Clovis Oncology: Another Upcycle Coming
May 08, 2021
Summary
Clovis Oncology is an intriguing stock because it goes through periods of boom and bust.
As an ideal stock for traders, you can build Clovis shares in a downdraft and take profits on the upswing.
Though Rubraca sales came in subpar for this quarter, Clovis is expanding its label into a first-line drug for deadly ovarian cancer.
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When you invest in biotech, it pays to study the particular trading analytics powering your holdings. For instance, an extremely volatile stock that periodically moves in various up/down cycles can be lucrative for trading. Provided that you buy low and wait for the bullish trend to sell high.
That being said, Clovis Oncology (CLVS) is an excellent example of such a cyclical stock. Since late 2019, Clovis shares have rallied then faded, and the whole cycle repeats itself. Investors who bought cheaply and sold dearly have profited handsomely. On the other hand, those who cannot tame volatility have suffered losses. Based on the latest earning release, there are powerful catalysts that can galvanize another rally. In this research, I'll feature a fundamental update on Clovis and provide you my expectation on this intriguing equity.
About The Company
As usual, I'll present a brief corporate overview for new investors. If you are familiar with the firm, you should skip to the subsequent section. Operating out of Boulder, Colorado, Clovis is focused on the innovation and commercialization of stellar medicines to deliver hopes for patients afflicted by cancers such as ovarian, prostate, breast, and bladder.
Powered by an interesting portfolio, Clovis is maturing nicely with both approved/developing therapeutics and diagnostics. The crown jewel of this pipeline is rucaparib (i.e., Rubraca). The oral small-molecule inhibitor of poly (ADP-ribose) polymerase (i.e., PARP), Rubraca is launched as a second-line option for resistant ovarian cancer and deadly prostate cancer. The specific condition is metastatic castration-resistant prostate cancer (mCRPC) with the BRCA1/2 mutations.
Additionally, Clovis is expanding Rubraca's label for the first-line maintenance, either as monotherapy or in combinations with nivolumab (i.e., Opdivo) for ovarian cancer. Beyond Rubraca, Clovis is advancing lucitanib and a radiopharmaceutical compound dubbed FAP-2286 for other oncology conditions.
Rubraca Progress
Since Rubraca is the crown jewel of this pipeline, you should check its development. On the commercialization front, Rubraca sales disappointed investors, as it tallied at only $38.1M this quarter. That signifies an 11% year-over-year (YOY) decline. As I will elucidate in the financial analysis, this is due to the larger industry headwind relating to COVID. After all, Rubraca posted the strongest sales back in 2020, i.e., before the emergence of the Coronavirus pandemic.
Aside from the two Rubraca approved indications, Clovis is enrolling patients in the Phase 2 LODESTAR trial. LODESTAR studies patients suffering from solid tumors with a deleterious mutation in the homologous recombination repair (i.e. HRR) genes. I believe this franchise will deliver positive data results. Accordingly, you can expect Clovis to execute a regulatory filing in 1H 2022 to expand Rubraca's label.
Beyond HRR, I'm most excited about the combination study of Rubraca with Opdivo in the Phase 3 ATHENA trial. In my view, this will position Rubraca to become a first-line maintenance drug for ovarian cancer. Now that is if, and only if, the said trial will deliver positive outcomes in H2 this year. Roughly speaking, you'll only have to wait a few months from now to get the results.
Leveraging my system of forecasting, I ascribed the 65% (i.e., more than favorable) chances of delivering superb ATHENA outcomes for Rubraca. My rationale seemed from the positive ARIEL 4 results. Due to the robust efficacy, you can bet that it will be replicated in the ATHENA trial. And if this will occur, you can anticipate another big upcycle for this cyclical stock, Clovis.
FAP-2286 Advancement
Though I haven't mentioned FAP-2286 much, this is an overlooked asset. It's interesting to note that this radiopharmaceutical compound is comprised of both diagnostic and therapeutic components. Accordingly, the diagnostic entails FAP-2286 tagged with gallium-68 (i.e., an isotope) which is used to identified FAP-positive tumors. Concurrently, the therapeutic (FAP-2286) is powered by lutetium-177 (isotope) for destroying the tumor.
I believe this is an ingenious and lucrative approach toward decimating cancers. The use of radiopharmaceuticals to diagnose and treat cancer isn't going away any time soon. In fact, their importance is growing stronger by the day. For instance, Endocyte (ECYT) was acquired by Novartis (NVS) for $2.1B in recent years.
In terms of progress, Clovis is enrolling patients in the Phase 1/2 study of FAP-2286 for multiple tumor types. Perhaps, the company will disclose interim data either toward the year-end or early next year. Depending on the results, this can galvanize Clovis shares to a new high.
Lucitanib Development
Here, Clovis is investigating lucitanib (i.e., Luci) in combo with Opdivo for various cancers in the Phase 1b/2 LuMIERE trial. In the Phase 1b component, the study assesses the combo in different gynecologic cancers. As for the Phase 2 segment, Clovis is enrolling patients in various groups (i.e., cohorts) for different tumors. They include non-clear cell ovarian, non-clear cell endometrial, cervical, and clear-cell ovarian/endometrial.
The results, thus far, have not been impressive. Specifically, the non-clear cell ovarian cancer group showed some efficacy but not robust enough to warrant further investigation. Of note, ovarian cancer is deadly that's why lucitanib cannot subdue it.
As you can see, some drugs/combo is better at attacking one cancer more than others. And, you can appreciate that when Clovis realized the results are subpar to quickly shift focus on other cohorts. There is no point in wasting money as well as patient's time on a development that is unlikely to bear fruits.
On another note, the company intends to release interim data for endometrial cancer later this year. Based on my forecasting, I expect strong data for the endometrial cancer cohorts. This comes from my intuition and years of clinical forecasting.
Financial Assessment
Just as you would get an annual physical for your well-being, it's important to check the financial health of your stock. For instance, your health is affected by "blood flow" as your stock's viability is dependent on the "cash flow." With that in mind, I'll analyze the 1Q 2021 earnings report for the period that ended on March 31.
As follows, Clovis procured $38.0M in revenues compared to $42.5M for the same period a year prior. As you know, the revenue decreased by 11% YOY. And this is due to the commercialization headwinds associated with COVID. As we vaccinate more people, you can expect sales to improve later this year.
That aside, the research and development (R&D) for the respective periods registered at $52.8M and $68.2M. The 23% R&D decrease is related to the completion of the clinical studies for Rubraca. Now, I like to see an increasing trend in R&D because the money invested today can turn into a blockbuster in the future. After all, you have to plant a tree to enjoy its fruits.
In addition, there were $66.2M ($0.64 per share) net losses compared to $99.3M ($1.39 per share) decline for the same comparison. It's great to see a huge improvement in the bottom line. And, this is made possible by the reduction in R&D spending.
About the balance sheet, there were $190.9M in cash and equivalents. Against the $96.0M quarterly OpEx, I believe that there is adequate capital to fund operations into year-end. However, Clovis stated that their cash runway will last into early 2023.
While on the balance sheet, you should check to see if Clovis is a serial diluter. After all, a company that is serially diluted will render your investment essentially worthless. Given that the shares outstanding increased from 71.6M to 104.2M, my math reveals a 45.5% annual dilution. At this rate, Clovis did not clear my 30% cut-off for a profitable investment. Though it is the main weakness for Clovis, it's a trading stock where you can still bank gains.
Potential Risks
Since investment research is an imperfect science, there are always risks associated with your stock regardless of its fundamental strengths. More importantly, the risks are "growth-cycle dependent." At this point in its life cycle, the main risk for Clovis is if Rubraca sales can be ramped up if COVID is abated. Though I believe that COVID exerts commercialization pressure on Rubraca, the fact that Clovis is going at it alone also reduces the chances of successful marketing.
There is also the risk of clinical trial failure for ATHENA, LODESTAR, and LuMIERE. Altogether, I ascribed a 35% aggregate risk. In case of any negative trial results, your stock is likely to tumble by 50% and vice versa. Furthermore, I'm most concerned by the rate of cash burn and the amount of stock dilution. At that pace, it can put significant constraints on a rally.
Conclusion
In all, I maintain my buy recommendation on Clovis Oncology with the 4.3 out of five stars rating. Now, Clovis is not a stock for the faint of heart. Despite its robust fundamental development, the shares have been on a roller coaster ride. The key to capturing profits in Clovis is to view it as a "trading stock." Of note, the choice to buy, sell, or hold is always yours to make. In my view, you should buy at a low point in its cycle like now and thereby wait for an upcycle to sell your shares.
Fundamentally speaking, Clovis is supported by various organic developments. As the best-in-class PARP inhibitor, Rubraca is now launched for two deadly cancer indications, resistant ovarian and mCRPC BRCA1/2. Interestingly, the company is expanding the label for HRR mutation. Best of all, you can expect Rubraca to ultimately gain the first-line indication for ovarian cancer maintenance in the future. If that is achieved (and I believe there is a good chance it would), you can expect a huge rally. As such, the first solid sign is the upcoming strong ATHENA data release by H2 this year. Keep your eyes on that development because it can galvanize another upswing.
Aside from Rubraca, Clovis is advancing its radiopharmaceutical compound, FAP-2286, and lucitanib. Those franchises are enrolling patients. Looking ahead, you can anticipate interim results either toward year-end or early next year. If positive, they can fuel another rally.
