Is Dynavax an Underdog -- or Just a Dog?

Short-sellers and hedge fund managers may be shadowy, but sometimes they are the smartest guys in the room. They've done their homework, and they're willing to bet their capital against the crowd -- an investing strategy that can be as lucrative as it is contrarian.

On Motley Fool CAPS, we've also got leading analysts who find the chinks in a company's armor and correctly call its fall. Our "Underdogs" have earned 100 or more CAPS points by correctly predicting that one or more stocks would underperform the market. So if there are investors who've scored big by correctly predicting which stocks will fail, it may be worth our while to check out those they think will succeed.

Today I'm looking at drug developer Dynavax (NAS: DVAX) , which has more than doubled off the lows it hit following mixed results last year for its hepatitis B vaccine Heplisav. Although it recovered the lost ground after submitting a biologics license to the FDA this past April, it tumbled once more the following month after pricing a secondary offering at a steep discount and saying its CEO was resigning.

It's been an up-and-down -- and up again! -- ride since then. However, nearly two dozen All-Star CAPS members have weighed in on the drugmaker, with 85% thinking it will beat the Street.

Dynavax Snapshot

Market Cap$764 million
Revenues, TTM$18 million
1-Yr. Stock Return100%
Est. 5-Yr. EPS GrowthN/A
Dividend & YieldN/A, N/A
Recent Price$4.30
CAPS Rating (out of 5)**

Source: The Motley Fool.  TTM = trailing 12 months.

Of course, stock prices can be irrational longer than you have money to stay in the game. And you don't want to end up with fleas by lying down with dogs until you do your homework.

One of the hep cats
The road hasn't been straight or smooth for Dynavax, but Heplisav is moving forward nonetheless, and the company recently announced that the FDA's advisory committee for vaccines and biological products was taking up the application this November. With confirmation that its hep B drug is at least as good as GlaxoSmithKline's (NYS: GSK) Engerix-B vaccine, the likelihood the panel will give it a thumbs-up is much greater than it was.

The global market for hepatitis B drugs was about $3.1 billion in 2011, and is estimated to hit $4.4 billion by 2019, a 4.8% compounded annual growth rate, markedly slower than the 8.6% rate realized over the last five years.

Doing their job too well
The reason for the slowdown, however, has been the rise in vaccinations. Since 1982, the CDC has recommended that all adults and children be vaccinated, and between 1990 and 2009, the number of new infections dropped 90% in children and by 75% in other age groups. Even so, 38,000 people were infected with hep B and some 2,000 to 4,000 people will die from it every year.

So there's still a big market for vaccines, with the opportunity estimated to grow to around $1.4 billion by 2018. Of course, those kinds of numbers also attract competitors, and some better-financed rivals currently dominate the market. Dynavax's product will need to continue offering compelling efficacy in order to supplant Glaxo and Merck (NYS: MRK) , who reign over the hep B market. (Sanofi's (NYS: SNY) hep B work is geared toward children.)

While Heplisav is the key for Dynavax's immediate future, it has a number of irons in the fire, including partnerships with AstraZeneca (NYS: AZN) for an asthma therapy and with Glaxo for treating autoimmune and inflammatory diseases. AstraZeneca's paying for development expenses up to $20 million on the asthma treatment, but it's only in preclinical trial stages right now, while the autoimmune and inflammatory disease therapy has so far made it out of phase 1 testing successfully.

Might I also suggest that should Heplisav fall its way, it may become an attractive takeover target for one of its powerful partners?

Money ain't cheap
Relying upon the kindness of strangers as Dynavax does explains why it sometimes needs to tap into the public markets to raise money to fund operations, though investors would wish it didn't undersell the stock in the process. When it executed its secondary offering back in May, it priced shares at a 17% discount to where it was trading at the time, causing the stock to plummet 22%.

A lot can go wrong with biotechs on the path to drug approval, and CAPS member pchop123 thinks it will "run out of upside" before gaining approval. However, I'm rating Dynavax to outperform the market on CAPS, believing it will achieve positive outcomes in November. Let me know in the comments section below if you agree that this drugmaker isn't a dog riddled with fleas but one still with a lot of promise.

There's no need to fear...
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