Why Tesaro, Inc. Shares Skyrocketed

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Tesaro (NASDAQ: TSRO  ) , a clinical-stage biopharmaceutical company focused on developing therapies to treat cancer, rocketed higher by as much as 33% after announcing a collaborative agreement with privately held AnaptysBio for its immuno-oncology antibody program targeting PD-1, TIM-3, and LAG-3.

So what: Under the terms of the agreement, Tesaro will pay an up-front licensing fee of $17 million and provide funding of costs incurred by AnaptysBio during the drug development process. For each development program AnaptysBio is eligible to receive $18 million in milestone payments based on drug development achievements and an additional $90 million based on U.S. and rest-of-world submissions and approvals. To boot, AnaptysBio would also receive a single-digit royalty on all commercially sold therapies. The companies will collaborate on development in a preclinical setting with Tesaro taking over once development hits the clinical stage. Tesaro would handle manufacturing and marketing if approved as well.

In return, Tesaro gains exclusive access to AnaptysBio's immunotherapy platform, SHM-XEL. In the words of Mary Lynne Hedley, president of Tesaro, "In our view, immunotherapy-based approaches are likely to transform the way that cancer is treated and may become the foundation of many future cancer therapy regimens."

Now what: If you needed any confirmation that immunotherapy programs, which work by retraining the body's immune system to recognize and attack cancer, are incredibly hot, then let Tesaro's 33% move higher today serve as a blatant reminder. I wholeheartedly agree with Tesaro's president that a world of opportunity awaits in regulating the body's immune system to recognize and fight cancer. I am, however, a bit concerned by the enormity of today's run-up considering how little is known about AnaptysBio's cancer immunotherapy pipeline. Its anti-PD-1 antibody, for example, is only in preclinical studies, and a lot can change when going from preclinical to human trials. I'm ultimately hoping for success with this partnership for Tesaro, but I feel at this level its valuation simply doesn't make much sense.

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