What happened

Shares of AVEO Pharmaceuticals (NASDAQ:AVEO) are down 17.9% at 11:58 a.m. EDT after the company issued an 8-K with the Securities and Exchange Commission that disclosed a settlement of a five-year-old class action lawsuit brought on by shareholders. Hidden 12 paragraphs into the document, AVEO Pharmaceuticals also disclosed that data for its phase 3 TIVO-3 trial will be delayed until the fourth quarter.

So what

The class action settlement shouldn't be sending shares down by double digits. The shareholder plaintiffs will get $15 million, but that'll be paid by the company's and former officers' insurance carriers. They'll also get warrants to purchase 2 million shares that are exercisable at $3.00 per share. But that's higher than where AVEO Pharmaceuticals closed yesterday, so the warrants aren't really worth anything at the moment.

On the other hand, the delay in the TIVO-3 data makes the company more risky, which is likely why shares are down today. After delaying the planned data disclosure a couple of times, the latest estimate was to expect data from the clinical trial in the third quarter, but now investors won't find out results until the fourth quarter.

Doctor talking to patient in exam room

Image source: Getty Images.

Like most cancer trials, TIVO-3, which is testing AVEO Pharmaceuticals' tivozanib as a third-line treatment for advanced renal cell carcinoma, is based on the number of "events" that occur. For TIVO-3, an event is defined as either the patient dying or the tumor progressing, collectively called progression-free survival (PFS).

There are three possibilities for the delay:

  1. Patients taking tivozanib have longer-than-expected PFS, which would obviously be great news.
  2. Patients in the control group taking Bayer's Nexavar have longer-than-expected PFS, which would be very bad news for AVEO Pharmaceuticals.
  3. Both groups have longer PFS, which is also bad news for AVEO Pharmaceuticals because it lowers the relative extension of PFS. For example, the difference between a five- and eight-month PFS is a 60% improvement, but the same relative three-month improvement at eight and 11 months is only a 38% improvement.

The SEC document also disclosed that part of the delay was because some patients were removed from the PFS analysis, which could be an issue when the Food and Drug Administration reviews the data.

Now what

Today's drop could end up being a buying opportunity, but without knowing why the PFS is longer than expected and the lack of disclosure as to why patients were removed from the PFS analysis, the biotech is arguably more risky than it was before the disclosure and deserves a lower share price until the data is released later this year.