- Analysts and investors have started fretting that AstraZeneca's drug will be a stronger potential rival to Clovis's lead drug rociletinib.
- Rociletinib still looks like an efficacious drug, but hyperglycemia may be a limiting factor and there's still not much data on rucaparib or lucitanib.
- I estimate a fair value of $75 for Clovis, with more than $37/share in value for rociletinib.
The last year hasn't actually been all that bad for biotech, as the S&P Biotech ETF (NYSEARCA:XBI) has outperformed the S&P 500 by about six or seven points. Whether or not the XBI is a great benchmark for the biotech industry is beside the point, though; by any standard Clovis Oncology (NASDAQ:CLVS) has done poorly since I wrote about it in late December of 2013. Down almost 30% since then, some of the weakness may be due to less risk appetite from biotech investors, but I think it has more to do with growing concerns over competition for the company's lead drug CO-1686 (or rociletinib).
I don't take it lightly when any stock I recommend is down 30%, but I also acknowledge that that can be the way it goes in biotech - in the absence of solid data to go on, investors obsess over the tea leaves and can run hot or cold on a stock to dramatic effect. I was concerned in December that analysts were already too aggressive with their assumptions about market share and odds of approval, but my own numbers haven't changed that much. With a fair value of $75 and several news events on the way, Clovis shares could turn the tide over the next six to 12 months (or smash on the rocks).
Growing Worries About Competition
One of the key topics of conversation around Clovis seems to be worries about competition for rociletinib, the company's lead drug for T790M+ non-small cell lung cancer (or NSCLC) patients. I won't rehash the role this mutation plays in lung cancer or the market dynamics (Pro subscribers can read my earlier article for that information). In particular, analysts and investors are starting to fret that AstraZeneca's (NYSE:AZN) rival mEGFR inhibitor AZD-9291.
A year or so ago, analysts thought that toxicity/adverse events could limit this drug and/or that it would prove to be less active and less effective in T790M+ NSCLC patients. As the data continue to develop, though, that is not proving to be the case. As of the most recent update I've seen, AstraZeneca has seen a 64% ORR in its Phase I AURA study with an acceptable safety profile.
For Clovis, its most recent update of its '008 Phase I trial showed an ORR of 58%. Comparing across studies can be very misleading, as Clovis has been enrolling sicker patients (a median of two prior TKI lines, versus one for the AZD-9291 AURA study), but I would say the efficacy data reported so far are more or less equivalent.
A Bug … Or A Feature?
On the safety side, though, rociletinib has been leading to frequent (30% to 40% of patients) cases of hyperglycemia, with more than 20% of patients experiencing grade 3 hyperglycemia. As a result, many patients receiving the drug have had to go on metformin (a common medication for diabetes) to manage their blood glucose levels.
Oddly enough, Clovis thinks this may be a sign of an additional benefit to the drug. The effect on blood glucose is caused by a metabolite that is an IGF-1 receptor antagonist. Clinicians and researchers have known for some time that anti-IGF-1R antibodies can mediate resistance to EGFR inhibitors, though the effect has proven very difficult to nail down and reproduce consistently (late-stage studies of cancer combo therapies using anti-IGF-1R antibodies have not been successful). Nevertheless, Clovis has suggested that this may be a mechanism by which its drug is more effective in combating cancer.
I am not too concerned about the hyperglycemia. Honestly, if you have Tarceva-resistant NSCLC, you have bigger problems to worry about than high blood sugar. That said, if the efficacy between rociletinib and AZD-9291 don't diverge in Clovis's favor, it may be an issue in real-world use.
What I am more concerned about vis a vis AstraZeneca is the possibility that AstraZeneca may be faster to market both as a monotherapy and combo therapy. Where Clovis has laid out a somewhat ambitious timeline, AstraZeneca has been playing it conservative and may actually make it to market first. AstraZeneca is also moving forward with trials pairing AZD-9291 with its other in-house immuno-oncology drug candidates. Clovis wants to test rociletinib in combinations as well, but as it does not have an internal portfolio of I-O drug candidates like AstraZeneca, it can't exercise nearly as much control on the process (it has to work with other companies).
What About The Rest?
I wasn't as excited about rucaparib, Clovis's PARP-1/2 inhibitor, in December and I haven't changed my mind. Management gave a very limited (and mixed) update on the Phase II ARIEL2 study at ASCO, and further data should be coming out at the November EORTC-AACR-NCI (an acronym abomination if there ever was one). BioMarin (NASDAQ:BMRN), Tesaro (NASDAQ:TSRO), and AstraZeneca have already established some pretty tough benchmarks to beat in terms of ORR in breast cancer and ovarian cancer, so Clovis has its work cut out to prove it's not a me-too player. Word that the company is moving forward with a Phase II study in pancreatic cancer is incrementally positive, but I won't get really interested until and unless the data are good.
I'm still relatively more bullish on lucitanib. A Phase I study showed a 50% ORR and 9.6-month PFS in FGF-aberrant breast cancer and Clovis and Servier are cooperating with each other on Phase II development - Servier is running a Phase II EU-only study (FINESSE) to identify which patients most benefit from the drug, while Clovis will be running a U.S.-only study more focused on dosing.
Re-estimating The Value
Between the passage of time and the progress made by AstraZeneca, I'm fine-tuning my numbers on Clovis. I've taken 10% out of my second-line lung cancer market share estimate for rociletinib (from 50% to 40%), but left my approval odds unchanged (40%). That lowers my fair value estimate to $22.50 (from $26.50). I've lowered my market share estimate for first-line use by 5% (to 15%) and left my approval odds unchanged (15%), leading to a fair value of just under $15 (versus $15.50). Trimming my market share estimate for rucaparib by 2.5% leads to an $11 fair value (versus $15), and I've left my lucitanib estimates unchanged (with the passage of time lifting the fair value to $27 from $25). All told, my fair value estimate drops about $7 to $75.
There are plenty of events left that can shift these estimated values significantly. Preliminary Phase II rociletinib data should come out in November, while AstraZeneca will be reporting updated PFS numbers at ESMO in September. Further data should be available in 2015, including some early data from a first-line study. Preliminary data on rucaparib in ovarian cancer should come out later this year, with early-stage data on pancreatic cancer in 2015. Interim FINESSE data on lucitanib could be available before year-end, with final Phase II data in 2015.
The Bottom Line
I don't know whether sell-side analysts got a little swept up in the biotech bubble or not (they're human too), but I thought the assumptions made regarding the odds of approval and market share for Clovis's pipeline were pretty aggressive back in December. Some of the underperformance in the shares may be a reaction to that overconfidence and a recalibration back to a more reason set of assumptions.
Either way, while Clovis hasn't done well this year, experienced biotech investors know that you either have to be a nimble trader or be willing to hold on through these bad stretches. I continue to be bullish on the value of the pipeline at Clovis and its shares and this would be one of the first biotech stocks I'd consider if I were to add more biotech to my portfolio.