Clovis Oncology Inc (CLVS): Look Before You Leap (IBB & XBI)

On Wednesday, small cap cancer stock Clovis Oncology Inc (NASDAQ: CLVS) soared 16.68% after announcing a $200 million cancer deal plus the biotech has more than tripled since late 2011, meaning it might be time to take a closer look at what's driving the stock higher as well as look at the performance of biotech ETF benchmarks like iShares NASDAQ Biotechnology Index ETF (NASDAQ: IBB) and SPDR S&P Biotech ETF (NYSEARCA: XBI).

What is Clovis Oncology Inc?

Small cap Clovis Oncology is focused on acquiring, developing and commercializing cancer treatments in the United States, Europe and other international markets as its development programs are targeted at specific subsets of cancer. Clovis Oncology has three product candidates in its development pipeline: 1) CO-1686, currently in Phase I/II development for the treatment of non-small cell lung cancer (NSCLC); 2) rucaparib, currently in Phase II development for the treatment of platinum sensitive, relapsed ovarian cancer; 3) lucitanib, currently commencing Phase II development for the treatment of breast and lung cancers.

For benchmarking purposes, the iShares NASDAQ Biotechnology Index ETF tracks the Nasdaq Biotechnology Index through 119 holdings while the SPDR S&P Biotech ETF tracks the S&P Biotechnology Select Industry Index through 58 holdings.

What You Need to Know and Be Warned About Clovis Oncology Inc

On Tuesday after the market closed, Clovis Oncology announced it had acquired EOS (Ethical Oncology Science) S.p.A., a privately-held Italian biopharmaceutical company that owns the exclusive global (excluding China) development and commercialization rights for lucitanib, a drug in mid-stage clinical testing that is being studied as a treatment for breast cancer plus patients with other cancers (e.g. kidney and thyroid tumors) are said to also respond to treatment with it. Terms for the deal are as follows:

Pay an up-front payment of $200 million, which includes $190 million in Clovis common stock (3,713,731 shares) and $10 million in cash. Pay an additional $65 million in cash upon FDA approval of lucitanib. Receive €350 million (approximately $470 million) upon the achievement of development and commercial milestones pursuant to a license agreement with Servier (note: Clovis the rights to lucitanib in the US and Japan while Servier has the rights for all other countries). Receive royalties on sales of lucitanib in the Servier territories. Pay the EOS shareholders up to an additional €115 million in cash (approximately $155 million) upon the receipt by Clovis of certain of the milestone payments pursuant to the Servier license agreement.

Is the above a good deal for Clovis Oncology and for investors? On one hand, Clovis Oncology can expand its pipeline (which is still in its early stages), but lucitanib still needs to get FDA approval – which is never a slam dunk. Moreover, the deal does seem rather frontloaded (albeit its in the form of new shares rather than cash) with the risk being on Clovis Oncology and investors.

Investors should also remember that Clovis Oncology sank 41.8% in one day late last year while shares of development partner Clavis Pharma ASA (OSLO: CLAVIS) plunged more than 87% after the failure of CO-101 (CP-4126) to demonstrate any impact on survival in a pivotal Phase II trial in metastatic pancreatic cancer. All development on the drug stopped at that point in time.

In the case of CO-101, Clovis Oncology originally licensed US and European rights to CO-101 from Clavis in a deal worth up to $380 million, plus royalties, with the deal latter expanded to include Asia for another $205 million on the table. Luckily for the company and for investors, both deals were strongly back-end loaded with most of the available milestones tied to sales and only $25 million in two up-front payments being made to Clavis for the failed drug.

Then just last June, shares of Clovis Oncology more than doubled after the company reported positive data on its two early stage experimental treatments: CO-1686 in EGFR-mutant non-small cell lung cancer (NSCLC) and Rucaparib in a monotherapy study of solid tumors. Certainly the results are promising but again, it could turn out to be another bad bet at the roulette wheel for both the company and for investors.

Share Performance: Clovis Oncology Inc vs. IBB and XBI

On Wednesday, small cap Clovis Oncology surged 16.68% to $54.56 (CLVS has a 52 week trading range of $11.67 to $86.29 a share) for a market cap of $1.65 billion plus the stock is up 241% since the start of the year and up 333.7% since November 2011. A quick look at Clovis Oncology's performance verses that of biotech ETF benchmarks iShares NASDAQ Biotechnology Index ETF and SPDR S&P Biotech ETF reveals the following chart:

As you can see, a small cap biotech like Clovis Oncology can both underperform as well as blow any biotech ETF benchmarks out of the water – if you pick the right ones.

Finally, here is a look at the latest technical charts for Clovis Oncology plus the iShares NASDAQ Biotechnology Index ETF and SPDR S&P Biotech ETF:

The Bottom Line. Obviously any investor not used to the roulette nature of small cap biotech stocks like cancer stock Clovis Oncology will want to stick with safer biotech ETF benchmarks such as the iShares NASDAQ Biotechnology Index ETF and SPDR S&P Biotech ETF. Nevertheless, those with a high tolerance for risk might still find some tempered gains to be had with Clovis Oncology.