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Months after presenting incredibly good Phase I data for drugs CO-1686 and Rucaparib at ASCO 2013, Clovis Oncology (NASDAQ: CLVS) is starting to look at potential acquirers with help from Credit Suisse and unnamed consulting firm(s) (link). The company, which held its IPO on NASDAQ in November 2011, multiplied its value by about six times since.

It seems that the company is making a great move for its long-term shareholders, since the company has a $2.25 B valuation based primarily on the two Phase I compounds mentioned earlier. The company has the funding and institutional support for clinical development, but the current bloated valuations given to certain oncology assets (like CO-1686 and Rucaparib) makes it easier to understand why Clovis would shop itself this early in the game.

CO-1686 is the more impressive of the two drugs at this point, and the bulk of the company's intrinsic value. CO-1686 was originally designed by a biotech company named Avila Therapeutics, a covalent drug-focused entity that was acquired by Celgene on March 7th, 2012, in a $925 M deal. The compound was introduced to the Clovis pipeline in a $209 M partnership made in 2010 between Avila and Clovis, and the IND application was accepted not long before the company held its IPO on April 3rd, 2012.

The molecule is a covalent drug that irreversibly inhibits epidermal growth factor receptor (EGFR), which aids cancer cells in proliferation. Clovis is specifically developing it as a non-small cell lung cancer (NSCLC) treatment, since it can bypass certain obstacles in NSCLC cells that other EGFR inhibitors cannot.

A big problem that other EGFR inhibiting NSCLC drugs like Tarceva (erlotinib) and Erbitux (cetuximab) have is their vulnerability to particular mutations in cancer cells that can bypass their mechanism of action. In particular, a frequently seen mutation known as T790M is known to counteract EGFR inhibition in nearly two out of every three cases. Other, less common mutations like L858R and del19 cause similar disruptions.

What makes CO-1686 unique relative to its peers is the molecule's ability to inhibit EGFR in patients that have T790M, l858R, del19 and other drug-disabling mutations while avoiding inhibition of non-mutated (or wild type) EGFR. It was hard to believe that a NSCLC drug could be so well designed, although the Phase I data that Clovis presented at ASCO 2013 seemed to reinforce the notion that the drug works as intended.

In the trial 42 total patients were enrolled, 24 entered the dose escalation phase of the study, and 6 reached the highest daily dose of the drug (1800 mg, twice daily). According to biopsies taken from the 42 patients, 74% were positive for the T790M mentioned earlier, implying that the efficacy results would be a good gauge of whether or not CO-1686 worked as well as it should in lung cancer patients with that mutation.

Patients saw none of the typical signs of EGFR inhibition-related toxicity - specifically rash and diarrhea - up to a 1800 mg daily dose of the compound (N=6) as mentioned. There was 1 possible exception in the 900 mg arm that included diarrhea and some other serious side effects, labeled as an instance of dose limiting toxicity (DLT). Total adverse events (grade 3 or higher) were limited to 4 patients - including the DLT patient, and were explained to be unrelated to the administration of CO-1686. Total adverse events were seen in 62% of the population although the most frequent of these were common symptoms like fatigue and nausea.

Rucaparib is a potent PARP inhibitor - or a Poly(ADP-ribose) polymerase inhibitor being developed for breast/ovarian cancer indications. This compound was originally one of Pfizer's oncology drugs and was named "PF-01367338" during its tenure as drug for solid tumors, although the development was handed over to Clovis in a deal announced in 2011 that gave Clovis full responsibility over the development and commercialization of the compound in exchange for an upfront payment and milestone payments of up to $255 M. At ASCO, this drug seemed to be overshadowed by Tesaro's niraparib which targets the same indications.

The lack of data supporting CO-1686 and Rucaparib might make it difficult for the company to sell itself at a substantial premium, which is why the market may hesitate to keep CLVS above $80/share. While there is a lot of potential behind the company's assets, the drugs are huge investments at their current valuation and present substantial risk to a would-be acquirer. Most cancer drugs fail in late-stage development because of their inability to replicate positive results from prior trials.

On top of risk of failure, a company would also factor in the expensive clinical trials that would be needed for CO-1686 and Rucaparib, and the time value of an investment that may not generate any revenue for 10+ years.

It's clear that CO-1686 is one of the best early-stage cancer assets out there, but $2.5-3 B still seems expensive for anything in the early stage. We'll just have to see whether Wall Street's current valuation of Clovis matches big pharma's.

Source: Clovis: After Data, Company Looking For Acquisition