If enough people think something, does that make it true?
That’s the question investors should ask themselves when it comes to Clovis Oncology (NASDAQ:CLVS), which saw its stock skyrocket 371% in November. The reason: The return of merger and acquisition (M&A) activity in the pharma industry has renewed hope that the company might be an attractive buyout candidate.
Clovis Oncology has a potentially important oncology drug on the market in Rubraca, which could earn supplementary approvals to greatly expand its use. The business recently started to curb operating expenses, which may tempt a potential suitor to take action — or so goes the thinking of wishful investors. Do the rumors swirling around this pharma stock have merit?
A legitimate buyout candidate vs. wishful thinking
Some might argue that Clovis Oncology is making progress where it matters. For instance, after reporting operating cash outflow of $98.4 million in each of the first two quarters of 2019, the business cut that down to a cash outflow of $57 million in Q3.
To be fair, one quarter isn’t a trend. Even if it proves to be, the company would be on pace to burn through roughly $228 million in cash from operating activities on a forward-looking annualized basis. That would still meet the definition of progress: Clovis Oncology has reported operating cash outflows of at least $260 million in each of the previous three years.
Slimming down may be a good way to attract a potential suitor, which would likely make significant spending cuts after completing an acquisition. It also helps to extend the company’s runway, as it ended September with $354 million in cash. But potential buyers will still need to factor in the hefty cash burn. The cost of the potential transaction is the upfront price to acquire Clovis Oncology, plus forking over at least $200 million per year (or whatever it can be whacked down to) to support the unsustainable business.
The acquisition calculus would also need to factor in the future of the company’s primary asset, Rubraca, which is less than certain. The drug inhibits poly ADP ribose polymerase (PARP), an enzyme that plays an important role in the survival of certain genetically defined cancers, especially those harboring mutations in BRCA 1 or BRCA 2 genes, or those with mutations in other genes controlling DNA repair mechanisms.
Rubraca is currently approved to treat individuals with epithelial ovarian, fallopian tube, or primary peritoneal cancer who have been treated with at least two chemotherapies or who are in complete or partial remission. That’s a relatively small opportunity, but PARP inhibitors could potentially be used to treat various forms of genetically defined, solid-tumor cancers as first-line options. That could represent a multibillion-dollar opportunity for the drug class.
The issue for Clovis Oncology is that there’s ample competition with significant financial backing. AstraZeneca (NYSE:AZN) and Merck (NYSE:MRK) have teamed up to market and develop Lynparza, while GlaxoSmithKline acquired Tesaro for $5.1 billion in early 2019 to gain control of Zejula. Johnson & Johnson owns partial rights to the drug in prostate cancer, which could become the decisive market for PARP inhibitors.
Unfortunately for Clovis Oncology, Wall Street analysts have much higher expectations for the commercial potential of Lynparza and Zejula compared to Rubraca. Consider the latest clinical results for the trio when it comes to objective response rates (ORR) in metastatic castration-resistant prostate cancer (mCRPC) with various mutations in DNA repair genes:
| METRIC | RUBRACA | LYNPARZA | ZEJULA |
|---|---|---|---|
| Peak annual sales estimate (all indications) | $740 million | $3.1 billion | $1.1 billion |
| Study design for latest mCRPC data | Phase 2, single-arm | Phase 3, randomized | Phase 2, single-arm |
| ORR in individuals with BRCA 1/2 | 43.9% (57 patients) | 33% (162 patients, includes ATM mutations) | 41% (46 patients) |
| ORR in individuals with non-BRCA mutations | N/A | 21.7% (256 patients, all mutations, including 162 patients above) | 9% (35 patients) |
DATA SOURCES: REUTERS AND COMPANY PRESS RELEASES.
Each of the three PARP inhibitors has earned “breakthrough therapy” designation from the U.S. Food and Drug Administration (FDA) in mCRPC. That will allow Clovis Oncology to file a supplemental new drug application (sNDA) from the phase 2 data before the end of 2019, which means it could receive regulatory approval in 2020. The company is also enrolling patients in a larger, randomized phase 3 trial comparing Rubraca against a therapy chosen by the treating physician.
While generating data from a randomized study design will prove crucial for the ultimate commercial fate of Rubraca, AstraZeneca and Merck already have that data for Lynparza. The pair will submit an sNDA this month and look to gain approval in 2020. It may not matter which drug gets to market first, however.
Doctors — especially in countries with government-run, value-based healthcare systems — are more likely to choose Lynparza over Rubraca, especially since Lynparza was shown to reduce the risk of disease progression or death by 66% compared to the current standard of care. That could change if Rubraca delivers robust results from its phase 3 study, but that data is at least one year away.
Pump the brakes on the speculation
Shares of Clovis Oncology erupted higher in November on speculation that the company is a leading buyout candidate. Investors didn’t seem to care about the mCRPC data or timeline for an sNDA filing, as shares actually lost value in the month following the last data update. While the company only has one needle-moving asset, investors assumed that a market cap of less than $300 million was simply too good to pass up. But investors may want to pump the brakes on all the speculation.
Clovis Oncology is burning through over $200 million in cash through operations on an annualized basis, which a potential suitor certainly wouldn’t overlook when assessing the value proposition. The more important consideration is the uncertain future of Rubraca. After generating $104 million in revenue in the first nine months of 2019, the drug product is far from maximizing its potential. However, any company interested in a deal would have to bet that Rubraca holds its own against Lynparza in prostate cancer after launching in 2020, delivers superior data to Lynparza in the former’s currently enrolling phase 3 trial, and then races to disrupt established relationships with doctors to snag market share (assuming the previous condition is met).
That’s a risky bet. It also doesn’t factor in superior data in other solid-tumor cancers for Lynparza in the PARP inhibitor landscape, or the fact that more targeted PARP inhibitors are being developed across the industry’s pipeline today. Rather than gobble up Clovis Oncology and hope the value proposition pans out, it may make more sense to throw down on a lucrative licensing deal with a start-up or industry peer. Simply put, everything has to go right for Clovis Oncology, which isn’t a great position to be in.
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