Tivozanib and AVEO: Valuation Suggests Upside Ahead of FDA Decision

It seems that shares of AVEO Oncology (NASDAQ:AVEO) may have finally found their bottom. The oncology drug-developer bounced off of support at $6 (a triple bottom) early this week before beginning a brief uptrend, in-part fueled by insider buying last week. More importantly in the long-run, however, the FDA has accepted AVEO’s New Drug Application for tivozanib, a potential first-line treatment for Renal Cell Carcinoma (RCC), and set a July 28, 2013 PDUFA date for the VEGF inhibitor. Notably, tivozanib outperformed its potential competitor Nexavar (sorafenib) in the Phase III TIVO-1 study, which reported data earlier this year and compared the Progression Free Survival (PFS) benefit of the two drugs. But a secondary, arguably more important endpoint, Overall Survival (OS), proved a miss, as slightly more patients on tivozanib had passed away after one year. AVEO shares declined from $17 early this year to around $6 in November, an all-time low for the stock and a clear sign that expectations for tivozanib have gotten progressively worse following the survival data. Additionally, short interest in the stock climbed three-fold since March. What was once a high-expectation play in the oncology space has turned into a chancier investment as trial results proved less decisive than expected and FDA sentiment remains unclear. But if AVEO reports rosier OS data in February and tivozanib receives FDA approval in mid-2013, investors will see quality returns. The chances of approval, we believe, are good based on the FDA’s acceptance of PFS as an endpoint in past oncology treatments (cabozantinib for instance), and the question of long-term success will then fall to tivozanib’s marketability. We expect interest in AVEO to continue to increase in 1Q13 as a number of events approach – namely, pivotal OS data presentation in February – with trading peaking ahead of the mid-2013 FDA action date. With shares near their 52-week lows and the market largely discounting tivozanib’s approval and success, AVEO stands a good chance of delivering returns.

Mixed results raise questions for Tivozanib’s prospects. Tivozanib’s efficacy will come under close scrutiny as it enters the review process, and although the FDA has not yet announced involvement from the Oncologic Drugs Advisory Committee, it seems likely considering tivozanib’s mixed data. In the Phase 3 TIVO-1 trial, pitting tivozanib against the approved first-line RCC treatment sorafenib, tivozanib demonstrated a median PFS of 11.7 months compared to sorafenib’s 9.1 (HR of 0.797, P=0.042). In a subset of treatment-naive patients (70% of total), tivozanib demonstrated a median PFS of 12.7 months vs. 9.1 for sorafenib (HR 0.756, P=0.037). While a statistically significant improvement, investors and the FDA have instead focused on the 77% of tivozanib patients who achieved one year OS, compared to the 81% of sorafenib patients who did the same. The FDA subsequently communicated that the OS data will be a concern going into the review process, and these issues have pressured the stock in the second half of 2012.

AVEO explains the OS results from TIVO-1 as a result of crossover between the two arms of the trial, a valid element that could certainly confound Overall Survival data. In the trial, 53% of Nexavar patients went on to receive subsequent therapy, primarily with tivozanib, while only 17% of patients treated with tivozanib followed with supplementary therapy. The benefit from multiple treatments are obvious, and certainly may have impacted the results. Additionally, says the company, not enough patients in the 517-patient trial had passed away at the time of the data release to properly determine a mature median OS figure.

OS data to be presented in February will drive value for AVEO. Now, months later, AVEO has prepared and included the TIVO-1 full OS data in its New Drug Application and will present the final analysis at ASCO’s Genitourinary Cancer Symposium in February, a major value-driving event and one that could be a make-or-break moment for AVEO shares. Should the upcoming presentation prove consistent with earlier data, the stock may tumble to the $3-$5 range, just above cash. But if the data in fact show an improved or similar OS to sorafenib, share price will pop as shorts scramble to cover and investors take on a more confident stance ahead of the upcoming PDUFA. And despite investor concerns, tivozanib was better tolerated than its comparator in TIVO-1, and produced fewer adverse events, suggesting that overall survival may be a low hurdle to approval. Based on its safety and tolerability alone, an OS improvement may not be entirely necessary, although a benefit would further solidify tivozanib’s performance. Cross over in the trial is a valid reason for the misconstrued OS results, and a positive analysis of the data is likely.

Market is large, although the RCC space is crowded with approved drugs. Investors are looking to tivozanib’s competitors as indicators of the drug’s market opportunity. Pfizer’s (NYSE:PFE) market leading Sutent (sunitinib) generated $1.2 billion in 2011 globally, while sorafenib did $1.01 billion in sales for Bayer and Onyx Pharmaceuticals (NASDAQ:ONXX), although it’s important to note that these drugs are approved for broader indications. That said, many are questioning tivozanib’s ability to penetrate a market saturated by established products. With more than seven treatment options on the market, five of which are approved for first-line therapy, the question of tivozanib’s performance will come down to efficacy and tolerability compared to drugs like Sutent, Wyeth’s Torisel (temsirolimus), Novartis’ (NYSE:NVS) Afinitor (everolimus), GlaxoSmithKline’s (NYSE:GSK) Votrient (pazopanib) and Roche’s (RHHBY) Avastin (bevacizumab).

While the TIVO-1 comparator, sorafenib, is approved as a first-line treatment, it is more often used as a second-line therapy. Pfizer’s Sutent has secured the position as primary first-line treatment and using sunitinib in the TIVO-1 trial would have proved a more poignant comparator. In June, however, AVEO announced the Phase II TAURUS trial, juxtaposing tivozanib to sunitinib in a patient preference study that should read out in early 2014. That trial will be telling of patient preference, but in oncology indications, efficacy benefits are more determinant of physician adoption. Without a true efficacy comparison, peak sales will be difficult to predict. GlaxoSmithKline also compared its own RCC treatment, Votrient, to Sutent in a patient preference study and a non-inferiority trial. The drug overwhelmingly proved preferable, and the COMPARZ trial testing Votrient and Sutent head-to-head for efficacy also demonstrated non-inferiority. The results will be crucial in the long-term as provider utilization of Votrient picks up; many physicians have already indicated a greater likelihood of utilization following the two comparator trials. AVEO may need to run a similar non-inferiority trial, which could prove necessary to tivozanib’s sales.

Kidney cancer is already a crowded space, and another player will mean smaller pieces of the pie for all. Patient preference in the TAURUS trial will be valuable in assessing tivozanib’s market opportunity, and demonstrating preference will be a boon to AVEO and its shareholders, but the bottom line in oncology indications is efficacy. Without an efficacy comparison between tivozanib and Sutent, or even Votrient, providers aren’t going to jump to begin utilizing the new drug. Nevertheless, with its quality safety profile, we expect the drug to serve a notable portion of the patient population. Tivozanib sales of even a fraction of Sutent’s past performance support a higher valuation for AVEO than its current market cap, and analysts, who widely expect the drug to receive approval, have set price targets for AVEO ranging from $9 to $17.

Financials and current valuation suggest upside. AVEO splits tivozanib commercialization and revenue equally with partner Astellas Pharma (ALPMY) in North America and Europe, and in addition, pays tivozanib’s originator Kyowa Hakko Kirin royalties in the teens on AVEO’s recognized tivozanib revenue. AVEO does, however, make up some of that ground through a substantial milestone agreement with Astellas, which totals $1.4 billion in clinical, regulatory, and sales milestones.  AVEO is well-capitalized to continue development, removing the risk of a financing, and with a competent commercialization partner, AVEO is positioned to take advantage of a tivozanib approval.

With much riding on the ASCO data, we expect shares to continue moving sideways into February, although positive news on that front will prompt a significant run-up for AVEO into its PDUFA date, possibly even back towards its 52-week highs over $15. Considering the number of oncology candidates approved based on PFS alone, a positive vote from the FDA seems likely, but patient preference and comparators will be important to long-term tivozanib adoption. The drug already demonstrated improved PFS, and if it can show improved or similar OS to Nexavar, plus positive results from the Sutent patient preference trial, tivozanib will be positioned as one of the top-tier RCC treatments. After falling from its highs early this year, the market is discounting tivozanib approval from AVEO’s valuation, and shares are cheap enough to warrant a speculative position. Negative OS data will prompt further selling, but positive data will lift shares into the July PDUFA. It’s worth noting that although AVEO has two more candidates in the pipeline, Ficlatuzumab in Phase II and AV-203 in Phase I trials, these candidates will be largely ignored by investors until tivozanib receives an FDA decision.