Is this oversold biotech ready to recover?
Kevin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
What: AVEO Pharmaceuticals, Inc. (NASDAQ: AVEO) a biotech company that recently took a stock hit when the FDA expressed a desire to further examine study results of the company’s newest therapy, Tivozanib, a treatment for patients with renal cell carcinoma (RCC). The valuation was over $17 at the beginning of the year and is now down to $9.44 although the price has come up in recent days. AVEO has a market cap of $412 million (relatively small for the biotech/healthcare industry/sector), a negative P/E and this year’s EPS is up over 100% but current bad press has predictions of a negative EPS for next year.
So What: The tumble in valuation this year revolves entirely around one product, Tivozanib (is it just me or are these medicine names starting to sound more and more extra-terrestrial?) an RCC treatment that was beaten in recent tests by another new RCC treatment. AVEO is adamant that there were flaws in the study. This situation has caused AVEO Pharm to push back application for marketing approval by another quarter – just the type of thing that scares biotech investors – while the results are sorted out.
It is unknown whether the FDA will accept AVEO’s analysis of the ‘mistakes’ and thus allow Tivozanib to move forward quickly.
Central to the issue is Tivozanib’s effect on progression-free survival (PFS) of RCC patients and the how the FDA views PFS as an end point of effectiveness. The FDA is more likely to quickly approve a therapy if PFS is the end point. If PFS was not the end point, it would require an additional 5-10 years to make the drug in question available to the market. Also, PFS is the way to compare two drugs so as to eliminate many data-skewing factors. To demonstrate the FDA’s opinion of a positive PFS impact, consider that five drugs have been approved because of a positive PFS impact: axitinib (Pfizer), bevacizumab (Avastin, Genentech), everolimus (Afinitor, Novartis), sorafenib (Nexavar, Onyx), and sunitinib (Sutent, Pfizer). This means that things look rather good for Tivozanib in the long run.
Now What: So far, we’ve only looked at the latest product from AVEO Pharmaceuticals and not other factors, including the company itself.
AVEO produces a distinctive drug-screening Human Response Platform that allows researchers to avoid using xenografts. Basically, xenografts are human cancer tumors grafted into mice so that treatments can be administered and studied. AVEO’s technology allows researchers to grow a tumor in the mouse and avoid problems caused by immunosuppressants altering the animal’s response to anti-tumor agents. The Human Response Platform is being licensed out and popularity would equal revenue. In the 10-Q it was stated that other targets have been found for this technology and are being explored. In other words, everything isn’t hinging on Tivozanib for this small cap.
Looking at the 10-Q and 8-K and some fundamentals paints an interesting picture. R&D costs have dropped by more than 60% for the first 6 months of 2012 as compared to 2011. This is notable because the company has “devoted substantially all of our resources to our drug discovery efforts comprising research and development, conducting clinical trials for our product candidates, protecting our intellectual property and supporting the general and administrative functions of these operations.” AVEO hasn’t generated revenue through sales in 2012 getting its funding from sources like license fees, milestone payments and research and development funding received from strategic partners ($320 million) as well as the IPO ($169 million). The lack of sales explains the Q/Q sales of -92% and Q/Q of -338%. Certainly those are eye-grabbing numbers, but they basically mean things are on hold until Tivozanib hits the market while the Human Response Platform generates licensing revenue.
AVEO has over $200 million in cash on its balance sheet and collaborations with Astellas, Biogen IDEC, and Johnson and Johnson (NYSE: JNJ) to fall back on if things get drawn out.
Given the growth potential for the Human Response Platform and the number of other drugs that have a positive PFS that hit the market making chances look good for Tivonazib, AVEO is looking like a good long term buy after taking a share price fall of more than $7.
Biotech’s that are a sound company and have lower valuation after a bump in the road represent some great profit opportunities. This is yet another reason why AVEO Pharmaceuticals (aka AVEO Oncology) is at least worth a closer look. Invest wisely, invest boldly and make money, capitalism wants you to.
thedeswolf has no positions in the stocks mentioned above. The Motley Fool owns shares of Johnson & Johnson. Motley Fool newsletter services recommend Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.