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Whenever you invest in any company, you’re looking for its market cap to rise. – Peter Lynch
In biotech, volatility is the name. The game is to bank on volatility for your gain. That being said, shares of Clovis Oncology (NASDAQ:CLVS) follow cycles of boom and bust. That is to say, the stock rises and falls after a major catalyst event like a run-up toward approval or a data reporting. If you are able to catch cycles of a highly volatile stock like Clovis, you can make a tremendous amount of capital. Conversely, you can also lose a lot of money if you do not know the trading behaviors of this company.
Over the past month, Clovis rallied by over 30% subsequent to the ATHENA-MONO data release. The shares then lost their momentum. Interestingly, I believe that the momentum will rebuild soon because there are more data releases and regulatory filings in the upcoming months. In this research, I’ll feature a fundamental analysis of Clovis and share with you my expectation of this intriguing equity.
About The Company
As usual, I’ll present a brief corporate overview for new investors. If you are familiar with the firm, I recommend that you should skip to the subsequent section. Headquartered in Boulder, Colorado, Clovis is focused on the innovation and commercialization of stellar medicines to fulfill the unmet needs in ovarian, prostate, breast, and bladder cancers.
Notably, Clovis is powered by an interesting portfolio of both approved and developing therapeutics. The crown jewel of this pipeline is rucaparib (i.e., Rubraca). As an oral small-molecule inhibitor of poly (ADP-ribose) polymerase (i.e., PARP), Rubraca is marketed as a second-line option for patients suffering from resistant ovarian cancer and metastatic castration-resistant prostate cancer ((mCRPC)) with the BRCA1/2 mutations. Asides from targeted therapy with Rubraca, Clovis is shifting its focus to radionuclide therapy with FAP2286 and other younger assets.
As you may recall, Rubraca is authorized as a second-line maintenance drug for ovarian cancer. Sadly, most second-line drugs do not generate blockbuster results. Asides from the need for a larger sales/marketing force, you need to expand the drug’s label into the first-line indication. Additionally, the more label coverage/expansion, the better the sales. That’s exactly what Clovis is doing with the Phase 3 (ATHENA-MONO and ATHENA-COMBO) studies. Positive results from these trials would position Rubraca to garner a much stronger sales ramp-up.
Shifting gears, let us analyze the latest data update from Clovis. On March 31, the company released results for the highly anticipated ATHENA-MONO trial in which Rubraca monotherapy was pitted against the placebo (i.e., control). Of note, Rubraca demonstrated extremely robust efficacy and good safety.
As it cleared the primary study endpoint with flying colors, Rubraca logged in the markable median profession-free survival (i.e., PFS) of 20.2 months compared to only 9.2 months for patients on the placebo. Importantly, the PFS benefits are observed for patients in the exploratory subgroups of patients with HRD-negative and BRCA mutant tumors. Commenting on the strong results, President and CEO Patrick Mahaffy enthused:
The results from the ATHENA-MONO study of Rubraca in first-line maintenance treatment ovarian cancer exceeded our expectations in terms of significant improvement in PFS versus placebo in each of the primary efficacy populations, including the all-comers or intent-to-treat population. We believe that the positive results from ATHENA-MONO demonstrate that Rubraca will provide an important new treatment option for women with advanced ovarian cancer in the first-line maintenance setting, and we look forward to submitting these data to the regulatory authorities in the US and Europe during Q2 and Q3 2022, respectively.
In June, Clovis is set to present these data plus additional analysis at the American Society of Clinical Oncology (i.e., ASCO) Annual Meeting. Riding strong results, Clovis is eager to file a Supplemental New Drug Application (i.e, sNDA) for the Rubraca label expansion in 2Q2022. Thereafter, a filing in Europe is projected for 3Q2022.
Leveraging on my Integrated System of Forecasting, I ascribed a 65% (i.e., more than favorable) chance of approval for Rubraca. I based my rationale on the excellent ATHENA-MONO data, my forecasting experience over two decades, and my intuition. Now, don’t let my 65% throw you off. My forecast is based on categorical rather than numerical analysis per se. As such, my 65% equates to an 85% numerically. As I keep track of my forecasting over the years, you can see my records to get a feel for what to expect from Rubraca’s upcoming binary event.
Asides from ATHENA-MONO, Clovis intends to release data for ATHENA-COMBO (in which Rubraca plus Opdivo is assessed against Rubraca alone). As you can imagine, the combo would deliver therapeutic synergy and thereby superb data outcomes. As such, the ATHENA-COMBO data may entice an acquisition by Bristol Myers Squibb (BMY), which owns Opdivo. After all, Bristol would want additional labels for its flagship drug, Opdivo.
More Upcoming Data Release
Asides from ATHENA, you can see that there’s the Phase 3 (TRITON-3) study brewing in the background. As you know, Rubraca is already authorized to treat mCRPC with the BRCA1/2 mutation. And, TRITON-3 serves as a confirmatory trial. By Q2, Clovis also plans on releasing selected data for this study. In my view, the results should be positive and supportive of its already approved status.
A Shift Toward Nuclear Medicine
Viewing the pipeline, you can see that Clovis shifted its focus to cover nuclear medicine. Specifically, the company is advancing three radionuclide therapies in pre-clinical stages for undisclosed targets. On top of that basket approach, there is the lead nuclear medicine (i.e., FAP2286) being developed in the Phase 1/2 (LuMIERE) study for advanced or metastatic solid tumors (i.e., those that are progressing despite prior therapies). Looking ahead, the company will present data on the Phase 1 portion at a Nuclear Medicine meeting. I believe that date is in June.
If you’re thinking like I do, you can appreciate that I like this transformation very much. That’s because nuclear medicine is a lucrative field. There is an extremely robust demand for novel therapeutics in this niche. Two companies that I covered in this segment were all bought out. The proof in the pudding is that Progenics (PGNX) was acquired by Lantheus Holding back in 2019. And, Novartis (NVS) also scooped up Endocyte (ECYT) back in 2018.
About competition, Clovis operates in a highly competitive oncology environment. Rubraca is competing against the other PARP inhibitors. The prime example is Lynparza of AstraZeneca (AZN) and MSD, which is being marketed for advanced ovarian cancer, metastatic breast cancer, and pancreatic cancer. Moreover, Lynparza has been used in over 25K patients worldwide. That aside, Zejula of Tesaro (TSRO) – a GlaxoSmithKline (GSK) acquisition – is another example. For various Clovis’ various radionuclide therapies and FAP2286, they face conventional chemoradiation therapies. Other competitions also play significant roles, as I noted in the prior research,
There are novel treatments like CAR-T, CAR-NK, and CAR-macrophage. Notably, CAR-T is already approved for blood cancers. Though these novel CARs have not been proven effective for solid tumors, that’s where future developments are heading. You can bet there will be some CARs that would be highly effective against solid tumors. That aside, there are the tumor-infiltrating lymphocytes (i.e., TILs) of Iovance Biotherapeutics (IOVA) that have demonstrated extremely robust efficacy for cancers. Regardless of the competition, there is always a strong demand for novel therapeutics. The oncology space is vast and thereby affords many blockbusters.
Just as you would get an annual physical for your well-being, it’s important to check the financial health of your stock. For instance, your health is affected by “blood flow” as your stock’s viability is dependent on the “cash flow.” With that in mind, I’ll analyze the 4Q2021 earnings report for the period that ended on December 31.
As follows, Clovis procured $35.9M in revenues for Q4 compared to $43.2M for the same quarter last year. On an annual basis, Fiscal 2021 witnessed $148.7M in revenue compared to $164.5M for Fiscal 2020. On a year-over-year basis, the quarter and annual declines tallied at 16.8% and 9.6%, respectively. The significant decline is due to the pandemic effects on marketing and commercialization. As COVID is abating, it’s likely that Clovis would enjoy a revenue boost.
That aside, the research and development (R&D) registered at $41.8M and $56.7M for the respective periods. Typically, I want to see an R&D increase. However, the concern for Clovis is to minimize its high expense rate. Additionally, there were $64.3M ($0.50 per share) net losses compared to $98.9M ($1.02 per share) decline for the same comparison. On a per-share basis, the bottom line is improved by 102%. The improvement is related to the lower R&D spending as well as reduction of other expenses. Seeing this improvement, I appreciate the trend because Clovis needs to lower its burn rate.
About the balance sheet, there were $143.4M in cash and equivalents. Against the $88.6M quarterly OpEx, there should be adequate capital to fund operations into either Q2 or Q3. Simply put, the cash position is not adequate relative to its burn rate. On this trend, it’s likely that Clovis will execute a public offering soon.
While on the balance sheet, you should check to see if Clovis is a “serial diluter.” A company that is serially diluted will render your investment essentially worthless. Given that the shares outstanding increased from 96.6M to 128.4M, my math reveals a 32.9% annual dilution. At this rate, Clovis is in my ballpark of the 30% dilution rate for a profitable investment.
It’s important that you appraise Clovis to determine how much your shares are truly worth. Before running our figure, I would like to share with you the following:
Wall Street analysts typically employ a valuation method coined Discount Cash Flows (i.e., DCF). This valuation model follows a simple plug-and-chug approach. That aside, there are other valuation techniques such as price/sales and price/earnings. Now, there is no such thing as a right or wrong approach. The most important thing is to make sure you use the right technique for the appropriate type of stocks.
Given that developmental-stage biotech has yet to generate any revenues, I steer away from using DCF because it is most applicable for blue-chip equities. For developmental biotech, I leverage the combinations of both qualitative and quantitative variables. That is to say, I take into account the quality of the drug, comparative market analysis, chances of clinical trial success, and potential market penetration. For a medical diagnostic device, I focus on market penetration and sales. Qualitatively, I rely heavily on my intuition and forecasting experience over the decades.
Molecules and franchises
Market potential and penetration
Net earnings based on a 25% margin
PT based on 128.4M shares outstanding and 10 P/E
“PT of the part” after appropriate discount
Rubraca for advanced malignancies
|$17.52 (10% discount because Rubraca is already in commercialization yet the company doesn’t have a robust sales/marketing team)
|FAP2286 for solid tumors
|$1B (Estimated from the $581.25B global cancer market)
|$1.94 (90% discount because it’s in very early stage of development)
|$1B (Estimated from the $581.25B global cancer market)
|$0.97 (95% discount because of its extremely early stage)
The Sum of The Parts
Since investment research is an imperfect science, there are always risks associated with your stock regardless of its fundamental strengths. More importantly, the risks are “growth-cycle dependent.” At this point in its life cycle, the main risk for Clovis is if it can gain Rubraca’s label expansion for the first-line ovarian cancer maintenance. Now that we’re at the tail-end of the pandemic, the other concern is if Clovis can regain Rubraca sales momentum. By going at it alone in commercialization, the firm has to spend tremendous capital with little results. Moreover, its sales/marketing force is not as large as I would like to see. As such, the small sales/marketing size limits Clovis’ ability to fully unlock Rubraca’s value.
Moreover, there is the risk that other trials (ATHENA-COMBO, LuMIERE) might not post positive data results. In the case of negative data or failed regulatory approval, you can expect Clovis to tumble by 50% and vice versa. The high cash burn rate and dilution can cause your shares to be significantly diluted. The elephant in the room is also management concerns.
In all, I have adjusted my recommendation on Clovis Oncology from a buy to hold with the 4.7/5 (up from 4.3) stars rating. On a one to two years horizon, I expect the new $20.43 price target to be reached.
Epitomizing an extremely volatile trading stock, I noticed that Clovis Oncology tends to rally and tumble in a cyclical fashion. And, each cycle correlates with a big catalyst. With some fundamental concerns like management, I’ve categorized this stock over time as a “trading stock.” While you can hold Clovis for the long haul, this stock is much more profitable if you buy in at the low (i.e., down cycle) and sell at the high (i.e., up-cycle).
Right now, it seems like Clovis is embarking on another rally due to its upcoming data reporting for TRITON-3, LuMIERE, and ATHENA-COMBO. If positive, the stock would be galvanized. Else, you can see the former Merovingian King (Clovis) fades into history.
As usual, I’d like to remind all investors that the choice to buy, sell, or hold Clovis is always yours to make. In my view, if you are underwater on Clovis, you should continue to hold for either a buyout or another up-cycle. If you want to trade this one, you can enter 1/2 of a full position to wait for the rebound.