The story surrounding Clovis Oncology (CLVS) never seems to get boring as the company and its stock continues to witness a lot of volatility. It was officially September of 2013 when I last looked at the business after reports surfaced that the company was looking to sell itself. Shares traded around $75 per share at the time as a potential sale (excluding any premium) would have allowed investors to lock in a great profit, as shares started the year in the mid-teens.
More than four years later, Clovis has an approved product, but its shares trade 20% lower than the levels back in September of 2013 as enthusiasm surrounding the company has cooled a bit. While Clovis remains speculative, despite product approval, I am a bit more upbeat at these levels, considering a speculative modest long position.
Back in 2013, Clovis benefited from great research results in its Phase I/II monotherapy studies for patients with solid tumours with its drug candidate Rucaparib. This is a so-called oral PARP inhibitor which was developed to treat patients with ovarian cancer, providing benefits to 89% of patients in Phase I trials. The stock furthermore benefited from good news on the CO-1686 study which was in Phase I as well, targeted to treat non-small cell lung cancer.
These promises made investors award a $1.8 billion enterprise valuation to Clovis back in 2013, soon after the company went public in 2011 as a small promising biotechnology name.
A sale did not materialise in 2013 as the company spent most of 2014 to start new research programs. The company benefited from generally positive research data as shares jumped to a high of $115 in September of 2015 amidst crazy M&A momentum in the sector, as well as good research results.
The company received breakthrough designation for Rucaparib as the company announced bombshell results in November. The company announced that the FDA requested additional clinical data for effectiveness of rociletinib, which was designed to treat lung cancer, as the results were less promising than previously thought and delay would be seen in an eventual approval. Shares collapsed from $100 to $30 as a result of the news flow and fell to just $15 in early 2016.
Shares recovered to the mid-twenties that year as the FDA accepted the new drug application for Rucaparib for priority review in ovarian cancer. Shares traded in the forties again in December as the FDA approved Rubraca/Rucaparib for treatment of ovarian cancer. The company could really need this break as the company has burned through a billion in cash through 2016, mainly on research efforts of course.
2017 News Flow
Shares traded at $50 in May of 2017 as the company announced first-quarter results, with product sales of Rubraca/Rucaparib coming in at $7.0 million. Nonetheless, the company continued to burn through a lot of cash with quarterly expenses hitting $63 million. The company held $276 million in cash, offset by a similar amount in convertible notes outstanding, as cash balances would finance these losses for just about a year absence of a pick-up in sales.
This meant that the 44 million outstanding shares number was expected to drift up quite considerably (as it has done in the past). At $50, this valued Clovis at $2.2 billion, actually more than the $1.8 billion valuation at $75 in 2013 as a result of continued dilution.
The company posted strong research results in June as Rucaparib demonstrated great results in ovarian cancer phase III for maintenance treatment, prompting the company to expect to submit a new drug application in the coming months for second-line treatment option. Following the great news, shares jumped as the company quickly offered more shares at $88 to fix the problem of declining cash balances.
After nearly hitting the $100 mark, shares traded at $80 in August when Clovis reported the second-quarter results. Sales of Rubraca more than doubled to $14.6 million (in the US alone) as the company planned to file the maintenance treatment NDA in October. The advancement in sales was offset by a rising expense base to $72 million. Cash balances grew to $492 million following the follow-on offering in June as this was offset by continued losses and a $117 million legal settlement.
Enthusiasm cooled a bit from November onward (when shares were still trading in their seventies) as the company posted its third-quarter results. The sequential pick-up in sales was not that impressive as third-quarter sales of Rubraca grew to just $16.8 million. Ever since, shares lost a bit of ground as the market seems to discount comments made by CEO Patrick Mahaffy. He claims that slow sequential growth is the result of a rapid shift away towards the maintenance therapy.
Continued losses and related dilution meant that the share count rose to 49 million shares which valued Clovis at $3.5 billion in November at levels in the low seventies. Despite the convertible notes outstanding, net cash balances grew to $330 million as a result of follow-on offerings. Cash holdings of over $600 million are sufficient to finance the current loss rate for little over 2 years to come, alleviating some of the financial concerns.
In December, Clovis announced that it has received priority review for Rucaparib as maintenance treatment with an action date set in April of this year. The other upside has to come from approval of Rucaparib in other tumor types such as prostate and bladder cancer, among others. This represents a huge indication on top of the current approval.
Furthermore, note that Rucaparib has a much greater potential in Europe as the number of ovarian cancer diagnoses each year is roughly 3 times the number in the US. Even ¨better¨ for Clovis, the market for prostate cancer is roughly 6 times as large as that of ovarian cancer, indicating that turns could really look good if Rucaparib might be approved for that indication over time as well.
Absence of the slow pick-up in sales in Q3, the outlook for Clovis looks solid in terms of getting wider approval for Rucaparib in the maintenance treatment of ovarian cancer, approval in Europe and over time approval for other cancer types.
Success in these areas and approval for other cancer types could have huge implications for the company and is necessary as the current annualised run rate of $67 million in sales is not very high, as sequential growth was disappointing in Q3. The 49 million outstanding shares have fallen back to $59 which values equity at $2.9 billion and the business at $2.6 billion.
The company is still posting losses but that results from the low level of sales as well as the fact that it continues to pour money into expanding approval for Rucaparib. If approval as second line maintenance treatment could very conservatively double the market, and approval in Europe could again triple the potential market (given the higher prevalence numbers), the company could post sales of $400 million at this run rate. Such a revenue number could easily justify today's valuation. Real upside has to come from approval of Rucaparib in other (more prevalent) cancer indications, but that is a longer term trajectory.
Problems, or concerns, are widely available as well, including that of stiff competition from names like AstraZeneca (NYSE:AZN) and TESARO (NASDAQ:TSRO), among others. For now, all eyes remain on April as maintenance treatment should be a bigger market for Rucaparib than its current indication, as I wonder how much sales will grow in Q4. The other good news is that besides a full pipeline, Clovis is out of the woods in terms of its requirement to tap equity markets for the next year or two as cash holdings are substantial and the burn rate should come down.
If approval is given in April and sales pick up nicely for maintenance treatment indications, this could be a very nice year. At current levels, a modest speculative position seems warranted, on the back of potential drivers, a modest (dollar amount) valuation and thereby prospects for M&A rumours as well.
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I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.