Betting against biotech stocks is a pretty scary way to make money -- and it's getting a whole lot scarier now that retail investors have learned how to work as a team to create short squeezes. Clovis Oncology (CLVS +0.00%), a commercial-stage biotech, has recently become a target among members of Reddit's WallStreetBets community with just that purpose in mind.
Clovis Oncology is facing so many challenges right now that nearly 30% of its outstanding shares have been borrowed and sold short in order to bet against the company's success. However, while lots of institutional money is being put behind the idea that Clovis Oncology's stock price is a disaster waiting to happen, there are reasons to believe Wall Street has it wrong.
Here's what you should know before exposing your own portfolio to this risky biotech.
Image source: Getty Images.
Reasons to buy
Short-selling has always been a dangerous game because stock prices have a nasty tendency to remain irrational for much longer than investors can remain solvent. If a heavily shorted stock's price gets too high, hedge funds and individuals alike can be forced to cover their short positions, leaving them with enormous losses.
Clovis Oncology has more going for it than just a potential short squeeze. In 2016, the company's first drug, Rubraca, earned approval from the FDA to treat a genetically defined group of ovarian cancer patients. The easy-to-swallow tablet has more recently also been approved to treat advanced-stage prostate cancer patients who have BRCA mutations.
Now, Clovis Oncology is developing lucitanib as a potential new treatment for gynecologic cancers in combination with Opdivo from Bristol Myers Squibb (BMY +1.75%). Opdivo is a blockbuster cancer drug that sent $7.0 billion in sales to Bristol Myers Squibb's top line last year.
When drugs like Opdivo work, they can be incredibly effective. Unfortunately, most patients don't respond to them for reasons that aren't entirely clear. Bristol Myers Squibb has been known to sign lucrative partnership deals with companies like Clovis Oncology to secure access to cancer treatments like lucitanib that might boost Opdivo's utility.
What the short-sellers see
Rubraca makes it hard for tumor cells to repair their DNA by inhibiting poly (ADP-ribose) polymerase (PARP). Unfortunately for Clovis Oncology, Rubraca isn't the only PARP inhibitor that has been approved by the FDA to treat patients in its limited populations. This is why sales of Rubraca have been enormously disappointing since it earned FDA approval in 2016.
Lynparza is a competing PARP inhibitor that AstraZeneca (AZN +0.00%) markets in partnership with Merck (MRK 2.07%) to treat the same ovarian cancer patients as Rubraca, as well as newly diagnosed patients, a group that Rubraca isn't approved to treat. Similarly, Lynparza has been approved to treat the same third-line prostate cancer patients as Rubraca, plus less heavily pre-treated patients.
While Lynparza's sales rocketed 37% higher year over year in the first quarter to $543 million, Rubraca's quarterly sales have never topped the $50 million mark. With just a trickle of revenue coming in, Clovis Oncology keeps bleeding money.
With limited resources, Clovis could find it impossible to run the clinical trials that might help Rubraca get ahead of Lynparza. Even if the company finds a way to get a leg up on Merck and AstraZeneca, there are other PARP inhibitors from GlaxoSmithKline and Pfizer to contend with.
CLVS Percent of Shares Outstanding Short data by YCharts
Clovis Oncology shareholders shouldn't hold their breath for a juicy offer from Bristol Myers Squibb for the rights to lucitanib. In June, the company presented disappointing clinical trial results from a phase 2 study treating ovarian cancer patients with lucitanib. Adding Clovis Oncology's most promising new drug candidate to Opdivo shrank tumors in just one out of the 22 participants.
Investing or gambling?
At the moment, around 30% of Clovis Oncology shares available for trading are sold short. Given the number of shares that change hands on an average day, it would take more than seven days for investors to cover all those positions.
When a company has just one approved product, a lack of potential new sources of revenue, and a pattern of chronic losses, that's a bad combination. Given Clovis Oncology's lack of a visible path to profitability, the only reason to buy its shares right now would be the expectation of a Reddit-fueled short squeeze. There's a chance that gamble will pay off, but relying on WallStreetBets to bail you out every time you buy overpriced shares of struggling businesses is not a great strategy for building wealth.
