Clovis Oncology Inc (NASDAQ:CLVS) management did a great job setting realistic expectations during 1Q15 conference call on both regulatory timelines, and data releases across their pipeline by explicitly stating that they do not expect initial approval in the T790m- population, but will file a supplemental NDA for T790m- in 2016. Management also made sure to alert the market that updated Rocilitinib data won’t be disclosed on the ASCO abstract next week, but will be presented in an oral presentation.

But in our opinion, they are finally beginning to convey to the market the significant competitive advantages of Rocilitinib over AZD-9291 (something we have been waiting for since ASCO 2014).

Overall, we came away with more confidence in our model, and expectation for an M&A bid for ~$147 per share +/- 10% (implying $133- $162 valuation range vs. GS M&A valuation $179).

CLVS remains our highest conviction M&A call through 2016, as it is one of the only latestage, de-risked. oncology assets within the top 100 biotech companies ranked by market cap and believe Roche (ROG) or NVS are the most likely bidders, but GILD makes sense after their explicit interest in EGFR+ NSCLC by disclosing they will be initiating momelotinib with AZN’s MEK inhibitor later this year during GILD’s 1Q15 earnings call.

Despite the +60% gains since our initial report from November 18th 2014, there remains at least another +84% upside over the next 12- months. While timing M&A is always difficult there are some key events that can be used as a guide using Roche’s past behavior.

We believe there are 2 free call-options with Rucaparib this year in the prospectively defined BRCAness population. Both Goldman and Citi have yet to include this segment in their Rucaparib models, representing upside potential from the ARIEL-2 data presentation at ASCO 2015. With the first PFS outcomes data at ASCO- 2015 this should act as a “step-up” in valuation models as both Citi and Goldman currently do not model the BRCAness segment yet.

Highlights from 1Q15 Conference Call

  • Two NDA filings in next 12-16 months: (1) Rocilitinib’s NDA/EMA filing should occur approximately at the same time (July-August). (2) CLVS has guided to an NDA filing for Rucaparib in 2016 based on ARIEL-2 data.
  • Rucaparib received FDA breakthrough designation as monotherapy for treatment of patients with advanced ovarian cancer who have received at least two lines of prior platinum containing therapy, with BRCA-mutated tumors (including both germline/somatic BRCA mutations, not yet in the BRCAness population, 2-3x larger…). Rucaparib remains the only PARP inhibitor to receive a breakthrough designation thus far, and in our view, is a testament to the advantage of CLVS’ pharmacogenetic drug & companion diagnostic approach to drug development.
  • Filing preparations start next month (June) for CO-1686, could be done as soon as July in our opinion, management conveyed that August guidance was only to give them additional “wiggle room.” Rolling NDA submission in July/August, TIGER-2 data will serve as the basis for submission, and recall Rocilitinib was granted BTD by the FDA in May 2014. US launch by year-end, marketing and sales force are already in place. Our bull case would be that the FDA is mindful, and could possibly get approval during the 16TH WORLD CONFERENCE ON LUNG CANCER September 6 – 9, 2015, being held in Denver, Colorado.
  • At ASCO 2015, they will update Rocilitinib data in their second consecutive oralpresentation, and management informed the market today to “please not expect this data to be disclosed in the Abstract on May 13th,” it will be presented on May 31 st. This sets-up for a possible informational arbitrage in the options market, selling some weekly puts could take advantage of any dip after Abstracts are released and the uninformed market may or may not send CLVS shares down. This would be an opportunity to get long ahead of the oral-presentation May 31 st.
  • CLVS will commence combination studies with several targeted therapies during the second-half of 2015 with PD-1/L1 checkpoint inhibitors, and with the only approved MEK inhibitor (Trametinib). The MEK combination should have a really low barrier to approval >20-25% ORR’s vs. current ORR’s in this setting of <15%.
  • Management hasn’t disclosed which PD-1/L1 molecules it will be studying in combination with Rocilitinib yet, but will once enrollment begins 2H2015.
  • mportant to note the Rocilitinib (CO-1686) data released in the NEJM this month was from the TIGER-1 study and had a data cut-off from June 2014 (old). Data from JPM 2015 had a November data cut-off (most recent available). Consistent safety and efficacy across data sets in T790m (+) and (-).
  • Finally, management has started highlighting the differentiating properties of Rocilitinib vs. AZD-9291 saying “Our Data are derived almost solely from western patients, that do not fare as well as Asians with TKI therapy, and is more representative of US market.” We firmly agree with this and expressed this viewpoint post-ASCO 2014, and ahead of the SNO-Triple Meeting in November. Our review of the literature essentially confirms that response rates in Asians displays less variance (thinner confidence intervals) relative to Caucasians that have more variance in response to EGFR TKI’s in NSCLC (caveat emptor).