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Here's Why AVEO Oncology Fell as Much as 12.7% Today

By Maxx Chatsko – Jul 11, 2017 at 10:21AM

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The stock has been caught in the trap of momo traders.

What happened

Shares of biopharma AVEO Oncology (AVEO) fell as much as 12.7% today following continued momentum trading. Things haven't quite been the same for the stock since June 23. That's when it announced data from a pivotal phase 3 trial for its lead drug candidate tivozanib, which was evaluated as a treatment for renal cell carcinoma.

The data was good enough to send the stock higher and provoke the Committee for Medicinal Products for Human Use (CHMP) in the European Union to recommend tivozanib for approval on June 27. A final decision still needs to be made by the European Medicines Agency (EMA), but it usually follows recommendations from CHMP. As of 3:12 p.m. EDT, the stock had settled at a 7.1% loss.

An investor with his face on his desk, and a stock chart showing losses behind him.

Image source: Getty Images.

So what

AVEO Oncology stock was essentially left for dead prior to the whirlwind events of the last several weeks. In fact, shares were trading at just $0.75 each on June 22. They're up 292% in the three weeks since, and up 32% in the last five trading days despite the increased volatility.

AVEO Price Chart

AVEO Price data by YCharts.

Why were investors so pessimistic? Companies of AVEO Oncology's size almost never earn regulatory approval for cancer drugs. Biopharma investors may better know this as the Feuerstein-Ratain Rule, which is based on the observation that "companies with a market cap less than $300 million several months before the release of phase 3 results" never gained marketing approval -- when the rule was initially proposed years ago, anyway.

If EMA approved tivozanib in the European Union, then AVEO Oncology will become at least the third company to go against the grain. That doesn't change the fact that the odds are still against small- and micro-cap oncology companies, but it does explain the sudden interest in the stock.

Now what

Unfortunately, investors will need to get used to volatility for the time being. Things may cool off in between regulatory decisions and future data release dates, but the momentum traders have set traps that AVEO Oncology just can't seem to avoid.

Maxx Chatsko has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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