AVEO Pharmaceuticals, Inc. (NASDAQ:AVEO) Just Validated Our Thesis, Here's What's Next

AVEO Pharmaceuticals, Inc. (NASDAQ:AVEO) just announced that its lead development asset has picked up approval in Europe. The company is trading up around 5% on the news and looks set to appreciate further as we move into the middle of the week. We think this is an under-response, however, and we think that this under-response serves as a nice opportunity to pick up an exposure to the much larger catalyst headed AVEO's way. AVEO 1 Year ChartFor those that are new to this company, it's one that we last highlighted around a week ago as part of this coverage. In the piece, we laid out two potential approaches to trading AVEO for anybody that didn't yet have a position in the company and that – by proxy – didn't have an exposure to the two catalysts we pointed to as being value drivers near term.One of the catalysts was the one that just hit press – the European approval of the company's lead asset, a drug called tivozanib, which AVEO is trying to get approved as a treatment for patients with a type of kidney cancer called advanced renal cell carcinoma (RCC).Early on this year, we learned the outcome of an EMA advisory panel meeting and, with the outcome recommending approval, we suggested that the final decision of the EMA (the equivalent of the FDA in the US) would likely be positive. The agency just announced its decision and, as mentioned, the drug is now approved in Europe.Europe is a large market for this type of kidney cancer and, for a company of AVEO's size (market capitalization at last count came in at a little over $580 million), it's a market that could really make a difference to topline and – ultimately – valuation.It was the implications of an approval in Europe, however, that we were really looking for and it was in this sort of one-two step process that rooted our thesis. The company is set to report data from a phase 3 investigation of the same drug in the US, in the same indication, during the first quarter of 2018.In this trial, AVEO is comparing its own assets with an already approved Bayer AG (ADR) (OTCMKTS:BAYRY) drug and the outcome could underpin an application that – if approved – will double or treble the market potential for tivozanib as compared to its European prospects.We suggested that a risk tolerant trader could pick up exposure ahead of the European announcement and maximize return in anticipation of European approval and a subsequent positive topline readout from the US phase 3 study. We also suggested that a more risk-averse trader might want to wait until we got the European outcome and use that to inform an exposure ahead of the phase 3 topline data.Well, we've just got the European decision and its setup both of the above-mentioned types of trades for a strong first quarter 2018 play. For anybody that got in before this decision was made, nice work on the cheap entry. For anybody that's not yet picked up an exposure, there's still plenty of opportunity to do so, but don't expect AVEO to stay flat during the coming months – the company is almost certain to appreciate on speculative volume as the data readout nears.Just because the drug is approved in Europe doesn't necessarily mean the phase 3 trial will wrap up positively, of course. With that said, however, the willingness of the EMA to approve the drug in Europe does say a lot about its risk-benefit profile and this is an important factor in risk mitigation when considering an exposure to this sort of late stage catalyst.Cash on hand at June 30 was $10 million, meaning we probably won't see any dilution during the coming months. If the phase 3 readout is positive, however, we might see a raise aimed at supporting a commercialization strategy.Check out our previous coverage of this one here. We will be updating our subscribers as soon as we know more. For the latest updates on AVEO, sign up below!Image courtesy of fdecomite via FlickrDisclosure: We have no position in AVEO and have not been compensated for this article.