Clash of the Hedge Funds: BioPharm Wars

Clash of the Hedge Funds: BioPharm Wars

A fascinating back-and-forth has broken out over the prospects of Clovis Oncology (NASDAQ: CLVS), a Boulder Colo.-based biopharmaceutical concern. The fascination derives from large helpings of both cutting-edge science and portfolio management, with a soupcon of regulatory risk and dash of that most controversial of 21st century subjects: the biological differences among the races of the human species.

Hayman Capital, the hedge fund personification of renowned investor Kyle Bass, posted a presentation on the company on Wednesday, November 25, arguing that Clovis had been over-sold after the announcement of disappointing news on one of the three drugs it now has in clinical development: Rociletinib.

Rational Discounting or Over-selling?

Rociletinib is intended for the treatment of non-small cell lung cancer. Clovis’ other two drugs are: Rucaparib, for ovarian cancer, and Lucitanib, for the treatment of breast and lung cancers.

Unfortunately for the company and for any straightforward bull case, on November 16 the U.S. Food and Drug Administration asked for more data in connection with the efficacy of Rociletinib, with regard both to the 500 mg and the 625 mg twice-daily dosage patient groups. The request meant, at the least, a delay in the approval of the drug for U.S. launch. The FDA is not now expected to take action until the end of the first quarter of 2016.

The stock’s price fell nearly 70% on that news, from $100 down to $30.24. (The useful thing about a stock price right at $100 is that it makes the percentage calculation of the next move an easy one.) The usual plaintiffs’ lawyers filed the usual lawsuits, alleging that the company’s management had mislead purchasers of its stock since May, by submitting data to the FDA that was based in part on unconfirmed response rates – creating the database that the FDA says the company must now update.

The tricky call for investors is whether the 70% price drop was (a) just enough, (b) not yet enough, or (c) perhaps too much to discount this blow. Hayman Capital thinks 70% was too far, that the company is worth on a conservative estimate $45 a share, so this is a buying opportunity. It bases this valuation on two key premises: that Rociletinib’s approval has only been delayed, not derailed; and that Rucaparib still looks promising for an early approval. (The Bass/Hayman opinion doesn’t seem to turn on any optimism over Lucitanib.)

The Dash of Race

When Rociletinib eventually comes to market, it will compete with an AstraZeneca drug, Tagrisso. Hayman suggests that investors in Clovis ought to be looking forward to that head-to-head match-up. Its report says that AstraZeneca in its own clinical trials stacked the deck in Tagrisso’s favor by enrolling “significantly more Asians” than would have been right for a sampling representative of the U.S. population. Asians “are known to respond better to lung cancer treatments” than other patients. Clovis has kept its own studies much more representative of the target population, accepting the statistical handicap that implies.

In other words, on Hayman’s reading, not only is there no merit to the claim that Clovis has deceived the public or the FDA: Clovis actually designed its test so as to keep the results conservative.

The immediate market consists of doctors, who are the gatekeepers who will decide whether to prescribe Tagrisso or Rociletinib for each particular patient. Hayman thinks the tea leaves suggest that that market will be receptive to Rociletinib, since “doctors recognize the difference in study populations.”

Alpha Biopharm Begs to Differ  

On November 27, though, a different voice entered the discussion. Alpha Biopharm Advisers LLC, consultants focusing on both the U.S. and the E.U. biopharm sectors, posted their own view of the prospects of CLVS, again in Harvest. Alpha takes a very different position from Hayman, holding that both the quality of management and the quality of data are “justifiably” in question, and that given these questions, “the risk-reward on CLVS does not represent an asymmetric risk-reward in light of the new realities.” That’s politely expressed, but it means: not a buy.

As to the racial/statistical point, Alpha cautions that “most oncologists do not know or believe the magnitude of effect is significant enough to risk using an inferior drug on efficacy on the speculative notion that there is a statistically significant and real clinical differences based on baseline patient differences on race.”

Alpha sees only one “ray of hope” for Rociletinib. It does have a superior safety profile vis-à-vis Tagrisso, so it might prove useful as part of “future drug combinations with PD/L1 inhibitors and other agents.” Thus, they don’t think investors should write off the drug or the company just yet, but they should look for a lower price than the stock has yet discovered before deciding that this is a bargain.





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