On the heels of Bayer AG (BAYR.Y -2.06%) licensing Loxo Oncology's (LOXO) fusion-targeting cancer drug, Roche Holdings (RHHBY -0.18%) is acquiring Ignyta (NASDAQ: RXDX), a company that's also exploring origin agnostic approaches to cancer treatment. The $1.7 billion all-cash deal reflects growing excitement in this promising area of cancer research and development.

What's the story

Historically, cancer treatment has been driven by the origin of the cancer (e.g. breast cancer, lung cancer, or kidney cancer). In the future, it may be driven by discoveries at the molecular level.

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Specifically, mutations in genes that are tied to cancer regardless of where it began. The potential to commercialize this next generation of targeted medicines is generating a lot of interest among big pharma.

In June, Loxo Oncology reported a 76% response rate to its drug, larotrectinib. Larotrectinib interrupts signaling responsible for causing tropomyosin receptor kinase (TRK) fusions that can contribute to cancer growth. These TRK fusions can occur in breast cancer, colorectal cancer, lung cancer, melanoma, and other cancers.

The trial results led to Bayer paying Loxo Oncology $400 million upfront in November for global rights to larotrectinib and LOXO-195, a second-generation TRK-fusion drug. Loxo Oncology can also receive 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 from Bayer. The two companies will split U.S. profits and Bayer will pay Loxo Oncology tiered double-digit royalties and up to $475 million in sales-based milestone payments on ex-U.S. sales.

In Roche's case, it's getting exposure to fusion targeting drugs by acquiring Igynta, a Loxo Oncology competitor.

Ignyta's lead drug is entrectinib -- a selective TRK inhibitor that may help patients harboring NTRK fusions and ROS1 fusions. In October, Ignyta reported impressive mid-stage trial results for entrectinib, including a 69% overall response rate in ROS1 fusion-positive non-small cell lung cancer patients. Median progression-free survival was 29.6 months. Since it crosses the blood-brain barrier, Ignyta speculates that it may help prevent brain metastases, which can be common in these patients.

Ignyta's management thinks those results are good enough to eventually position entrectinib as the standard of care in first-line NSCLC patients with ROS1 fusions.

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What's next

ROS1 fusions aren't common, but the size of the NSCLC indication could still make entrectinib worthwhile to Roche. ROS1 fusions occur in 1.7% of NSCLC patients and NSCLC accounts for between 80% and 85% of the 222,000 new lung cancer cases diagnosed in the U.S. every year. Those figures suggest entrectinib's addressable patient population in NSCLC could be about 3,000 per year in America alone.

It's too early to predict pricing for these precision medicines, but based on other recent cancer drug launches, I think it's safe to say that annualized prices will be in the six-figures. If so, then entrectinib has a good shot at producing hundreds of millions of dollars in annual sales for Roche.

Over time, entrectinib's opportunity could be even bigger than that. ROS1 fusions are also found in some melanoma and colorectal cancer patients, too. 

Only time will tell if precision medicines like these are commercial successes, but fortunately, investors won't have to wait long to find out. Previously, Ignyta has indicated plans to file for entrectinib's approval in NTRK and ROS1 fusions in 2018.