AVEO Oncology: EU Approval Pop Is Just The Beginning – Seeking Alpha

Posted: August 31, 2017 at 2:44 am

My past two articles presented contrarian stocks (link 1 and link 2) trading at or near 52 week lows that I believe could experience exceptional gains in the next six to twelve months. Readers who have followed me for a while know that I am equally at ease with finding investing and trading ideas at either end of the spectrum.

While shares of AVEO Pharmaceuticals (AVEO) have decreased 60% over the past five years, the stock price has roared back rising 250% over the past year and over 500% year to date!

AVEO data by YCharts

The big news this week came when their lead asset tivozanib received approval in the European Union for the treatment of advanced renal cell carcinoma (RCC). Now called FOTIVDA, the drug will be utilized in first line treatment of adult patients with advanced RCC and for those who are VEGFR and mTOR pathway inhibitor-nave following disease progression after one prior treatment with cytokine therapy for advanced RCC.

The approval decision was based on data from a pivotal trial (TIVO-1) which enrolled 517 patients with advanced RCC, who were then randomized to receive sorafenib or the study drug. Superior progression-free survival (PFS) was observed (11.9 months vs. 9.1 months, p=0.042), while PFS in treatment naive patients of 12.7 months versus 9.1 months (p=0.037) also compared favorably.

Figure 2: Efficacy in VEGF TKI refractory setting (source: corporate presentation)

Especially of note, tivozanib’s favorable side effect profile was highlighted with only 14% of patients requiring a dose reduction due to adverse events (versus 43% with sorafenib). This bodes very well for future use in combination with other promising treatments. Incidence of diarrhea (23% vs. 33%) and hand-foot syndrome (14% vs. 54%) were also somewhat significant points of differentiation.

Figure 3: Favorable tolerability versus approved TKIs (source: corporate presentation)

AVEO stands to receive up to $394 million in milestone payments from EU partner EUSA Pharma in addition to tiered royalties from low double digits to mid-twenty percent range on net sales. In the near term, the company will receive $4 million associated with EU approval and could receive up to $12 million in payments related to reimbursement and regulatory approvals. Readers should keep in mind that a portion of milestone and royalty payments will go to Kyowa Hakko Kirin (KHK) as a sublicensing fee.

Keep in mind that the company estimates a $600 million commercial opportunity in 1st line RCC alone, with 85% of the market split between sunitinib and pazopanib. Management believes impressive efficacy coupled with the favorable tolerability profile could lead to significant market penetration.

Figure 4: Impressive PFS and strong safety profile in 1st line compared to other TKIs (source: corporate presentation)

For the second quarter the company reported cash and equivalents of $40.1 million, while net loss came in at $33.3 million (includes $23.9 million non-cash loss attributable to the increase in the fair value of the warrant liability). Management has guided for an operational runway into the fourth quarter of 2018, which doesn’t take into account milestone payments from partners (or payment of licensing milestones) nor equity or debt financings. During the quarter the company received $14 million in gross proceeds from their credit facility and ATM (at-the-market offering), while in June they announced a $5 million drawdown of their credit facility with Hercules Capital and $9 million sale of common stock via their ATM.

Other potential value drivers to pay attention to include advancement to phase 2 (full dose) of the TiNivo study utilizing tivozanib in combination with Opdivo in RCC. Study results will be presented in the near term. While early data from combining PD-1 treatments and VEGF TKIs/CTLA4 has generated promising responses, this has been accompanied with challenging toxicity as observed in the percentage of grade 3 and grade 4 adverse events. While down dosing from approved RCC doses is one option to reduce toxicity, it’s quite intriguing to imagine tivozanib becoming the candidate of choice in this setting due to its high selectivity and immunomodulatory properties.

Figure 5: Promising combination data with rough toxicity issues leaving room for improvement (source: corporate presentation)

The readout for the TIVO-3 pivotal US study is expected in the first quarter of 2018 and represents a major catalyst with a high potential to cause a run-up in share price. The study (along with TIVO-1) is expected to support approval in both 1st and 3rd line indications. Management estimates a market opportunity in the United States of over $1 billion in 1st line and around $250 million in 3rd line RCC with an important differentiator being that the generated dataset will be the only one stratified by prior PD-1 exposure.

Figure 6: TIVO-3 pivotal study design (source: corporate presentation)

Another asset that I’d like to at least mention is AV-353, their first-in-class Notch 3 Mab that could be the first drug to be utilized in pulmonary arterial hypertension with disease modifying properties. If they are able to strike a decent partnership for the asset, it could go a long way in reducing their cash crunch (even if at the preclinical stage of development).

When readers ask me about the role that key institutional holders play in my investing decisions, I typically respond that it’s important not only to look at the total size of their positions (on the whole and in relation to the fund) but even more importantly how aggressively they have been adding to a position. In the case of AVEO, it’s interesting that RA Capital has a new position (8.4 million shares), VenBio has been aggressively adding (6.6 million shares total), and other well known names such as Point 72 and Perceptive Advisors also have been adding or establishing pilot positions.

One risk to thesis is competition, as tivozanib is entering very crowded RCC markets where novel agents such as cabozantinib are stealing market share from oral TKIs. One strategy that management can utilize to differentiate their asset will be to initiate larger combination studies and targeting subsets of patients with specific biomarkers. Other risks include dilution in the medium term and the possibility of disappointing data for the TIVO-3 and TiNivo trials. Even if data is positive for the pivotal study, regulatory risk is a concern as approval by the FDA is never certain.

Below is one last graph on a valuation gap, some food for thought. While this is not even a case of apples to apples (or as one reader stated in a different case, apples to fruit loops), Exelixis was once considered a risky small cap stock with significant debt and an unproven asset in RCC as well.

AVEO Market Cap data by YCharts

As with all run-up plays, readers should reduce exposure to an amount that allows them to sleep well at night as study readouts draw near. Personally, I’d say after establishing a pilot position in the near term to ramp up to a 3/4 position buying on dips and then reduce to a half position prior to the TIVO-3 readout in the first quarter of 2018.

**I have a few great posts lined up for my weekend blog series here on Seeking Alpha regarding trading strategy that I believe readers will benefit from. Upcoming topics include contrarian stock picking and the rationale for tracking & continually updating the Runner of the Year Contenders list. Stay tuned!

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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AVEO Oncology: EU Approval Pop Is Just The Beginning – Seeking Alpha

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