|Shares Out. (in M):||47||P/E||0.0x||0.0x|
|Market Cap (in $M):||820||P/FCF||0.0x||0.0x|
|Net Debt (in $M):||-340||EBIT||0||0|
Type: Event-driven / Speculative Pharmaceutical
AVEO: A Seth Klarman small-cap pharma pick
AVEO pharmaceuticals offers what we believe mis-priced wager on clinical trial results expected in Q4 2011 at the earliest, offering up 80% probability for a 50 to 75%+ return on the upside vs a 20% probability for a -60% return on the downside (to net cash) in about 6 months time . Expected value today given our prices and probabilities should equal between 22 and 24 per share. In per share terms, we believe we're risking $10-12 per share to get $8-10 with an 80% likelihood of success, or about a 5:4 payout with 4:1 odds. We'll take bets like this all day long, so long as they are sized appropriately.
The opportunity exists because of a) the speculative nature of preclinical biotech b) the small, under followed nature of the company and c) the recent share issuance
AVEO history: buying in to a late-stage VC project at just the right time
Rather than re-create the wheel, just read this article. Key take-aways are that a) the people are excellent and b) the project has b
AVEO owns 45% - 50% net interest of the next potential Avastin in North America and Europe
Tivozanib (TIVO) is AVEO's special sauce. TIVO is a small-molecule oral vascular endothelial growth factor (VEGF) inhibitor, currently in Phase III trials for the treatment of advanced renal cell carcinoma (RCC - kidney cancer) and in Phase Ib/II trials for numerous other indications. Very briefly, VEGF inhibitors work by fitting molecules into the 3 types of VEGF receptors in cell walls, preventing key hormones from entering cells and stalling the blood-vessel growth critical for supporting cellular division. The market for VEGF inhibitors is expected to reach $14 billion by 2014, up from $10 billion today. Avastin, with ~6 billion in sales, is a VEGF inhibitor.
TIVO is significantly superior to other small-molecule oral VEGF inhibitors because it a) has a much longer half-life in the body and b) has a much better fit to the VEGF receptors without hitting other off-target receptors. The impact of these benefits can be seen in the dosing quantities. Patients on TIVO take approximately 1.5 mg per day in a single dose, where patients on other VEGF inhibitors currently in-market take between 50 mg and 800 mg per day. Axitinib, another small-molecule oral VEGF in Phase III and perhaps TIVO's closest competitor going forward, requires 2 doses of 5 mgs per day.
Physicians frequently say that side-effects are entirely correlated to dosing quantities. This heuristic rings true with TIVO as well - the tolerability profile is so much better for TIVO than it is for any of the other currently marketed small-molecule oral VEGF inhibitors. As an example, oncologists currently prescribe Sutent for RCC in advanced patients today. While the median progression free survival (PFS) for Sutent is around 11 months, meaning that on average tumors don't grow for 11 months while on Sutent, patients frequently discontinue drug usage at around the 7 month mark due to intolerability leading to lack of dosing compliance.
The tolerability of TIVO is a major reason why it could be a big time blockbuster as it allows for combination treatments. The VEGF cancer-fighting cocktail theory goes like this: prevent further tumor growth with the VEGF inhibitor and simultaneously attack the current tumor mass with chemo/radiation. This is how a majority of patients on Avastin are treated. And current results for other indications are promising - Phase Ib clinical trials have shown that TIVO can be combined with targeted therapies and chemo at full dosage - Torisel in RCC, FOLFOX6 in colorectal cancer, Taxol in metastatic breast cancer, and Xeloda in breast and colorectal cancers.
Furthermore, physicians are excited about TIVO, as evidenced by the swift enrollment in the Phase III trial - 6 months ahead of schedule. Indeed, in Europe, TIVO was granted orphan drug status for RCC treatment by the EMA, which accelerates the regulatory process. And when physicians are excited, investors should be excited.
TIVO is roughly comparable to Sutent and Nexavar, both oral small-molecule drugs approved for multiple indications, including RCC. In 2010, Sutent and Nexavar did 1.1 and 0.9 billion in sales worldwide respectively. On a comparable basis, TIVO is expected to be significantly more potent than Nexavar and somewhat more potent than Sutent in treating RCC populations. And, as stated above, TIVO's tolerability profile is quite differentiated from both of these drugs. Note that ONYX pharmaceuticals (ONXX), the company that owns a 50% interest in Nexavar, sports a 2.2 billion market cap (Sutent is owned by PFE).
The TIVO trials - early data hints at extremely positive results
TIVO's Phase II data showed remarkable numbers. The median PFS for the entire population of Phase II participants (272) was 11.7 months, about 1 month higher than Sutent, the current standard-of-care for treating RCC. More importantly, in the patient population who had a prior nephrectomy and a clear cell histology (176), PFS was a whopping 14.8 months. In addition, the tolerability profile was fantastic, with minimal off-target toxicities associated with Sutent and Nexavar (diarrhea, fatigue, stomatitis, and hand-foot syndrome), and the toxicities associated with the mechanism of action (hypertension and hoarse voice) are both very manageable.
The Phase III trial is set up as a head-to-head against Nexavar, where about 260 patients will take TIVO and 260 patients will take Nexavar. Patients in this trial must have had a) a prior nephrectomy and b) a clear cell histology, so these patients are identical to the 176 in which TIVO performed fantastically. Initial results will be available at the 310 patient event mark (an event is defined as noted tumor growth based on CT scans independently reviewed). The trial was 'powered' with the assumption that the median PFS for the Nexavar trial would be 6.7 months - significantly above the 5.1 to 6.5 months Nexavar has shown in all independently-reviewed trials - and the median PFS for TIVO would be 9.7 months - significantly below TIVO's shown PFS in this patient population. The trial completed enrollment in August 2010.
Initial results were expected mid-2011, about 12 months after the trial had begun. By then, it would be extremely likely that all the patients on Nexavar would have shown progression and that a good bit more than half of the patients on TIVO would have shown progression. However, management re-guided initial results until Q4 2011 at the earliest and only because of the event rate.
There are three possibilities for this: 1) Events are slower than expected in the Nexavar arm. We find this unlikely considering historical Nexavar trials, which have hardly ever done better than 6.5 months PFS. Admittedly though, this outcome would be bad for AVEO. 2) Events are slower in the TIVO arm. We find this very likely considering what we know about the Phase II trials in the similar patient population. In fact, we believe that a shift from 9.7 to 15 months median PFS in the TIVO-1 arm can almost entirely explain the 6 month delay in event expectations. This would be incredible results for AVEO. P3) Some combination of the two. Again, we think this is unlikely because of #1 above. Unfortunately, even management cannot tell which arm the events are coming from, only that they are coming significantly slower.
So then, how do we come up with some meaningful probabilities for the Phase III trial? To begin, we take a seminal study from Deloitte about preclinical drugs, specifically the oncology group. Out of the 46 compounds which advanced to Phase III trials, 28 filed for an NDA, meaning 18 did not. Thats roughly a 39% attrition rate for the industry average. Of this 18, 13 were abandoned because they lacked efficacy in their trial, 3 were abandoned for pipeline prioritization, 1 was abandoned for adverse effects, and 1 didn't provide a reason. We believe the evidence clearly shows efficacy. We also know that TIVO will not be abandoned for pipeline prioritization. However, to be conservative, we leave 33% of the normal efficacy risk and 100% of the adverse event risk and other risk. This leaves ~34 drugs in our relevant bucket, with ~6 of them being abandoned, or an 18% attrition rate.
So what exactly are we buying?
AVEO owns the following:
|Upside per share||3||4||5|
|Cash per share(downside)||6||26||23||20|