How good are the company's cost analysis and accounting controls? - Philip Fisher
For most of 2019, the China Trade War and drug pricing concerns clobbered many fundamentally strong stocks. In the thick of these market clouds, a downpour of negative sentiments washed away the market cap of most bioscience equities. As my probability analysis revealed, there are signs of a market upturn in the making. As such, I believe that certain stocks will deliver extremely robust returns going forward.
A prime example of the aforesaid phenomenon is Clovis Oncology (NASDAQ:CLVS). As you can see in the chart below, Clovis shares traded on a steep downtrend this year. Hence, the stock's market valuation became greatly disconnected from its true worth (i.e. intrinsic value). Since my instinct proved correct, Clovis shareholders have enjoyed a vigorous rally. However, I believe that the recent rallies are only the first waves of rebound. In this article, I'll present another fundamental update on Clovis. Moreover, I'll compare Clovis to a similar company dubbed Myovant Sciences (MYOV). That way, you'll have a better understanding of what will happen to these growth stocks.
Figure 1: Clovis Oncology chart (Source: StockCharts)
As usual, I'll feature a brief corporate overview for new investors. If you are familiar with the firm, I suggest that you skip to the subsequent section. Operating out of Boulder, Colorado, Clovis is focused on the innovation and commercialization of therapeutics to serve the unmet needs in various oncology conditions. They include ovarian, prostate, breast, and bladder cancers.
April 2018 marked a historic day for Clovis as the lead molecule, rucaparib (Rubraca) was FDA approved. As an oral, small-molecule inhibitor of poly (ADP-ribose) polymerase ("PARP") 1, 2, and 3, Rubraca is marketed as second-line maintenance for recurrent ovarian cancer.
Because it is a second-line drug, its sales have been gradual. As such, I believe that if Clovis successfully pushes Rubraca into a first-line medicine, it'll become a blockbuster. Asides from the commercialized asset, Clovis is investigating different treatment combinations of Rubraca either with immune checkpoint inhibitors and other drugs (lucitanib and rociletinib) for different cancers as shown below.
Figure 2: Therapeutic pipeline (Source: Clovis)
Just recently, Clovis in-licensed the rights to a radiopharmaceutical targeting drug known as FAP-2286. And, the company will file FAP-2286's investigational new drug ("IND") application by 2H2020.
As I mentioned, Clovis was left for dead in the barren field of financial desert earlier this year. Asides from the industry headwinds, an elevated operating cash burn rate is the culprit to Clovis' decline. This is not surprising because investors hate companies that excessively burn cash. That is to say, a high burn rate means either inefficient operations or unscrupulous spending. In my view, Clovis needs to maintain a low cash burn rate for the stock to trade higher.
Amid the industry headwinds, my gut feelings (i.e. instinct) tells me that the larger market sentiment is shifting in favor of bioscience stocks. Now it didn't happen for Clovis out of the blue. Certain catalysts had to materialize into a "high probability" event to start the rally. You guessed it right, it's the improvement in cash spending.
Before the ongoing turnaround, Clovis' management had promised to reduce the cash burn. And yet, investors didn't buy into that promise. As it turned out, the management recently lowered the operating cash by a huge margin. Specifically, Clovis posted a 42% reduction, going from $98.0M in 2Q to $57.0M in Q3.
In my experience, any pleasant surprise is a high probability event to start a vigorous rally. Since the market didn't believe Clovis' management, the fact that they honor their promise was a strong vote of confidence. It's no wonder why the market psychology kicked in and thereby rapidly improved investor's sentiment.
I initially thought that Clovis abandoned the advancement of Rubraca into the first-line indication for ovarian cancer. Nonetheless, I was dead wrong. I noted in the prior article,
To my surprise, Clovis will enroll patients in the Phase 3 ATHENA trial of Rubraca in combo with Opdivo several months from now. Since Rubraca alone delivers excellent results, do you believe that its combination with another stellar medicine (Opdivo) will generate better outcomes? Well, you should, if the cornerstone of cancer management using combination therapy is true. And, it is!
Despite that Rubraca is currently approved as a second-line maintenance drug, its year-over-year (YOY) sales improved by 38% for Q2 and 65% for Q3. At this rate, Rubraca will generate several hundred million dollars in sales even if it won't become a first-line medicine.
From a valuation viewpoint, several million dollars in revenues is quite significant for a small (i.e. $474.4M) market cap company, Clovis. As you saw, the pleasant surprise in pushing Rubraca into the first-line for ovarian cancer sustains the current rally.
If you recalled from my recent article, Clovis updated what appeared to me as excellent data for the Phase 2 (TRITON) trial studying Rubraca for mCRPC at the European Society for Medical Oncology (ESMO) Congress 2019.
Asides from having a good safety profile, Rubraca demonstrated a 43.9% confirmed objective response rate (ORR) in 57 evaluable patients suffering from mCRPC with an associated BRCA1/2 mutation. There was also a 52.0% confirmed prostate-specific antigen (i.e. PSA) response rate in 98 PSA-evaluable patients with the same disease profile.
Three weeks ago, my probability analysis revealed a market misperception of the data. Since prostate cancer is easy to treat with over 90% cure rate, it seems to me that the market was expecting a similar response rate. But in reality, this is mCRPC with the BRCA1/2 mutation!
In my view, the said findings are extremely good results. And, it'll enable Rubraca to cut into a $2B mCRPC with BRCA1/2 market. As such, I believe that continuing advancement in this franchise will fuel more rallies.
As you know, I recently shared with readers in my blog about one of the companies set to rally. Since IBI members have access to my higher-level intelligence, they knew that stock is Myovant! Before the 13.3% appreciation today (i.e. Nov 23), Myovant shares tumbled by 4.2% in the day prior. Despite the high probability event of a rally, it was delayed due to the market confusion about competition between Clovis and Myovant.
As follows, the market seemed to believe that Rubraca outcompetes Myovant's lead medicine coined relugolix. Though both Rubraca and relugolix are designed to treat prostate cancer, Rubraca is reserved for metastatic "castration-resistant" cancer (i.e. mCRPC). Of note, patients suffering from mCRPC no longer respond to hormonal (i.e. testosterone or relugolix) therapy. Hence, Rubraca and relugolix are not direct competitors. That is to say, they serve different subpopulations.
Another confusion is that Rubraca and relugolix are competitors for women's health. Sure, they're both for women's health. But Rubraca is designed to treat ovarian cancer; whereas, relugolix is geared to manage endometriosis and uterine fibroids.
Long story short, despite the seeming confusion, I believe that there is a gradual shift in the market sentiment. In my view, Myovant has 65% chances of enjoying another big rally soon. If you're interested in Myovant, you should check out my prior market intelligence.
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." Because I already analyzed Clovis' 3Q2019 earnings report, I'll just do a quick assessment here.
Notably, Clovis garnered $37.6M in Rubraca sales compared to $22.8M for last year and thereby represents a 65% year-over-year (YOY) increase. With strong traction, I expect the company to easily reach its Fiscal 2019 revenue estimates of $141M to $147M. Moreover, the research and development (R&D) investment for the respective periods registered at $77.9M and $63.9M. Additionally, there were $94.1M ($1.72 per share) net losses versus $89.9M ($1.71 per share) declines for the same comparison.
In all, I maintain my buy recommendation on Clovis Oncology and upgraded it to a five out of five stars. The life science sector has been decimated by the market headwinds (i.e. the China Trade War and drug pricing concerns) this year. Consequently, any "perceived" weakness in an equity is exaggerated. As you know, waiting for a stock to turnaround can be a painful experience. But your patience is well rewarded. When the market sentiment shifts, you can expect huge profits from turnaround growth equities (i.e. Clovis and Myovant).
For Clovis, Rubraca is a stellar medicine that is gaining strong sales traction. Nevertheless, I believe that the best is yet to come. As Clovis is pushing Rubraca into the first-line indication for ovarian cancer, it'll generate blockbuster revenues. Be sure to keep tabs of developments on this front (i.e. the ATHENA's upcoming enrollment). By itself, Rubraca delivers excellent efficacy, so it's a no-brainer that its combo with Opdivo will generate robust outcomes in ATHENA.
That aside, you should monitor whether Clovis will submit the new drug application ("sNDA") of Rubraca for mCRPC with BRCA1/2 by year-end. It's also important to check if the management will follow through with operating cash reduction. For Myovant, the run just started, so position your trades accordingly. Last but not least, this too is passing, and it'll lead to an era of prosperity. Tune into IBI to get your market intelligence to stay ahead.
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Disclosure: I am/we are long CLVS. 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.
Additional disclosure: As a medical doctor/market expert, I’m not a registered investment advisor. Despite that I strive to provide the most accurate information, I neither guarantee the accuracy nor timeliness. Past performance does NOT guarantee future results. I reserve the right to make any investment decision for myself and my affiliates pertaining to any security without notification except where it is required by law. I am also NOT responsible for the actions of my affiliates. The thesis that I presented may change anytime due to the changing nature of information itself. Investment in stocks and options can result in a loss of capital. The information presented should NOT be construed as a recommendation to buy or sell any form of security. My articles are best utilized as educational and informational materials to assist investors in your own due diligence process. That said, you are expected to perform your own due diligence and take responsibility for your actions. You should also consult with your own financial advisor for specific guidance, as financial circumstances are individualized.