Bayer AG (NASDAQOTH:BAYRY) has entered into a collaborative partnership with Loxo Oncology (NASDAQ:LOXO) that could make it a global leader in cancer drugs that are used in patients based on genetic mutation, rather than the location of cancer. Loxo Oncology's TRK fusion cancer drugs have demonstrated impressive efficacy in a range of cancers, suggesting they could mark an important new direction for cancer treatment. Can this deal pay-off for investors?

A shift in treatment

Research is showing us that many cancers may be caused by the same genetic mutations and as a result, the same drugs may be able to be used to help improve patient outcomes regardless of whether cancer first took hold in the lung, breast, or somewhere else.

A business man stretches out his hand to shake on an agreement.

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In June, Loxo Oncology presented trial data for its lead cancer drug, larotrectinib, at the annual American Society of Clinical Oncology conference. The data from its use in late-stage patients with few alternative treatment options was remarkable. In 55 patients across 12 cancer types, 76% of patients with a TRK fusion genetic mutation responded to larotrectinib. 

TRK signaling is important to neuronal synapses, memory development, and maintenance and the protection of neurons, but its activity normally declines after birth. Sometimes, however, it can fuse together with other genes, fueling cancer growth and proliferation.

The study results are good enough to support a filing for larotrectinib's approval and if it eventually gets the green light, management estimates it could be used to treat between 1,500 and 5,000 late-stage eligible patients in the U.S. alone. TRK fusions occur in similar proportions outside the U.S., so the patient populations in Europe and Japan are meaningful too.

Getting in on the action

Bayer's decided that the potential to treat thousands of patients with TRK fusion mutations globally is too good of an opportunity to pass up. The company's paying Loxo Oncology $400 million upfront for the global rights to larotrectinib and a second-generation TRK-fusion drug, LOXO-195.

Loxo Oncology will oversee global development and U.S. regulatory filings, and Bayer will file for approval overseas and spearhead global marketing. The companies will share development costs on the drugs

Bayer has also agreed to pay Loxo Oncology up to $450 million in regulatory and first-sale milestones for larotrectinib and up to $200 million in regulatory and first-sale milestones for LOXO-195.

Loxo Oncology and Bayer will co-commercialize and split U.S. profit on these drugs. Loxo Oncology can also receive a $25 million milestone if U.S. sales reach an undisclosed target. Outside of the U.S., Loxo Oncology will get tiered double-digit royalties based on sales levels and up to $475 million in sales-based milestone payments from Bayer.

What's next

This is big news for Loxo Oncology investors. If Loxo Oncology wasn't able to sign on a partner, it would have faced steep regulatory and commercialization costs that could have taxed its balance sheet and reduced its ability to fund other R&D projects. Instead, Loxo Oncology will be able to leverage Bayer's existing global oncology sales team.

Loxo Oncology's ability to negotiate to retain co-promote rights in the U.S. is also good news because, historically, the U.S. is the best market for cancer drugmakers in terms of pricing and profitability.

Of course, there's no guarantee that global regulators will approve larotrectinib or LOXO-195, but I think the odds of a go-ahead are pretty good. If I'm right, then this deal marks an important step in Loxo Oncology's transformation into a commercial-stage biotech because it adds clarity to the company's future cash burn, accelerates potential launches in foreign markets, and provides plenty of financial wiggle room for future R&D efforts. 

 

Todd Campbell has no position in any of the stocks mentioned. His clients may have positions in the companies mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.