Is Clovis Oncology a Wolf in Sheep's Clothing?

It has been a little more than three months since Clovis Oncology (NASDAQ: CLVS  ) , a clinical-stage biopharmaceutical company focused on developing cancer therapies, more than doubled after releasing data on two early stage treatments at the American Society for Clinical Oncology's annual meeting.

The two experimental therapies in question that led Clovis to soar are CO-1686, an EGFR-mutant non-small-cell lung cancer treatment, and rucaparib, a monotherapy treatment being studied in solid tumors. With regard to CO-1686, Clovis noted at ASCO that three out of four patients with the dominant resistance mutation T790M achieved a partial response in early stage trials, although the company was still trying to figure out an optimal dose. For rucaparib the story was similar, with the primary beneficiary of its 37-patient multiple disease solid tumor trial being ovarian cancer patients with which rucaparib provided an 89% clinical benefit. Yet, like CO-1686, optimal dosing was still being studied. 

Was this positive news? Absolutely? But did I feel that the share price deserved to move from around $12 in November to its closing price yesterday of $72? Heck no -- and I'll tell you why!

Clovis' epic fall from grace
Back in November, Clovis Oncology's lead drug candidate -- and the only reason it commanded a valuation in excess of $20 per share -- was CO-101, an experimental treatment for metastatic pancreatic cancer. Unfortunately, CO-101 failed to meet its primary endpoint of statistical significance from Eli Lilly's Gemzar in mid-stage trials and was subsequently shelved .

To rub salt in the wound, Celgene (NASDAQ: CELG  ) around the same time reported that its cancer-fighting compound Abraxane, when combined with Gemzar, outperformed the monotherapy of Gemzar in advanced cases of pancreatic cancer. The end result was that less than two weeks ago Abraxane was approved by the FDA as a first-line treatment with Gemzar for metastatic pancreatic cancer while Clovis' CO-101 study paperwork is now collecting dust. 

Source: Rareclass, Flickr.

Then came the real shocker yesterday: a report from Bloomberg that Clovis had hired Credit Suisse to help shop it around and hopefully find a buyer. The move, of course, makes sense given the high-profile deals and near-reaches we've witnessed in recent months in the biotech sector. Amgen paid a hefty price of $10.4 billion to scoop up Onyx Pharmaceuticals (UNKNOWN: ONXX.DL  ) in order to get a hold of Kyprolis and Onyx's other cancer-fighting gems within the past few weeks. Similarly, in late July, branded and over-the-counter drug maker Perrigo announced it would pay $8.6 billion for Elan (UNKNOWN: ELN.DL2  ) – a head-scratching move considering that Elan sold its Tysabri stake away to Biogen Idec for $3.25 billion and had recently seen more clinical trial failures than successes.

The market for M&A reaches is obviously ripe, but I can't help but feel that Clovis' bid to be bought is nothing more than it acting as a wolf in sheep's clothing.

Clovis, a wolf in sheep's clothing?
Let's look at it from this perspective: What is the purchasing company going to inherit?

First, we have to consider Clovis' cash and debt. Here's the good news: Clovis has no debt. Instead, the purchasing company will receive $372.2 million in cash, or a tad over $12 per share. Even removing this cash from the equation, though, we're still looking at a company valued just above $1.8 billion.

So what about Clovis' pipeline? What I mentioned above regarding its ASCO presentations is basically it. Three early stage studies (CO-1686 for NSCLC, and a separate monotherapy and chemo combination study with rucaparib) and a preclinical collaboration with Array BioPharma for a mutant cKIT inhibitor for the treatment of gastrointestinal stromal tumors. That's it. The entire pipeline. And it currently would cost a purchasing company about $1.82 billion with cash subtracted out of the equation to get a hold of it!

Now, I'm not saying that Clovis has zero chance of success with these existing compounds, but history has shown that purchasing companies that chase early stage results often have very shaky success rates. Last year Bristol-Myers Squibb (NYSE: BMY  ) purchased Inhibitex for $2.5 billion in order to get its hands on an early stage oral hepatitis-C treatment known as INX-189. The problem was after some clinical testing of this compound, renamed BMS-986094, it was found to have caused the death of a patient and was eventually shelved. Total writedown for Bristol-Myers: $1.8 billion.

The bottom line
So, what would the purchasing company really be getting here? An early stage solid tumor therapy that delivered solid results in 10 patients, and a mutation-specific cancer drug that worked on three of four patients in an NSCLC early stage trial, as well as $12-plus in cash. For a company already valued at frothy $2.19 billion, I personally view this situation as almost inconceivable for Clovis to expect to find a buyer for an even higher price point. Considering that Clovis will burn through about $80 million per year in expenses as it runs its trials and continues its research, I just don't see who, if anyone, would step up and pay such a steep price for such a young and unproven pipeline.

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