UPDATE 2-Dynavax stops development of allergy drug, shares fall

(Adds analyst and company comments, updates share movement)

By Esha Dey

BANGALORE, May 16 (Reuters) - Dynavax Technologies Corp (DVAX.O: Quote, Profile, Research, Stock Buzz) said it would stop developing its experimental ragweed allergy drug, Tolamba, after it failed to meet the main goal of a mid-stage clinical trial, sending its shares down as much as 32 percent.

Tolamba did not show a significant improvement over a dummy drug in reducing nasal symptoms, the biopharmaceutical company said in a statement. The company, however, backed its 2008 revenue outlook.

"This is a negative surprise," Pacific Growth Equities analyst Gregory Wade said. Wade, who has a "buy" rating on the stock, was expecting the drug to show positive data.

Tolamba, which suffered a setback in January last year after a study of its effectiveness was found to be inconclusive, got a fresh lease of life when Dynavax received a $30 million financing commitment from Deerfield Management for the allergy program.

However, the latest trial displayed a high degree of variability in the data set that was also observed in the previous Tolamba clinical trials, Dynavax said.

The company said it was discontinuing the development of the drug as it concluded that the problem may be difficult to overcome in future studies.

"We have to discuss with Deerfield how they want to proceed; whether they want to continue to work with us in cat and peanut allergies," Dynavax spokeswoman Shari Annes said by phone.