Interesting Value Proposition Despite Setback - PART II
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In Part I of this article, I discussed the basic investment thesis of Clovis Oncology (NASDAQ: CLVS). In this part, I will discuss the company's product pipeline and cash position, and conclude with a valuation in the third part. I suggest serious investors read each part to get a thorough understanding of this interesting company.
Product Pipeline of Clovis:
CO-1686 is an orally available, small molecule epidermal growth factor receptor (EGFR), covalent inhibitor that is in Phase I/II clinical development for the treatment of non-small cell lung cancer (NSCLC) in patients with initial activating EGFR mutations as well as the T790M primary resistance mutation. Clovis has a development partnership with Roche Molecular System.
In May 2010, Clovis entered into a worldwide license agreement with Avila Therapeutics to discover, develop and commercialize CO-1686. In March, Avila was acquired by Celgene Corporation .
CLVS may be required to pay Avila (now Celgene) up to an aggregate of $119.0 million in development and regulatory milestone payments if certain clinical study objectives and approvals are achieved and $120.0 million in sales milestones if certain annual sales targets are achieved.
In January 2012, the U.S. FDA accepted CLVS' investigational new drug (IND) application to begin clinical investigation of CO-1686.
CO-1686 has the potential to effectively treat patients with T790M mutant EGFR NSCLC-a large and growing group of patients which have been identified with greater frequency due to recently approved guidelines, who today have no effective therapy.
CO-1686 faces competition from Tarceva® (marketed by Roche globally) and Iressa® (marketed by AstraZeneca (NYSE: AZN) and Teva (NYSE: TEVA), two of the currently approved drugs that are used to treat EGFR mutant NSCLC. However, CO-1686 potentially offers several important advantages over the second generation EGFR inhibitors, including superior efficacy due to activity against the T790M resistance mutation and higher selectivity for the T790M mutation with relative sparing of normal EGFR, therefore avoiding the significant skin rash and gastro-intestinal toxicities associated with other first and second generation inhibitors, including Tarceva and Iressa.
There are two more products in development targeting EGFR for the treatment of NSCLC: Boehringer Ingelheim's BIBW-2992 (afatinib) (in Phase III trial) and Pfizer's PF-299804 (in Phase II trial). Also, the products in development targeting the PARP pathway include Abbott's ABT-888 (velaparib), Tesaro's niraparib, Eisai's E-7016, Teva's CEP-9722 and Biomarin's BMN-673.
CO-338 is an orally available, small molecule poly (ADP - ribose) polymerase (PARP) inhibitor being developed for certain ovarian and breast cancers, that is currently in Phase I/II clinical trials as mono-therapy and in combination with chemotherapy. The phase III dose will be identified by mid 2013. CLVS plans to initiate a pivotal program by 2H13.
In June 2011, Clovis entered into a license agreement with Pfizer to acquire the exclusive global development and commercialization rights to Pfizer's Rucaparib. If approved, Pfizer will receive royalties on the net sales of the product and up to $259 million of further payments, if certain development, regulatory and sales milestones are achieved.
CO-338/ Rucaparib faces competition from other products in development targeting the PARP pathway that consist of Abbott's ABT-888 (velaparib) (currently in Phase II clinical trial), Merck's MK-4827 (in Phase I trial), Eisai's E-7016 (in Phase I trial), Cephalon's CEP-9722 (in Phase I trial), and Biomarin's BMN-673 (in Phase I trial).
In July 2012, CLVS entered into a drug discovery collaboration agreement with Array BioPharma for the discovery of a novel KIT inhibitor targeting resistance mutations for the treatment of GIST, a gastrointestinal cancer. Clovis may be required to pay up to an aggregate of $192 million in milestone payments if certain development and regulatory objectives and annual net sales targets are achieved.
Liquidity Position: The table shows cash flow used in operating activities:
Source: Company Filings
Looking at the cash being utilized to fund operations every year and the cash balance of $162.5 million as of 3Q12, we can say that the company is in a comfortable position to fund operations for at least the next 12 months, even if it continues to discover new drugs and enters into agreements to develop them.
However, if the upcoming clinical trials become successful, the company will have to start making milestone payments as early as the start of FY15, depending on the time consumed in regulatory approvals, etc. In addition, the company will also have to start strengthening its sales force and enter into various agreements for sales, marketing and manufacturing of its product. At that time, the company would need to raise equity or debt.
For tentative schedule of major financial expenses, refer to the following tables:
Source: Company Filings
This concludes our study of the product pipeline and cash flow positions. If you missed Part 1, please read it for a pro/con analysis; Part 3 concludes this series with a stock valuation.
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