects look interesting as well. The company is considering a supplemental BLA for HEPLISLAV chronic kidney disease patients due to their vulnerability to HBV which may allow exposure to alternative markets. There are also three other phase I drugs in the pipeline, although these would be extremely hard to value at this stage.

There is a significant amount of bearish pressure on Dynavax shares (about 13.70 % of shares are short), which may be feeding off the negative sentiment associated with their recent stock offering, but this could be temporary.

Shorts must also be careful of developments that could trigger their own sentiment-driven rallies, including news on the firm's planned submission of a European Marketing Authorization in Q3 2012. There is also potential for Dynavax to further develop HEPLISLAV for the huge nephrology drug market.

We feel that the downside risk here is limited so long as there is no obvious sign of an FDA rejection for HEPLISLAV down the road. At the same time, the upside could be tremendous given the recent popularity of hepatitis-based investments.

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