Loxo Oncology (NASDAQ:LOXO) is one of biotech's best-performing stars this past year, and shares could still have room to run higher if the FDA cooperates with an OK for its lead drug, larotrectinib. 

A busy summer

After updating investors on larotrectinib's efficacy and safety in June at the annual American Society of Clinical Oncology (ASCO) conference, Loxo Oncology's shares have broken out to new highs. Wowed by high response rates in trials, investors sent shares soaring, leaving long-term investors with a return that's north of 230% in the past year.

LOXO 1 Year Price Returns (Daily) Chart

LOXO 1 Year Price Returns (Daily) data by YCharts

What's exciting about larotrectinib is that it targets biomarkers rather than cancers based on their location of origin. That means patients with a specific genetic abnormality can be prescribed larotrectinib regardless of whether they have lung cancer, breast cancer, or some other form of cancer.

Larotrectinib works by interrupting signaling that creates tropomyosin receptor kinase (TRK) proteins that are responsible for providing instructions to cells that govern cell behavior. In some patients, TRK fusions can occur when two chromosomes break apart and then incorrectly fuse back together. In those instances, a hybrid gene is formed that can activate a signaling pathway in cancer cells that cause tumors to grow. 

In trials, 76% of patients, including 43 adults and 12 children, responded to larotrectinib therapy. The study included patients diagnosed with a variety of cancers, including breast cancer, colorectal cancer, lung cancer, and melanoma, as well as others. The complete response rate was 12%, and 93% of patients who responded to therapy remained on larotrectinib at the time the data was presented at ASCO.

Loxo Oncology believes larotrectinib's efficacy data so far can support a filing for FDA approval by early next year. However, that filing hinges upon a blinded central review of the response data. Historically, such reviews tend to reduce overall response rates by 10% to 15%, but even if that's the case with larotrectinib, a response rate of about 61% could still secure a regulatory green light. If so, then management estimates larotrectinib's addressable market in the U.S. could be between 1,500 and 5,000 late-stage cancer patients.

Scientists in a lab looking at a double helix.

IMAGE SOURCE: GETTY IMAGES.

Preparation under way

Loxo Oncology already went into the ASCO presentation with enough cash on hand to fund operations into 2019, and following its presentation, it tapped equity investors for another $260 million in a follow-on stock offering that was oversubscribed.

The offering increased the company's cash stockpile to $467 million exiting June, providing it with plenty of financial firepower to advance its FDA filing, prepare for a commercial launch, and fund the development of other drugs in its pipeline, including next-generation TRK-fusion drugs that may work even better.

Despite a relatively small addressable market for larotrectinib initially, it's likely to command premium pricing, which suggests an approval could translate into hundreds of millions of dollars in annual sales or more. 

Of course, a lot can and often does go wrong in cancer drug development, which is why fewer than 10% of cancer drugs entering clinical trials ever end up on pharmacy shelves. Nevertheless, it appears that Loxo Oncology is on to something special with larotrectinib, and with deep pockets and a potential path to winning FDA approval as soon as late next year, it could be worth more than its current $2.6 billion market cap.

Todd Campbell 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.