Shares of Clovis Oncology (NASDAQ: CLVS ) sank double digits Wednesday after Bloomberg reported that not one buyer has stepped up to bid for Clovis after it hired Credit Suisse to explore strategic options. In a biotechnology space that seemingly has no regard for valuation, this might be a major eye opener, but does the loss present value?
A possible acquisition made sense
Big pharma is known to make big acquisitions to create pipeline value. Earlier this year, Amgen paid a whopping $10.4 billion to acquire Onyx Pharmaceuticals. A couple years ago, Gilead Sciences paid more than $10 billion to acquire Pharmasset, and in the last month, shares of ViroPharma have soared nearly 30% behind several acquisition rumors.
Therefore, when Clovis hired Credit Suisse it seemed reasonable that big pharma might be lurking around the corner. Yet, this reasonable possibility is simply not the case.
What's so exciting?
Earlier this year, back in June, shares of Clovis more than doubled after the company reported impressive early phase data at ASCO.
Clovis reported data on two different products: CO-1686, a lung cancer drug, and a Poly(ADP-ribose) polymerase inhibitor (PARP) called rucaparib.
CO-1686 is the drug that really impressed Wall Street. However, the study was incomplete, and hadn't found an optimal dose, but Clovis was in the process of increasing the dosage in patients as the trial progressed.
In that study, there were four partial responses, and three of those four came at a dose of 900mg, which was a high dose. Thus, with a higher dose producing better results, investors are optimistic that clinical results will improve in time.
However, what's even more impressive is that this particular patient group presents a mutation that prevents a therapeutic effect from similar drugs. CO-1686 was tested on patients who had this mutation and worked where others had failed. As a result, Clovis' stock doubled.
Then, Clovis' PARP inhibitor to treat breast and ovarian cancer produced "clinical benefits" in 89% of patients in the phase 1 trial, although precise data is still unknown, and data is minimal.
Clinical stage matters
While Clovis' data at ASCO looks attractive, especially considering there is no approved product to treat lung cancer patients with mutations, there is still a lot to learn.
With rucaparib, there is no concrete data, and with CO-1686, only 24 of the 42 patients enrolled had entered the dose escalation phase at the time of ASCO. Moreover, only six of those patients had reached the highest dose, which also produced the best results.
Therefore, with Clovis' market cap of $2.2 billion, big pharma would be paying a hefty premium for data that is incomplete at best. In addition, if you look at Clovis' history, including a failed phase 3 trial of CO-101 last year, big pharma must be skeptical of Clovis' ability to create this seemingly perfect drug in CO-1686.
In comparison, Acadia Pharmaceuticals (NASDAQ: ACAD ) has a market cap of $2.2 billion, equivalent to that of Clovis. The difference is that Acadia's lead product, the anti-psychotic drug pimavanserin, will likely be FDA approved at the end of next year and begin producing revenue by the start of 2015.
In addition, pimavanserin is a special drug because it does not cause the side effects found in other anti-psychotics, and it showed a clinical benefit in treating diseases that have no FDA-approved products. Hence, analysts believe pimavanserin could earn peak sales north of $2 billion annually. In the case of Clovis, no peak sales have been estimated.
With all things considered, it makes little sense for Clovis to trade with the same market valuation as Acadia, and for investors to expect a buyout. Even Sarepta Therapeutics (NASDAQ: SRPT ) has a smaller market cap than Clovis.
The difference is that Sarepta has complete data on a dozen Duchenne muscular dystrophy patients, which is equally impressive, and could earn an FDA approval sometime next year. Even if Sarepta has to complete a larger study, it would still beat Clovis to the market by at least two years.
The bottom line is that clinical stage matters regarding valuation, and especially to big pharma. Thus, two phase 1 studies don't constitute a multibillion-dollar buyout.
This company's more attractive
Aside from Clovis being very expensive relative to its data, the fact is that we really don't know much about its PARP inhibitor rucaparib.
Another company that has been on the acquisition block is BioMarin Pharmaceuticals (NASDAQ: BMRN ) , a company that treats ultra-rare diseases and has four FDA-approved drugs. In addition, BioMarin also has a PARP inhibitor called BMN-673 in late-stage studies.
BMN-673 is being developed to treat breast, ovarian, and small-cell lung cancers. Analysts project peak sales of $600 million for its breast cancer indication alone. Thus, BMN-673 is more diversified than rucaparib, has more data, and various analysts, such as Barclays Ying Huang, believe BMN-673 will be the most effective of the PAPR inhibitors in development.
With that said, BioMarin is about five times more expensive than Clovis, but with $525 million in sales over the last 12 months, and a large pipeline, it is possible that acquirers would prefer BioMarin over Clovis.
What's it mean for Clovis?
Essentially, Clovis' PARP inhibitor has little data and is considered a laggard behind BioMarin. Then CO-1686, although impressive, does not have robust data.
At this time, Clovis is trading lower by 13%, and investors should use big pharma's lack of interest as a realization that Clovis is simply too pricey, and that little investment upside exists at this time.
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