Last Updated on May 31, 2019 by Sultan Beardsley
At the end of January, the small-cap biotechnology company AVEO Oncology (AVEO) updated investors on the delayed timeline for filing with FDA for their lead compound tivozanib. This news led to a sharp drop in price as investors lost patience, and potential hope, for the approval of tivozanib. After this 60% single-day drop in share price, shares settled in a fairly stable trading range reaching a low of $0.49. Suddenly, on March 27th, the stock awoke and jumped up over 45% in a single session. The cause for this jump? Buyout chatter from Seeking Alpha blogger TheBlueLion involving AVEO and AstraZeneca (AZN) seems to be the most well-accepted cause. This has been on the heels of other grumblings of AVEO being suited for purchase on various forums. To date, this blog post appears to be the most publicized chatter. While AVEO has its rough period, a buyout at these levels may pay off handsomely for the acquirer, and shareholders. In this article, I will look at the merits of the buyout chatter and discuss the rumored buyout price…
AVEO Oncology (AVEO) has a history of an oncology player with volatile swings dating back to 2013, when its lead compound tivozanib was denied marketing approval in the United States by the FDA on the basis of conflicting progression free-survival (PFS) and overall survival (OS) outcomes. Shares reached a nadir in late 2015 at $0.60 before a small reversal was seen. Shares then languished till mid-2017, when tivozanib was approved in the European Union (EU) for first-line treatment of adult patients with advanced renal cell carcinoma (RCC) and for adult patients who are vascular endothelial growth factor receptor (VEGFR) and mTOR pathway inhibitor-naïve following disease progression after one prior treatment with cytokine therapy for advanced RCC.
Meanwhile, AVEO initiated and executed on its vision for tivozanib, completing the TIVO-3 trial. TIVO-3 is evaluating tivozanib in third and fourth line setting for RCC, with the intent to provide answers to the FDA’s questions in response to the TIVO-1 trial. These questions largely focused on: limited number of North American patients and a trend toward reduced survival in the tivozanib arm. On November 5th, AVEO announced positive topline results of the TIVO-3 trial, which was an improvement of progression-free survival. Despite this positive topline result, investors were more concerned with the immature OS data, which revealed a hazard ratio (HR) for death of 1.06 (p=0.69) with only 46% of survival events having occurred. On January 31st when AVEO updated investors on the timing of the NDA, they also updated the HR. It was discovered that a group of patients whose status was unknown at the time of the initial results had been discovered, and the HR for death had been revised to 1.12. The approval of tivozanib in the United States rests largely on the shoulders TIVO-3’s success. As such, since the update, the share price has moved in a range between $0.49 to $0.76.
Screenshots of the aforementioned buyout chatter are presented in Figures 1 and 2. Unfortunately, the link to the specific blog on seeking alpha no longer works, as it appears the piece has been removed. However, here is the link to the alert Seeking Alpha sent out to followers on March 27th at 14:03 that is still active. We will now start to dig into the various aspects of this rumor.
AVEO And Pipeline Value
As expected, the most coveted asset in AVEO’s pipeline would be tivozanib, as it is the most advanced candidate. The entire pipeline can be visualized here. AVEO licensed tivozanib from Kyowa Hakko Kirin (KHK). The terms of this agreement include tiered royalties in the range of low to mid-teens on any tivozanib sales in North America. There is a one-time $18 million milestone payment that AVEO would need to pay KHK if tivozanib is approved in the United States. AVEO has subsequentially sublicensed tivozanib to EUSA in the territories of Europe (excluding Russia, Ukraine and the Commonwealth of Independent States), Latin America (excluding Mexico), Africa and Australasia for all diseases and conditions in humans. Under the terms of this agreement, EUSA must pay AVEO tiered double-digit royalties on the net sales ranging from low double digits to mid-twenties. Per the agreement with KHK, AVEO must pay KHK a sublicense fee on these royalties of 30%. One can see that from the commercialization side, AVEO stands to gain very little from these royalties after consideration of the sublicense fee. On the front of milestone payments from EUSA, AVEO is still eligible to receive $2.0 million for reimbursement approval in each France, Italy, and Spain; these payments will be charged the 30% sublicense fee. AVEO is also eligible for milestone payments of $2.0 million per indication if/when EUSA files with the EMA for marketing approval for three prespecified indications, and an additional $5.0 million upon EMA approval for these indications. These milestone payments would be subject to the KHK 30% sublicense fee. Furthermore, if EUSA decides to opt in to the TIVO-3 trial, which it would need to do in order to file for approval in the EU, then EUSA must pay AVEO a $20 million payment. This payment is not subject to the KHK 30% sublicense fee. Interestingly, EUSA has been in discussions with Committee for Medicinal Products for Human Use (CHMP) per the January 2019 and March 2019 meeting agenda available here. It is uncertain what was discussed, but one can speculate EUSA is seeking information as to whether the current TIVO-3 data is enough to support marketing approval in the EU. One would expect that EUSA would need to pay the $20 million milestone to do so, however we have not been notified of this yet. This can be interpreted in multiple ways: EUSA does not need to pay unless they actually file, the payment will be received in the near term, or there are ongoing negotiations that have placed this payment on hold. These negotiations are likely to only be negotiations between EUSA and AVEO (more discussed later).
Tivozanib is also being developed for the treatment of hepatocellular carcinoma (HCC), albeit in much earlier stages. Tivozanib has been evaluated as monotherapy in treatment naïve patients with advanced, unresectable HCC. This showed good activity in the phase 1b portion, and the recommended phase 2 dose has been selected. On the combination side, tivozanib is being evaluated in 2 combination trials, one in RCC and the other in HCC. The RCC trial evaluated tivozanib in combination with Bristol-Myers Squibb’s nivolumab in RCC in the first- and second-line setting. AVEO also recently entered in to a clinical supply agreement with AstraZeneca to evaluate tivozanib with durvalumab in first line advanced, unresectable HCC. For the combination RCC trial, Bristol-Myers Squibb is supplying the needed nivolumab, but there are no financial implications of this program. With regards to the new AstraZeneca HCC combination, AstraZeneca is supplying the needed durvalumab, and research costs are being split equally.
The next most advanced compound is
The last compound in clinical development is AV-203, an inhibitor of ErbB3 (also known as HER3). AV-203 has been licensed to CANbridge. Under the terms of this agreement, CANbridge has the rights to develop, manufacture, and commercialize AV-203 in all countries outside of North America. CANbridge has received approval of its IND in China and plans to initiate a trial in esophageal squamous-cell carcinoma in 2019. Previously, AVEO completed a phase 1 dose escalation trial of AV-203.Under the terms of this agreement, AVEO is eligible to receive $40 million in development and regulatory milestones and an additional $90 million in commercial milestones. AVEO stands to receive tiered royalties on sales of AV-203 starting in the low double-digits. Just like tivozanib, AVEO has licensed AV-203 from a different company, however this time it was Biogen Idec. Under the terms of this agreement, AVEO must pay Biogen Idec a percentage of milestone payments and single digit-royalties on net sales of AV-203 which is capped at $50.0 million. Based on the information disclosed, it appears this sublicense fee is in the realm of 35%. Whether this HER3 approach will come to fruition is uncertain, there are several competitors such as patritumab, AstraZeneca’s sapitinib, and Celldex’s CDX-3379. Notably, Merrimack Pharmaceuticals has scrapped its anti-HER3 program after several setbacks. With this being said, I am not counting AV-203 as a large value driver at this time.
AVEO has three other preclinical candidates, which include a reformulated tivozanib for age-related macular degeneration, AV-380 for the treatment or prevention of cachexia, and AV-353 an inhibitor of Notch3 being evaluated for pulmonary arterial hypertension. AV-280 was previously licensed to Novartis and has since been returned to AVEO. AVEO is seeking a partnership for AV-353 and has publicized the potential to license the ocular formulation of tivozanib.
So, to summarize, tivozanib is clearly the most valuable asset in the pipeline. Despite this, tivozanib’s value outside of North America is minimal, given the royalties and sublicense fees. That being said, any potential purchaser would be buying tivozanib for its North American value. So, what is that potential value? AVEO estimates the third line and after market, which is the market they are targeting with TIVO-3, to be worth about $300 million. (reminder that AVEO must pay royalties to KHK on North American sales) Another competitor, Calithera Biosciences, estimates the third line setting to be valued in the range of $459 million, and growing to nearly $1.2 billion in 2025 (link). Until we see more advanced trials in HCC and information on the remaining pipeline, it is difficult to assign meaningful value to them at this time, especially given the fact many of these products are licensed out and AVEO would only see a cut of the potential future revenue if approved.
Patent Protection And Market Timing
Regarding the patent protection for tivozanib, there are two patents in the US with expirations ranging from 2022 to 2023. However, AVEO believes this may be extended to 2027 if approved by the FDA. There are also two patents in the Europe that expire in 2022 to 2023. An expiration date of 2022-2023 is not that attractive for someone to purchase, given AVEO is on pace to file in the 1H of 2020, and then potentially receive approval in 1H 2021. That leaves limited time to launch and grow revenue. The extension to 2027 would definitely help, but still, only six years of patent protection (if extended) is not that impressive.
But where will tivozanib fall in practice? Again, we will focus on tivozanib in RCC as this is the most advanced program and the most attractive piece of the pipeline. Tivozanib’s role in first-line therapy (TIVO-1 trial) diminishes each day, with the results of combination trials like JAVELIN Renal 101 and KEYNOTE-426. Previously, there had not been agents that showed a survival benefit in the first line, but now, we have regiments that do so. This is the new standard that will be needed for use in the first line of therapy, something tivozanib monotherapy doesn’t have. But what about the combination? The nivolumab trial looked at first and second line therapy and showed comparable to slightly less effective than the combinations currently under FDA review. Not only is the nivolumab and tivozanib regimen undifferentiated in efficacy, but it is several years behind, placing it at a disadvantage. Some may argue the tolerability of tivozanib differentiate it and make it more likely to be used, but at some point, tivozanib will need to prove efficacy and stop relying on tolerability for advertising and show a survival benefit. The combination of axitinib + pembrolizumab and axitinib +
But tivozanib monotherapy in the third line setting? That is where I see the most value at. There is little evidence to guide clinicians on what agents to use in this setting, and TIVO-3 would be the first stratified 3rd line data set of patients with prior PD-1 exposure. I believe this would help guide clinicians in today’s world of evidence-based medicine. And in this setting, once patient’s have endured several grueling lines of therapy, tolerability will play a larger role. This market in the US, could be valued at $300 million on the lower range. Consider just 20-25% market penetration, that yields $60-75 million annually, which is similar to what AVEO’s market cap was prior to any rumors!
Potential Suitors and Pipeline Synergy
There have been three names mentioned regarding a potential purchase of AVEO: EUSA, Bristol-Myers Squibb, and now AstraZeneca. Let’s take a look at each of these.
EUSA: They already have the rights to tivozanib outside North America. It seems reasonable to consider the fact AVEO hasn’t received the $20 million TIVO-3 payment for the data, yet EUSA has discussed the data multiple times with CHMP, as a sign of something going on, and the payment is being placed on hold. Maybe EUSA wants to buy AVEO and have tivozanib rights for itself? EUSA has recently opened up a new American headquarters in Boston, hoping to grow into a larger transatlantic company. Adding tivozanib could help them do this. However, I am uncertain whether EUSA would be more interested in purchasing AVEO, or just the rights to tivozanib, either case would benefit AVEO in the long run. Despite this, I still find EUSA to be the least likely of these three companies to purchase AVEO. EUSA does not have the experience and political pull that some of the larger pharma companies have that would them “push” tivozanib through FDA approval. In the first full commercial year of sales in Europe, AVEO received around $500,000 in royalties from EUSA. At a 10% royalty rate, that means at the most EUSA did $5 million in sales, before considering royalties and operating expenses. Furthermore, there has been new approvals in Europe giving tivozanib more competition in front-line therapy, such as the combination of nivolumab and ipilimumab. This revenue, without considering any operating expenses, etc., has yet to cover the amount of milestone and upfront payments EUSA had to pay. However, on the flip side, there is also a $20 million payment looming for TIVO-3 data, plus the potential for another $2 million upon filling with the TIVO-3 data. If EUSA feels that they can negotiate a better deal for themselves by combining these payments with a purchase or expanded license, then that will bode well for AVEO.
Bristol-Myers Squibb (BMS): It’s hard to discount BMS. As a company trying to reinvent itself, I find BMS the potential suitor for many companies. Granted they are amid the lucrative Celgene deal, I believe BMS will go on a shopping spree should the deal get shot down. This shopping spree will likely include a series of small to mid-cap bios, and I do not see why AVEO wouldn’t be a contender, given the current combination trial with tivozanib and nivolumab. Furthermore, a larger pharma company like BMS likely has the man power and expertise to “push” tivozanib’s approval through the FDA. This would not be a blockbuster-revenue driving deal, but likely would be a nice addition to the pipeline. Unless there is something special that catches the eye of BMS, there would be competition for tivozanib to find a spot in the BMS RCC pipeline. There are trials ongoing with nivolumab in combination with compounds such as cabozanib, axitinib, and entinostat, and not mention the myriad of combinations with immune-oncology agents such as the lucrative Nektar deal. This suggest BMS may be more interested in the tivozanib monotherapy aspects from a potential revenue stand point. Should the Celgene deal go through, I find the odds of a BMS buyout highly unlikely.
AstraZeneca: The timing of this rumor was quite peculiar. It is several months after the collaboration between AVEO and AstraZeneca, but just before AstraZeneca announced a massive deal with Daiichi Sankyo and subsequently an offering. Not only does this appear to have the most substantiated rumor, but I believe tivozanib synergizes best with the AstraZeneca pipeline. AstraZeneca does have an oral VEGF agent, cediranib, however it has had several trial failures prior, and appears to have not been prioritized in RCC or HCC. In fact, it is only listed once on AstraZeneca’s pipeline page, in a combination trial for recurrent platinum resistant ovarian cancer. There is a trial listed with cediranib in RCC, however none of the trial arms include durvalumab cediranib combination. Furthermore, this investigator sponsored trial has been categorized as “not yet recruiting” on clinicaltrials.gov for over 4 months now, so it is uncertain how high of a priority this trial is. Therefore, if there is something AstraZeneca seeing in their work with AVEO, picking up tivozanib would fill a hole in their pipeline that is an immune-oncology-VEGF combination in RCC. There is nothing to suggest AVEO is locked into a combination with BMS’s nivolumab based on the information available. AstraZeneca would gain this opportunity in addition to any revenue they would glean from the sales in the third line setting. Another notable hole in the pipeline for AstraZeneca, oral VEGF therapy in HCC. There is a single combination trial of durvalumab with cabozanib in gastrointestinal cancers, but this is not in the first line. The first line trial collaboration with AVEO has yet to be posted but is expected to start in 2019. Acquiring AVEO would help expand AstraZeneca’s reach into oral VEGF therapies in HCC also.
AstraZeneca did just raise capital and provided some insight on the use of the funds. They plan to raise about $3.5 billion, and use $1 billion to repay current debt and about $1.35 for the upfront payment in connection to their new deal with Daiichi Sankyo. This leaves about $1 billion for general corporate purposes. This general corporate purpose is interesting, as AstraZeneca is a large pharma player, not a small company that is losing cash each quarter. It is suspected this cash left over could be used for additional deals. Of the three companies discussed, AstraZeneca makes the most sense at this time, as long as they are willing to buy a candidate not commercialized in America.
Thoughts On The Rumor
Let’s evaluate the rumors in two parts. First, figure 1. “They (AstraZeneca?) believe FDA approval of AVEO Oncology’s Fotivda is near.” This quite non-discrete. Near, being a relative time may mean in a few months, or years. Ideally, if things go smoothly, AVEO could receive approval in 1H 2021. The timeline for this would be: interim OS analysis 4Q19, file 1H 2020, then standard 12-month review yields and approval time of 1H 2021. At this time, there is not enough compelling data to suggest there will be priority review for tivozanib. Next, a price of $800 million to $1.2 billion. I find this price to be to be quite inflated. Remember, AVEO only has the rights to tivozanib in the United States, which are subject to double digit royalty payments. There would be some revenue from Europe, however with the sublicense fee, I find the contribution of this revenue to be negligible. Furthermore, we are about 2 years out from a marketing of tivozanib in the United States, with only six years of marketing exclusivity ifthe patent is extended. This is a compound that has historically had issues with the FDA being skeptical, so that could also weigh this into one’s willingness to pay for AVEO. The pipeline, in my opinion, is rather bland. Many of the products are already licensed out and/or were licensed in, so the purchaser would only be getting a piece of the potential revenue if ever approved. The preclinical pipeline is still to early to assign much value to, and I find it unlikely that the AstraZeneca would buy AVEO for its preclinical pipeline and take the time and money to develop these compounds.
Let’s look at figure 2. They (AstraZeneca?) have spoken with the FDA and were reassured tivozanib would be approved for use in the United States. If buyout talks were occurring, there were most likely some sort of conversation happening regarding the FDA. I cannot imagine the FDA explicitly said tivozanib would be approved, however I could see the FDA stating what the goal is that tivozanib needs to meet in order to be approved. Likely this is a survival HR <1 in TIVO-3, with potentially a statistically significant p value, but I am not certain a statistically significant p value will be required. Based on the number and rate of events that have occurred thus far, I believe there is a good chance tivozanib will result in an OS HR <1, but statistically significant? I am not sure there is enough information available to speculate on this currently. In totality, direct interpretation of the claim I find unlikely. But thinking more critically about it, I find it likely there has been some discussion, either between AVEO and the FDA or a suitor and the FDA, regarding what is needed for the OS in TIVO-3 to support approval, and AstraZeneca and AVEO are confident tivozanib will achieve that goal. As a side note: TIVO-1 and TIVO-3 evaluated different patient populations, comparisons of the HR between the two trials cannot be done.
Things are heating up for AVEO Oncology and its shareholders. I find prospects of talks of a buyout to be more likely than not, especially at these depressed prices. In order to commercialize tivozanib, AVEO would need to grow out commercial infrastructure, something I do not believe they have the funds to do. As such, AVEO seems primed to entertain acquisition talks. Tivozanib has the potential to add a small portion of supplemental revenue to a larger players portfolio. Additionally, it could be the oral VEFG inhibitor that AstraZeneca lacks in its portfolio for research and development. I believe this synergy would suit AstraZeneca well, as long as AstraZeneca is willing to buy a compound for North American rights with a royalty, and limited patent protection. The remaining pipeline of AVEO is not a factor in my opinion. There is limited opportunity for near term profits from this part of the pipeline, given the stage in development and licensing/sub-licensing deals. Some may question the validity of this information, which they should. A few thoughts on this. First, is it likely that a blogger with just 4 followers can result in such a large movement in price? Or is this part of a larger leak of information? Along those lines, the volume on the day of the rumor trumped that of the selling volume on January 31st when AVEO dropped heavily (see Chart 2). Again, is it likely that this type of volume would be elicited from just a blog post? Or is there something larger going on? I find it hard to believe that the movement and volume are related to just an unsubstantiated rumor from a blog post.
Should the rumors of purchase be true, I do believe the $800 million to $1.2 billion is quite rich, given all the factors discussed. The price per share based on price is presented in Table 1. Even on the low end of the rumored offer, $800 million would represent a 10-fold premium to closing price on March 26th. The upper end of $1.2 billion is closer to a 15-fold premium. These premiums are very lucrative. I feel that the realm of $400 to 500 million is more reasonable. It seems hard to justify that anyone would be able to produce $1.2 billion in revenue in North America alone with tivozanib by 2027 when the patent will expire (if extended).
|Buyout Price (M)||Price Per Share|
|$ 400||$ 2.88|
|$ 500||$ 3.60|
|$ 600||$ 4.32|
|$ 800||$ 5.76|
|$ 1,000||$ 7.19|
|$ 1,200||$ 8.63|
Table 1. Price Per Share Based On Buyout Price
I believe whether AVEO is purchased or not, investors are in a good position. AVEO has ample cash at this time and is in line to received milestone payments in the near future from EUSA related to TIVO-3 and filing. Furthermore, I would also like to point out that the notorious venture capital firm New Enterprise Associates hold a 20,896,038 share (~15% of shares) stake in AVEO. Investors should feel some reassurance knowing NEA has been buying shares. Should AVEO end up going alone, focusing on judicious use of their capital will be very important, which I believe should focus on third line therapy. I believe the pending milestone payments, paired with the buyout speculation, present a high reward, moderate risk situation for investors. Investors should carefully evaluate whether the risk of investing in AVEO suits their goals and personal situation. This article discusses unsubstantiated rumors and should be interpreted as such. This is in no form a recommendation to purchase equities and investors should perform additional due diligence prior to investing. Small and mid-cap biotechnology stocks can be extremely volatile and should be invested in as such.
I/we long AVEO and CALA and may buy/sell shares held securities within the next 72 hours.