A Biotech With Enormous Potential

I hope everyone in the Real Money Pro community had an amazing Turkey Day. In the spirit of the holidays, for the next five Fridays leading up to the end of the year I am going to highlight some high-risk/high-reward small-cap plays that I believe could have stellar years in 2015, and could make for wonderful stocking stuffers. I have had some big winners this year among the biotechs I hold that are focused on liver-disease treatments. These have included Gilead Sciences (GILD), Achillion Pharmaceuticals (ACHN) and Conatus Pharmaceuticals (CNAT). Next year, I am counting on DynaVax Technologies (DVAX) to continue that winning trend. Dynavax is a small biotech company that is pioneering a new approach to therapies for multiple autoimmune and inflammatory diseases, including lupus, psoriasis, and rheumatoid arthritis. But the company's lead product, and what will move the stock in 2015, is a vaccine that is targeted at hepatitis B. Hepatitis B, the most common serious liver infection in the world, comes in two varieties: acute and chronic. Most individuals have the acute version of this disease, which affects the individual for one to four months with symptoms such as fatigue, appetite loss, nausea, itching and jaundice, as well as aches in the liver region. This version of the disease is usually defeated without drugs over a few months. The chronic version of hepatitis B, however, does not go away by itself, and can cause a form of liver cancer and death. Children are particularly at risk if they are infected with this type of the disease. DynaVax's proposed vaccine against the illness, Heplisav-B, is currently in its second go-around for Phase III trials. The results from its initial Phase III trials were encouraging when disclosed in late 2012, but neither the Food and Drug Administration (FDA) nor its European equivalent would grant approval for the compound. Both agencies felt that not enough test subjects were involved in these studies to provide for sufficient confidence in the efficiency and safety of the vaccine. The stock of Dynavax, which had ran up to more than $4.50 into the conclusion of those original Phase III trials, was crushed on the back of non-approval. In all, they plunged to about $1 in the few months thereafter. Since that decline, I have been building a position in this promising vaccine play as the company has gathered itself to overcome the obstacles regulators have put in front of it. Specifically, Dynavax spent the better part of a year enrolling more than 8,000 patients in a new Phase III study for Heplisav-B. The enrollment was just completed recently and, as a result, the stock has behaved better of late. Separately, the company just initiated a reverse 10-for-1 stock split, so the shares now trade for around $15. I believe there is a solid possibility that Heplisav-B will be approved soon after this huge study is completed -- probably sometime in the second half of 2015. The company has approximately $150 million in net cash on the balance sheet, and should not have to access the capital markets in the near term to raise additional funds for development. The stock has a total market capitalization of around $400 million. I believe DynaVax stock will run up into the trial results in the back half of 2015, just as it did in during the previous trials. If the shares stage the same sort of rally, investors could easily see the reach $30 to $40 sometime in the next year. At that point, and prior to the release of the trial results, I would take some profit. If the results trigger approval of Heplisav-B, the stock will go higher still. At this valuation, I like the risk-to-reward scenario of this small biotech play. The market seems to be severely discounting DynaVax's chances of approval of its hepatitis B vaccine, and is granting no value to the other early-stage drugs in the company's pipeline.

A Biotech With Enormous Potential

The market seems to be severely discounting DynaVax's chances of approval for its hep-B treatment.

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