When a biotech company prices a common stock offering, diluting existing shareholders, the stock typically falls. Yet when AVEO Pharmaceuticals (NASDAQ:AVEO) announced a $5.7 million share offering on Aug. 17, the stock went the other way. It’s rallied from $2.29 to $2.90, a 27.5% rally. So why are markets buying AVEO stock?
Aveo’s mission is to develop medicines that treat various cancers. While it has a broad portfolio for targeted oncology therapeutics, its lead candidate is tivozanib, which the company describes as “a potent, selective, long half-life inhibitor of vascular endothelial growth factor 1, 2 and 3 receptors, in North America as a treatment for renal cell carcinoma and other cancers.”
Aveo’s Financial Situation
Aveo issued a 2.5 million share stock sale at $2.26 a share, which is close to the trading price on Aug. 17. Since the company was not gauging the markets, investors may have felt some relief. Further, the funding is a small number, which suggests the biotech firm has other sources of funding. The diversity in funding sources is a positive signal since it shows shareholders will not get diluted by a large degree.
Upon reviewing Aveo’s second-quarter report posted on Aug. 7, it is clear that Aveo will need additional funding sources to continue operations through 2019. The company lost $6.57 million from operations in the period. Revenue of $0.43M is mostly from collaboration and licensing. The company spent $4.887 million in R&D, albeit down from last year’s $6.88 million. Cash and cash equivalents and marketable securities fell from $33.5 million last year to $18.09 million.
In Q2, Aveo reported a modest income of $4 million, or $0.03 a share. Around $11.1 million of its net income is due to a non-cash gain related to the fall in the fair value of the 2016 private placement warrant liability.
Aveo’s Strategy
Aveo continues to focus on U.S. drug registrations. Investors are looking forward to the company’s Phase 3 TIVO-3 study results in Q4. The randomized study will give investors an idea on the efficacy of the drug for treating advanced kidney cancer.
The recent launch of the drug FOTIVDA in Scotland in July could give revenue a small lift to the company’s future revenue growth. The drug is currently undergoing commercial efforts in German, the U.K., and Austria. If the drug is reimbursed in France, Germany, Italy, and Spain within the next few months, Aveo will earn an $8 million milestone payment.
Aveo will present the Phase 2 results from the TiNivo Trial of Tivozanib and Nivolumab (“Opdivo”) at the ESMO Annual Meeting, held October 19-23. Although the company is not expected to report anything significant, any good news should support the underlying rally in the stock.
Aveo Stock Valuation
Aveo does not have any steady revenue for investors to base forward estimates on. Still, if the company reports solid revenue growth over the next 10 years, with EBITDA peaking at 33.5 percent of revenue from FY 2025 to 2027, investors may assign a modest discount rate in the range of 10.5 percent to 11.5 percent. Using a 10-year EBITDA Exit model, AVEO stock would have fair value of %6.23, implying the stock is undervalued by 115 percent.
Bottom Line for AVEO Stock
Patient testimonies suggest the Phase 1 and Phase 2 of tivozanib were better than the alternatives. And the company has already established superior PFS, or progression-free survival, numbers. On July 19, Aveo said it would report topline data from the TIVO-3 study in the fourth quarter.
With the stock already rallying well-ahead of this event, markets expect Aveo will report strong data results. With a market cap of just $345 million, the stock has plenty of upside if clinical results are favorable.
The author does not own AVEO shares.
