Here's Why AVEO Pharmaceuticals Lost as Much as 19% Today

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What happened

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Shares of biopharma AVEO Pharmaceuticals (NASDAQ: AVEO) sank 19% Tuesday after investors had more time to digest Monday's news. That was, the company announced that the drug Fotivda gained marketing approval in the European Union for treating advanced renal cell carcinoma.

Tuesday's drop seems to be stemming from more complex factors being taken into account, or investors cashing out to lock in their gains. After all, the stock has risen almost 500% year to date, and that includes Tuesday's drop. As of 3:37 p.m. EDT, the stock had settled to a 13.3% loss.

So what

A drug approval is a huge milestone for any biopharma stock. That's doubly true for AVEO Pharmaceuticals, which began the year trading at less than $0.60 per share. Mr. Market had essentially left the company for dead after several failed clinical trials and after the U.S. Food and Drug Administration rejected Fotivda in 2013.

The European Commission apparently saw things a little differently for the drug, which was shown in the latest trials to be more effective and safer than Nexavar, owned by Bayer and Onyx Pharmaceuticals, a drug in the same class used for the same indication.

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There are some slight complexities investors may be considering on Tuesday, however. The EU rights to Fotivda are owned by privately held EUSA Pharma, although AVEO Pharmaceuticals can receive up to $394 million in future milestone payments. The approval itself triggered a milestone payment of just $4 million.

The tiny biopharma can receive additional milestone payments of $2 million for each jurisdiction that approves the drug, up to an additional $12 million. However, the United Kingdom recently declined to approve Fotivda as a first-line therapy for renal cell carcinoma, so the EU decision may not be a solid indication of how others will interpret the trial data.

As if that wasn't enough to digest, AVEO Pharmaceuticals and partner Bristol-Myers Squibb are advancing a new U.S. trial using Fotivda as a combination therapy with the blockbuster Opdivo. It's currently in phase 2. If it advances to and completes a late-stage trial, will the data be different this time around?

Now what

A pretty solid body of evidence shows that companies boasting a market capitalization under $300 million 100 days out from the conclusion of phase 3 oncology trials almost never gain marketing approval for the drug at the center of the study. AVEO Pharmaceuticals was one of the very few to break that "rule." And as the history of Fotivda seems to indicate, there's good reason for that -- the data appear to be on the line of approval and rejection. Some countries rejected the drug outright, others have approved it as a first-line therapy for its intended indication, and others still aren't sure how they want to use it. It's complicated, which means investors should probably get used to volatility in the coming weeks and months.

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