Dynavax Technologies is Still a Strong Buy
“A citizen of America will cross the ocean to fight for democracy, but won’t cross the street to vote in a national election.” – Bill Vaughn
The biotech sector continued to drift down as it has done for a month now after a big rally in July into early August. Sentiment on the industry and the pharma sector has turned more negative as drug price “gouging” has again become a political focus area in front of a contentious upcoming election. Luckily, the election is a little over two months away now and the sector can soon put this distraction in the rear view mirror. Hopefully, we will continue to have a divided government and the sector will see little major legislative changes in 2017 and beyond.
Barron’s had one of its frequent “roundtables” in this weekend’s issue where some of most prominent strategists on Wall Street give their views on the market. Healthcare came in as the second most popular sector in the economy to invest in right now. The one sector out of the ten with a more favorable view currently was Technology.
The sector is down some 5% since early July of 2015, the worst performance of any sector. Shockingly, losses exceed that of the energy sector which is still struggling with collapsed crude and natural gas prices and has seen a large drop in profits.
Collectively, the Healthcare group sells at the lowest valuations since investors had worries that the first President Clinton would implement what was dubbed “Hillarycare” in the early 90’s. The sector then became one of the strongest performers in the market for several years after that fear never came to pass. My wish is that we look back and note the accuracy of one Mark Twain’s most cited quotes “History doesn’t repeat, but it does rhyme,” a few years out.
Performance Update:
Our benchmark the iShares Nasdaq Biotechnology ETF (NASDAQ:IBB), the largest ETF focused on the biotech sector with almost $9 billion in assets, is now down 18.43% since we launched the Biotech Gems service at the start of May of 2015.
Our large cap core positions are down 4.28% on average while the small cap portion of our portfolio has shown marked improvement and is now down 9.35% on average, both not including dividends. Using the minimum 50% allocation recommended to our core positions gives us a blended loss of 6.82%, 1,161 basis points above our benchmark. The most conservative allocation of 75% dedicated to the large cap core positions results in a loss of 5.55%, 1,288 basis points above the benchmark.
Portfolio News:
Most of our small cap holdings drifted down in line with the major biotech indices this week with the exception of Dynavax Technologies (NASDAQ: DVAX). This stock dropped over 30% on Friday after the Ad Comm panel for the company’s hepatitis B vaccine in Mid-November was unexpectedly cancelled. I added 33% more shares to my position at around $11 late in trading Friday as this seemed an overreaction.
This turned out to be an amazing trade as the stock has shot up over 20% today, and after reading through the announcement the company made on Sunday, I still believe the vaccine will be approved for those 18 and older under what should be a similar timeline. Right now the stock is trading around $13 and is still significantly undervalued.
In this announcement I could infer that a separate supplemental Biologic License Application might then have to be filed for the diabetic subset. If the market reads the company’s announcement like I am interpreting it, I expect the stock to recover even more of its losses in quick order this week.
Among our large caps, we will be closely watching Mylan’s (NYSE: MYL) testimony around EpiPen pricing in front of the congressional subcommittee this week. The company has already made several moves to address the cost issue. Hopefully, politicians will feel they got their “scalp” on Mylan by the end of the week and the stock can go back to moving on fundamentals. At under eight times the consensus earnings for next year, a whole lot of bad news is priced into the shares at this level.
Finally, we will also keep a close eye on Novavax (NASDAQ: NVAX). This biotech concern should release Phase III data around a large scale RSV vaccine study before the end of September. Based on previous earlier stage trials and analyst commentary, I expect these results to be positive as the company marches to an important NDA for this needed biologic. If the biotech sector does not continue to fall, I would expect a nice little run up into trial data disclosure for one of our latest additions.
I just released a new special report on NVAX that covers all of the important details of this recommendation and why I see so much promise in its pipeline, just click the link below to access the report.