Is Clovis Oncology Still a Strong Buy?

By Markets Fool.com

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What happened

Shares ofClovis Oncology (NASDAQ: CLVS), a cancer-focused biophama, gained more than 64% for the month of August,according to data fromS&P Global Market Intelligence.

CLVS data by YCharts.

Clovis' stock took flight last month after the U.S. Food and Drug Administrationaccepted the company's New Drug Application (NDA) for the PARP inhibitor rucaparib as a later line treatment foradvanced ovarian cancer in patients with deleterious BRCA-mutated tumors. PARP inhibotors work by blocking a particular enzyme that repairs DNA. Preventing cancerous cells from repairing themselves should lead to their death.

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What seems to have really captured the market's attention, though, is the FDA's decision to grant this drug priority review status. In short, a priority review allows for a shorter review time (6 months instead of 10 months, on average) and implies that the agency views rucaparib as a major advancement in the treatment of BRCA-positive ovarian cancer.The FDA is expected to hand down its final decision by Feb. 23, 2017.

So what

Apart from the Street's rosy billion-dollar-plus peak sales estimates forrucaparib, a regulatory approval could transform Clovis into a rather compelling buyout target. Big pharma has shown a particularly keen interest in gobbling up novel cancer drugs likerucaparib in this current environment fueled by growth by acquisition.

Now what

Last week, Clovis announced that the FDA will forgo an advisory committee meeting to discussrucaparib's NDA, implying that the agency hasn't run into any major issues during its own internal review. As such, the drug looks like it will be approved in the not-so-distant future, although nothing should be taken for granted when it comes to the FDA.

But if all does go as planned and rucaparib is approved, investors shouldn't be surprised if AstraZeneca (NYSE: AZN) and Gilead Sciences (NASDAQ: GILD) emerge as the biotech's top suitors. Rucaparib, after all, would dovetail nicely with AstraZeneca's burgeoning ovarian cancer franchise that includes the PARP inhibitor Lynparza. And Gilead is currently on the hunt for a cancer drug to solidify its modest oncology franchise, and help it overcome the decline in sales of its hepatitis C drug Harvoni.

For what it's worth, Pfizer (NYSE: PFE) may also be lurking in the shadows, given its familiarity with rucaparib and the drugmaker's growing interest in the high-growth oncology market. After all, Clovis originally obtained the worldwide rights for rucaparibfromPfizerback in 2011.Moreover, Pfizer still needs to add a few more pieces to its Innovative Health unit ahead of a possible break-up, perhaps making a bolt-on acquisition like Clovis a prime target.

Although a buyout is a real possibility, investors certainly shouldn't buy Clovis -- or any stock, for that matter -- for this reason alone. However, Clovis does seem to still offer a fair amount of upside based on rucaparib's commercial potential, despite its hefty surge last month. And that's arguably the primary reason risk-tolerant investors may want to take a deeper look at this speculative biotech ahead of this key regulatory decision.

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George Budwell owns shares of Pfizer. The Motley Fool owns shares of and recommends Gilead Sciences. The Motley Fool has the following options: short October 2016 $85 calls on Gilead Sciences. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.