AVEO Pharmaceuticals Gets Sideswiped
- The stock of AVEO Pharmaceuticals was crushed last week due to a setback with the FDA.
- A key marketing application will now have to wait until further study results come out late in the summer.
- We discuss the company's situation and one possible way shareholders should trade this scenario in the paragraphs below.
- Looking for a community to discuss ideas with? The Biotech Forum features a chat room of like-minded investors sharing investing ideas and strategies. Get started today »
The saddest life is that of a political aspirant under democracy. His failure is ignominious and his success is disgraceful." - H.L. Mencken
AVEO Pharmaceuticals (NASDAQ:AVEO) was crushed in trading late last week. This is a name I have had several profitable Buy-Write positions expire over the past 18 months and currently, have a small Buy-Write holding in as well. I know several other members of the Seeking Alpha community that follow these columns are in a similar situation. Therefore, some quick thoughts on AVEO and what to do now.
AVEO Pharmaceutical is a Cambridge, Massachusetts-based biopharmaceutical company that is developing treatments for oncology and other areas of unmet medical need. With last week's stock implosion of nearly 60%, the shares currently sport a market capitalization of approximately $75 million and trade right around 60 cents apiece.
The trigger for the collapse of the shares in trading towards the end of last week was an FDA decision. The company stated Thursday that the governmental agency 'recommended not to file the NDA because preliminary OS results "did not allay its concerns" about the potential negative effect on OS that was cited in the June 2013 complete response letter'
This means the company will not file a U.S. marketing application seeking approval for FOTIVDA also known as tivozanib for the treatment of adult patients with advanced renal cell carcinoma in the first quarter of this year as planned.
Instead, the company will have to wait for more mature overall survival (OS) data from its Phase 3 study called TIVO-3 to come out. Those results should be out around August of this year. Basically, a delay in filing the NDA for tivozanib has cost over 60% of AVEO's market value in trading since this delay was announced.
Tivozanib is an oral, once-daily, vascular endothelial growth factor (VEGF) receptor tyrosine kinase inhibitor (TKI). Potent, selective, and exhibiting a long half-life, this inhibitor of all three VEGF receptors is designed to optimize VEGF blockade while minimizing off-target toxicities, potentially resulting in improved efficacy and minimal dose modifications versus other approved therapies according to the company's website.
Analyst Commentary & Balance Sheet:
H.C. Wainwright was the first analyst firm to have 'chimed in' on AVEO after this adverse news broke. They downgraded the stock to a Neutral and dramatically cut their price target to $1 on Friday. They had previously reissued their Buy rating and $9.00 price target on January 14th with the following commentary.
We maintain our Buy rating on AVEO and our 12-month price target of $9.00 per share. We derive our price target based on a risk-adjusted NPV analysis of projected tivozanib and ficlatuzumab revenues through 2030 assuming a 12.5% discount rate and 3% terminal growth rate. We derive an rNPV of $1.5B for the products and add in cash and cash equivalents of $18M to arrive at a 12-month price target of $9.16 per diluted share, which we round to $9.00."
Robert W. Baird maintained their Outperform rating on the stock on Friday as well but did lower their price target a buck to $2.00 a share.
AVEO ended the third quarter with just over $20 million in cash on hand and raised an additional $8.4 million from sales under its stock sales agreement with Leerink in October and November 2018. On its last conference call, management stated funding was in place to fund it through the second quarter of this year.
Verdict & Option Play:
Obviously, the postponement of the NDA filing is a major negative for AVEO. Not only does it mean that the NDA filing will be delayed by 6-9 months (provided the more mature study data in August is positive) but also the company is most likely to do another capital raise to fund operations sans an NDA filing in the coming months meaning significant dilution.
That said, a lot of bad news is priced into the stock at this point. In addition, several beneficial owners added tens of millions of dollars of stock to their holdings in this name in December. I would imagine they will continue to be buyers on any secondary offering to 'average down'.
I closed out my April $3 calls on my Buy-Write holdings for five cents (originally sold for $1.00) on Thursday. I will wait for the stock to rebound in the weeks ahead and then sell a longer-dated option with a lower strike price against my equity in AVEO.
If I was going to initiate a new position I would do so using the July $1 calls within a Buy-Write option order (giving me a chance to roll over the options to longer-dated strikes before full data comes out in August) as described below.
Using the July $1 call strikes fashions a Buy-Write order with a net debt of 45 to 50 cents (net stock price - option premium). This mitigates some downside risk and sets up a more than solid potential return for less than a six-month hold period and chances are good you will be able to roll the options easily if the stock has not rebounded above $1.00 before the expiration date. Option liquidity is decent in this strike price.
And that is my take on the situation in AVEO after its plunge last week.
A Sunday school is a prison in which children do penance for the evil conscience of their parents." - H.L. Mencken
Bret Jensen is the Founder and author of articles on The Biotech Forum, The Busted IPO Forum, and The Insiders Forum. To receive these articles as published on Seeking Alpha, just click the appropriate link and hit the orange follow button.
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Analyst’s Disclosure: I am/we are long AVEO. 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.
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