Will This Biotech's Roller-Coaster Ride Ever End?

Clovis Oncology (CLVS +0.00%) has taken its shareholders on a wild roller-coaster ride over the past year. Last November, Clovis' former lead drug candidate -- the pancreatic cancer drug CO-101 -- failed, causing shares to plummet from $21.49 to $12.50. However, the stock rose over the next few months on hopes that its new non-small-cell lung cancer, or NSCLC treatment, CO-1686, would succeed.

Anticipation bubbled up, until the beginning of June, when Clovis announced positive phase 1 results for the drug, causing shares to more than double from $36.58 on May 31 to $74.59 on June 3.

Source: YCharts.

Clovis tried to cash in on that positive announcement by selling 3.3 million new shares of stock worth $240 million, diluting its existing shareholders. Apparently taking a hint from Amgen's $10.4 billion takeover of Onyx Pharmaceuticals in August, Clovis hired Credit Suisse to explore a possible sale of the company in September.

Suddenly, Clovis' future looked murky. Why did it follow up positive trial data with a share offering and a bid to sell itself? That unanswered question caused considerable volatility in the stock, which culminated in a 9.5% drop at the end of September when the company announced that it hadn't found any buyers.

After that rough ride, which likely burned bulls and bears alike, investors are probably wondering if it's finally time to get off the roller coaster known as Clovis.

Where's all the money going?
To date, Clovis has not reported any revenue, since it does not have any marketed products. However, we can take a look at its R&D expenses, last quarter, to see what it's been spending its money on.

Sources: Clovis Oncology quarterly report, company website, author's calculations.

We can see that after Clovis discontinued CO-101, it poured that money straight into CO-1686 and Rucaparib. However, both drugs face some challenges.

Treating drug-resistant, mutated cancer cells
CO-1686 is an NSCLC treatment that Clovis hopes will stand out from other treatments with its ability to treat the T790M mutation -- in which mutated cells become resistant to the two leading treatments on the market: Roche's (RHHBY 1.09%) Tarceva and Iressa from AstraZeneca (NYSE: AZN) and Teva Pharmaceutical (TEVA 0.43%).

Tarceva and Iressa are first-generation epidermal growth factor receptor, or EGFR, tyrosine kinase inhibitors. The overexpression of tyrosine kinase can lead to uncontrolled cell division and proliferation, causing various forms of cancer. However, 60% of NSCLC patients with resistance to these drugs develop the T790M mutation and other "second site" mutations.

So far, Clovis' progress with CO-1686 has been encouraging. Its phase 1 study showed that three out of four patients with the T790M mutation reported partial tumor shrinkage. More detailed results from the trial are expected at the end of this month.

If successfully approved, Credit Suisse believes that CO-1686 could generate $1.2 billion in annual peak sales.

Can Clovis stay in the lead?
Although Clovis seems to be in the lead, in regards to treating the T790M mutation, it is not the only competitor on the field. Roche and AstraZeneca are not sitting idly by as newer drugs like CO-1686 threaten their lead in NSCLC treatments. Roche's Tarceva has been combined with other targeted therapies during clinical trials in an effort to improve its performance against the T790M mutation.

AstraZeneca is currently working on AZ9291, a new NSCLC treatment that is being developed to treat EGFR mutations such as T790M. Meanwhile, Boehringer Ingelheim has developed an approved second-generation EGFR inhibitor that showed promising results during a phase 3 trial in treating EGFR mutations.

All of these competing treatments could immediately threaten Clovis if they demonstrate the ability to treat the T790M mutation.

Will Clovis' BRCA drug be a game-changer?
Clovis' second best hope is rucaparib, its treatment for solid tumors. At the end of September, Clovis announced that patients with BRCA-mutant ovarian, breast, and pancreatic cancers had shown positive responses to the drug. Like the T790M mutation, BRCA mutations are rare, affecting 5% to 10% of women with breast cancer and 15% of women with ovarian cancer.

The most common treatment for BRCA mutation cancers is the use of estrogen blockers such as Teva's Tamoxifen. However, estrogen blockers can increase the risk of blood clots and cause uterine cancer.

Rucaparib was the most successful at treating BRCA-mutant ovarian cancer, in which it showed a disease control rate of 100% at 12 weeks and 63% at 24 weeks. Therefore, if Rucaparib is approved, it could be one of the first viable targeted treatments for the rare mutation.

The Foolish takeaway
So in the end, that's all Clovis is -- a clinical stage company, with its future pinned on two very specific treatments for two tough-to-treat mutations. Clovis should not be confused with Onyx Pharmaceuticals, which has revenue coming from three products -- Kyprolis, Nexavar, and Stivarga -- prior to its acquisition by Amgen.

However, with a market cap of $1.5 billion, Clovis doesn't look terribly expensive if CO-1686 and rucaparib are approved. At the very least, their success could attract larger marketing partners, which the company will definitely need to launch its drugs.

For smaller investors, however, this is one wild ride that could continue for a while, considering that neither CO-1686 or rucaparib are near late-stage trials yet. Therefore, it might be safer to get off Clovis' roller coaster and wait for the company to post more concrete results regarding its two lead drug candidates.