Near an All-Time Low, Is Clovis Oncology a Buy?

The collapse of Clovis Oncology (CLVS) stock has been stunning. Shares were trading at over $75 apiece in the middle of 2017, and even briefly soared to $100 each, but have gradually tumbled all the way to $6 apiece today. What happened?

Clovis Oncology has been in a fierce competition to expand the use of Rubraca, the company's poly ADP ribose polymerase (PARP) inhibitor, before other drugs in its class can carve out market share. While the drug generated only $66 million in revenue in the first half of 2019, analysts think PARP inhibitors could find broad usage against several cancers, representing a multi-billion market opportunity. 

Unfortunately, competing PARP inhibitors have delivered more impressive data in the last two years than Rubraca. But perhaps Wall Street is being a little too harsh. If that's the case, is Clovis Oncology a worthwhile investment?

Image source: Getty Images.

A look at the pipeline

Clinical trials conducted to date suggest PARP inhibitors could become valuable treatment options in certain types of ovarian, prostate, breast, and pancreatic cancers that harbor specific genetic mutations. There are three PARP inhibitors on the market today, but they're approved to treat late-stage ovarian cancer. The real opportunity for patients and companies is to earn marketing approval as earlier treatment lines in various cancers.

Clovis Oncology's candidate is Rubraca, which is currently approved as a maintenance treatment for recurrent ovarian cancer that has responded to platinum-based chemotherapy. Investors have been largely unimpressed with drug sales, which totaled $66 million in the first half of 2019 and were primarily generated in the United States. But the drug earned marketing approval in Europe in early 2019, so a slight revenue boost could be around the corner.

Then again, investors are more focused on clinical programs of Rubraca. Clovis Oncology is conducting three phase 3 trials and three phase 2 trials of the drug candidate in ovarian cancer, prostate cancer, and solid tumors with specific mutations. Among the most closely watched studies:

• The Ariel4 study (phase 3) is testing if Rubraca can treat ovarian cancer that has come back after two prior lines of treatment.
• The Athena study (phase 3) is testing if a combination of Rubraca and Opdivo from Bristol-Myers Squibb can become a first-line treatment option for ovarian cancer after platinum-based chemotherapy.
• The Triton 3 study (phase 3) and Triton 2 study (phase 2) are testing Rubraca as a treatment for advanced prostate cancer with specific genetic mutations. The results collected to date, including a 44% tumor response rate in 25 evaluable patients, have earned the drug candidate Breakthrough Therapy Designation from the U.S. Food and Drug Administration.

If the asset delivers in its late-stage trials, then SVB Leerink analyst Andrew Berens expects Rubraca could achieve peak annual sales of $740 million by 2025, according to FiercePharma. Given that, why have investors handed Clovis Oncology a market cap of just $310 million? There are two answers: competition and waning excitement about a potential buyout.

The PARP inhibitor race includes Lynparza from AstraZeneca and Merck, Zejula from GlaxoSmithKline (via the $4.2 billion acquisition of Tesaro in late 2018), and a slew of earlier research from start-ups such as Ribon Therapeutics. Save for the start-ups, those competitors have much deeper pockets than Clovis Oncology -- and perhaps more impressive clinical data to boot.

For example, Lynparza blew away investors in October 2018 with an update on its ovarian cancer indication. Patients receiving the drug had yet to reach a median progression-free survival (PFS) at the 41-month mark. The number of women achieving a PFS of at least 36 months on the drug candidate more than doubled compared to those taking placebo. That news pushed shares of Clovis Oncology sharply lower.

Meanwhile, investors had once expected Clovis Oncology to be a prime buyout candidate, but a lack of interest has started to spook investors. One look at the income statement might show why that's the case.

Image source: Getty Images.

By the numbers

Regardless of how the company's pipeline stacks up to the competition, Clovis Oncology has dug a deep hole for itself financially. The business reported $245 million in total expenses in the first half of 2019, primarily related to ongoing mid- and late-stage clinical trials. That created an operating loss of $179 million and operating cash outflow of $196 million in that period.

Data source: SEC filing. YoY = Year over Year.

Clovis Oncology exited June with $316 million in cash and available-for-sale securities and raised $263 million in convertible debt in early August. That should be sufficient to fund operating activities and expanded launches of Rubraca in Europe for the next year or so, but the business desperately needs to realize success in the clinic and with commercialization efforts. Significantly reducing operating expenses after that, where possible, would also be welcome -- and may help the company's buyout prospects.

A very risky pharma stock

Investors might think Clovis Oncology stock is a steal given the company's $310 million market cap and the sales potential of Rubraca. However, slow sales growth to date shows the company is struggling to gain traction with doctors, while competitors have delivered impressive clinical data that might suggest they'll be the ones owning the massive market opportunity for PARP inhibitors. While Rubraca (and the second drug candidate, lucitanib) are likely undervalued at the current market cap, that hidden value is likely offset by the enormous losses piling up. Ironically, the depressed market cap has likely kept potential buyers away, rather than brought them in for a closer look, because the lowly valuation is primarily driven by poor financial performance.

A company might still be willing to pull the trigger and acquire Clovis Oncology, but it probably wouldn't happen unless more impressive results are delivered, and that's a risky bet for investors to make right now.