Seeking Alpha
Long/short equity, special situations, value
Profile| Send Message| ()  

Shares of Clovis Oncology (CLVS) jumped upwards halfway during Tuesday's trading session. A Bloomberg report indicated that the company is exploring strategic options, including a potential sale of the company, which could allow investors to lock in decent profits over the past two years.

Note that the stock is very speculative at this point in time, and might not be a great investment for "traditional" investors. The stock could easily see a 10%-20% drop if no deal materializes, while a bidding war could boost the price to $100 per share, or possibly even more.

A Possible Sale?

Halfway through Tuesday's trading session, Bloomberg issued a report that Clovis Oncology is exploring strategic options for the firm going forward. One of these options includes the outright sale of the company.

Clovis has reportedly hired Credit Suisse AG to find a buyer for the business, as the process is reportedly still in the early stages.

Shares of the company have risen from $16 in January, and have quadrupled to highs of $80 per share in June. Shares doubled overnight on the back of the release of two news reports, which showed significant progress in its development programs.

Shares had fallen to lows of $60 in September as some investors might have taken some profits. Shares started Tuesday around $65 per share, to spike upwards to highs of $80 on the back of the report of a possible sale. Shares ended the day with gains of 7% at $72.50 per share.

June's Events

Shares of Clovis Oncology doubled on the 3rd of June, boosting the market value of the company by little over a billion.

The company came with upbeat news. At the time, Clovis reported that its Rucaparib demonstrates good results in Phase I/II monotherapy studies in patients with solid tumors.

Rucaparib is an oral, potent, small molecule poly polymerase (PARP) inhibitor being developed to treat ovarian cancer. Some 89% of patients with ovarian cancer have seen meaningful clinical benefits in the Phase I trial.

Yet Clovis Oncology had more good news. The Phase I portion of its Phase I/II clinical study of CO-1686 is going well. The novel, oral targeted covalent offers clear evidence of meaningful activity to target non-small cell lung cancer.

Valuation

Clovis ended its second quarter with $372.2 million in cash and equivalents as the company took advantage to issue some shares at elevated levels. The company operates without the assumption of debt for a solid net cash position.

Clovis has not reported any revenues over its past calendar year or in the years before. Net losses rose to $74 million over the past year.

Trading around $73 per share, the market values Clovis at $2.2 billion, or operating assets at little over $1.8 billion.

Some Historical Perspective

As recent as November of 2011, Clovis went public when it sold 10 million shares for $13 apiece. Shares have traded around the $20 mark before they rose to $38 in April of this year. June's positive news flow resulted in the share price doubling to highs of $80. This may have prompted the company to search for an exit.

If Clovis manages to find a buyer at $80 per share, investors in the public offering receive six times their initial investment within two year's time.

Investment Thesis

If Clovis manages to find a deal, management has done a great job at its task of creating shareholder value while making the world a better place by developing a useful medication.

With equity markets near their highs, the market for mergers and acquisitions remains strong, especially in the biotechnology sector. Merely three weeks ago, Amgen (AMGN) bought Onyx Pharmaceuticals (ONXX) in a $10.4 billion deal.

As recent as last Friday, shares of Viropharma (VPHM) jumped upwards after the company had apparently received unsolicited offers from European players, among which was Sanofi (SNY).

If Clovis manages to pull a deal, with a price tag approaching $100 per share, shareholders can only applaud management for creating astonishing value in a short time. Note that reacting on rumors is very risky as a potential process is still in early phases and the company has no revenues, while reporting big losses in the meantime.

An investment in Clovis is extremely risky, even after a pullback toward $70 per share, but could be lucrative if a deal goes though.

Source: Clovis Oncology: Biotech Bubble About To Snap As Companies Put Themselves Up For Sale?