Picking Up What’s Left of Aveo

Although shares of Aveo Oncology (AVEO) were crushed this week by a negative vote from the FDA’s Oncologic Drugs Advisory Committee regarding tizozanib (see Dr. Chaudhry’s follow-up), there’s reason to believe that picking up AVEO on the cheap might net investors some profit. AVEO tumbled from $7.50 at the beginning of the week to $2.62, a $115M market capitalization that’s actually below the company’s current $146M net cash position (estimated: $192M at 1Q13 – $26M in debt – approximately $20M burned thus far in Q2). The market recognizes AVEO’s steep cash burn, and is discounting the company in kind, but we believe that in the near-term AVEO will channel close to $3.00 as its investor base turns over.

The bet now is that either Aveo and/or partner Astellas pick up the pieces of the tivozanib program and develop a competent path forward. Although the FDA has yet to issue a full-blown rejection of tivozanib in Renal Cell Carcinoma (a PDUFA is set for July 28), no one is expecting a reversal of the ODAC vote, and the market is already factoring in this negative outcome. We do believe that the drug is approvable, and that the blame lies squarely on the poor trial design of TIVO-1. Frankly, it would make the most sense for Astellas to simply buy AVEO in its entirety. Assuming eventual approval and marketing of tivozanib in RCC, and/or its two other indications, triple-negative breast and colorectal cancer, Astellas could owe Aveo milestones totaling $1.3B. Compared to AVEO’s current $115M market cap and negative enterprise value, there’s a compelling case to be made for an acquisition. By folding Aveo’s pipeline into its own and eliminating the majority of G&A expenses for the existing business, Astellas could slash operating costs to the bone and run the tivozanib program itself for far less than what it may owe in milestones under an Aveo-led scenario.

There are a number of backdrops to this latest event. The TAURUS trial (NCT01673386) comparing tivozanib to sunitinib in metastatic RCC should read out early next year. The 160-patient trial will offer clarity on tivo’s performance vs. the leading and standard treatment option in RCC, but we’re not expecting this trial to be sufficient for marketing approval in the U.S. In addition, a Phase II 147-patient trial of tivozanib in triple negative breast cancer (NCT01745367) wraps up early next year, with a possible readout in 1H14. Astellas may also have preliminary results from a Phase II open-label trial (NCT01478594) of tivozanib in colorectal cancer during next year.

Frustratingly, AVEO burns a considerable amount of cash (almost $500K daily per latest guidance), and this presents the greatest near-term threat — AVEO is likely to raise capital yet again this year unless Astellas steps up in a strategic way. The company expects to end 2013 with $60M on the balance sheet (may be revised following Tivo’s rejection), which should last into 2Q14. We’re watching for a raise in the second half of this year. Again, we suspect that AVEO will base closer to $3 as its investors base rolls over, and being involved now is tempting given its fire-sale EV. But the preponderance of meaningful catalysts for the company won’t materialize until next year and waiting on the sidelines for clarity from management, an outlook from Astellas, and to see whether/when a capital raise materializes, would be most prudent.

In connection with AVEO, PropThink has taken a long position.