Clovis Oncology Has An Exciting Pipeline And A Reasonable Valuation

There aren't many cheap biotechs left out there, at least not among the higher-quality ideas. To be sure, arguing that Clovis Oncology (CLVS) is undervalued after a better than 250% rise over the past year is going to strike some as ridiculous. Even so, I believe the company has multiple exciting pipeline opportunities that make this still a name worth investigating further. Although I'm a little concerned that the Street's expectations for clinical success are ahead of industry norms, early-stage data have been quite encouraging.

Taking Oncology Personally

Clovis has focused its time and energy on an oncology portfolio built around personalized medicine. What this means in plain English is that Clovis is developing drugs that work for particular sub-types of cancer (or rather in patients with particular genetic variations). Companion diagnostic tests will be developed in tandem with these drugs to identify those patients who will most benefit from them.

The most valuable asset in the pipeline today is CO-1686, an irreversible inhibitor of the T790 mutation. Among non-small cell lung cancer (NSCLC) patients, approximately 15% have a mutation in the epidermal growth factor receptor (EGFR) and these patients are typically given Tarceva or Iressa. A significant percentage of patients will develop resistance to those drugs, with a T790 mutation being the cause in about 50% of cases. This is where CO-1686 comes in, as the drug has a greater binding affinity to EGFR than ATP (in patients with the T790 mutation, tyrosine kinase inhibitors like Tarceva cannot effectively compete with ATP).

So far, CO-1686 has shown some exciting efficacy in early-stage studies. In a Phase I study, the drug delivered a 67% overall response rate (ORR) in a heavily pretreated group of patients. Better still, a newer version of the drug (a hydrobromine (HBr) salt) has shown no rash or diarrhea even at quite high doses. Admittedly this is scant and very early data, but the results are quite encouraging all the same relative to prior second-line therapies. The company is working on finalizing the Phase II dose and should have a pivotal study underway by midyear.

There is definitely a real need for an effective second-line therapy, and I believe the market opportunity in the U.S. and EU could easily reach $2 billion by 2020. An even bigger opportunity could be available in first-line therapy, though, and Clovis will likely be pursuing trials in this indication starting in 2014.

Clovis isn't the only company targeting these opportunities. AstraZeneca (AZN) has its own mEGFR inhibitor, AZD9291, under development. I want to emphasize that it is very early to be saying this, but I'm not sure Astra's drug is going to be as compelling. It is more active against wild-type EGFR and that leads to rashes and diarrhea. It's also worth noting that the dose response of the drug has looked strange so far, and that can be a bad sign - that said, it is very early to be making any conclusions. Ariad (ARIA) is also working on a drug that could be competitive, a dual ALK/mEGFR inhibitor.

Rucaparib Will Have More Competition, But It Has Potential

Rucaparib isn't as exciting as CO-1686, but this PARP1/2 inhibitor is nevertheless a fine early-stage drug for certain segments of the ovarian cancer population. A Phase I study of the drug showed disease control (RECIST) in 92% of patients at 12 weeks and 50% at 24 weeks. In a sub-group of patients with BRCA mutations, the rates were 100% and 63%, respectively, and the adverse events were generally moderate across the study participants. A Phase II study is underway to determine whether the company can identify patients whose tumors will respond best to the treatment, and a Phase III pivotal study should be underway in 2014.

As with CO-1686, Clovis isn't the only company exploring this particular approach. BioMarin (BMRN) has BMN-673, which has shown disease control of 86% at 24 weeks in a Phase I breast cancer stud and 82% clinical benefit in a Phase I ovarian cancer study. Tesaro (TSRO)'s niraparib showed 50% ORR in Phase 1 studies of breast and ovarian cancer, and both AstraZeneca and AbbVie (ABBV) are working on compounds as well.

I'm incrementally less positive on this drug. It is very early and the studies are not designed for comparability, but rucaparib doesn't seem to jump out in terms of efficacy and the drug will likely be later to market than some of its rivals. Twice-daily dosing may also be a limitation, though not a serious one in my mind. All of that said, if Clovis can better fine-tune which patients respond best it could make a real difference in the market, and I wonder if this drug could get a try out in breast cancer.

A Newcomer With Potential

Last and not least, Clovis added a drug to its pipeline with its November acquisition of Ethical Oncology Sciences. For $200 million upfront ($10 million in cash), Clovis added the breast cancer drug lucitanib. This drug inhibits FGFR1/2 and VEGF receptors 1-3, and could potentially address as much as one-quarter of the breast cancer market. An agreement with Servier (which owns ex-US rights to the drug) will cover a lot of the Phase II development costs (and beyond), and Clovis is still entitled to milestones and royalties from OUS development. Novartis (NVS) and AstraZeneca are also developing comparable drugs to lucitanib and are worth keeping an eye on.

Totting Up The Potential

I value CO-1686 on the assumption of 50% market share in second-line NSCLC and a 40% chance of approval. I have seen many analysts assign approval odds of over 60% to this drug and while the early data have indeed been compelling, I would offer the reminder that Phase III cancer drugs have a success rate in the range of 35% to 45%. With my numbers, CO-1686's value in second-line NSCLC would be $26.50 per share. For CO-1686 in first-line NSCLC, I use a 20% market share assumption and a 15% chance of approval. That leads to a $15.50 fair value.

I should also mention that the relevant EGFR mutation is three to four times more common in East Asia than the U.S. and Europe, making markets like Japan more viable and significant than normal. I am not explicitly including CO-1686 in my model at this time, but this could be a significant factor down the line.

I believe rucaparib has a 25% chance of approval and gaining 20% market share in BRCA mutation ovarian cancer. Assuming that Clovis can better determine which patients respond best, I would increase the approval and market share assumptions, but likely reduce the overall addressable market (a larger piece of a better-defined market). As is, I am valuing this drug at $15/share today.

Last and not least is lucitanib. While I think initial pivotal studies may focus on more narrowly-defined subtypes, I am basing my assumptions on one-quarter of the breast cancer market. With both 20% approval odds and 20% market share, this drug is worth $25 a share today.

I am including no value for the company's technology or preclinical pipeline at this time, nor do I include the value of the company's cash on hand as that cash will be going towards R&D for the foreseeable future. I will also note that Clovis will owe royalty payments to Celgene (CELG) for CO-1686 and to Pfizer (PFE) for rucaparib if those drugs are approved. These payments are factored into my valuation.

The Bottom Line

All told, I believe Clovis is worth $82 today, comfortably above its $59 Friday closing price. There are certainly risks here, particularly as it appears that the sell-side is more optimistic on the chances of approval than history would suggest is appropriate. In any case, I do believe that Clovis has a provocative portfolio of oncology drugs that target specific, identifiable cancer subtypes where there is a real unmet need. No biotech is really suitable for risk-averse investors, but I believe Clovis is definitely worth a closer look from those willing to consider biotechs.

Source: Clovis Oncology Has An Exciting Pipeline And A Reasonable Valuation

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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. (More...)

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