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AVEO Pharmaceuticals (Nasdaq: AVEO  ) struck a solid partnership with Astellas Pharma and its investors are rewarding the company today.

In exchange for half the rights to its phase 3 cancer drug, tivozanib, AVEO gets $125 million up front and potentially another $1.3 billion in milestone payments. AVEO and Astellas will share profits and losses from sales of the drug in the U.S. and Europe. Astellas has full rights outside those regions except, ironically, in Astellas' home continent of Asia, where fellow Japanese drugmaker Kyowa Hakko Kirin owns the rights to the drug.

Tivozanib is being tested against Bayer and Onyx Pharmaceuticals' (Nasdaq: ONXX  ) Nexavar in kidney cancer. If it beats Nexavar, tivozanib should easily be able to cut into Nexavar's market share and might even be able to take share from Pfizer's (NYSE: PFE  ) Sutent, depending on how well the drug works.

AVEO probably didn't absolutely need a partner -- the company ended the year with $140 million in cash and securities -- but tivozanib has the potential to work in cancer types beyond kidney cancer. If the multiple clinical trials it's currently being tested in turn up positive, development could get expensive really quickly. Having a partner to share the costs of large late-stage trials will be valuable for AVEO.

In addition to lowering its cash burn rate, the upfront cash will also help fund the rest of AVEO's pipeline. Astellas seems like as good a partner as any, having bought OSI Pharmaceuticals last year and having oncology partnerships with development-stage drugmakers including Seattle Genetics (Nasdaq: SGEN  ) and Regeneron Pharmaceuticals (Nasdaq: REGN  ) .

Even after today, AVEO only has a market cap just north of $500 million, which looks completely reasonable for a development-stage drugmaker with a phase 3 asset. As with any drugmaker looking for its first approval, positive clinical trials and an FDA approval are the most important factors. If tivozanib can hit its marks, AVEO shareholders should be looking at some sizable future gains.

Interested in keeping track of AVEO as it develops tivozanib? Click here to add it to My Watchlist, which will help you keep track of all our Foolish analysis on AVEO.

Pfizer is a Motley Fool Inside Value recommendation. 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.

Fool contributor Brian Orelli, Ph.D., doesn't own shares of any company mentioned in this article. The Fool has a disclosure policy.

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