What happened

Shares of ARMO Biosciences (NASDAQ: ARMO) soared as much as 67.6% after the company announced that it was acquired by Eli Lilly (NYSE:LLY) for $1.6 billion. The formerly small-cap biopharma wields a promising pipeline of cancer immunotherapy drugs that rally a patient's own immune system to help shrink tumors. It went public just four months ago

The all-cash acquisition, which is expected to close in the second quarter of 2018, gives Eli Lilly a promising cancer immunotherapy platform to build upon. The pharma leader reported nearly $4.8 billion in cash and short-term investments at the end of March -- more than enough to cover the deal. Investors seem pleased with the decision, adding 2.2% to the stock, or about $2 billion in market cap.

As of 1:06 p.m. EDT, ARMO Biosciences stock had settled to a 67% gain, close to the acquisition price of $50 per share.

Stacks of coins and a green arrow showing growth sitting in a person's hands, held out like an offering.

Image source: Getty Images.

So what

ARMO Biosciences has a simple yet promising approach to immunotherapy. The lead drug candidate, AM0010, comprises a recombinant human growth factor called interleukin-10 (IL-10) attached to polyethylene glycol (PEG). IL-10 activates a type of white blood cell that serves a critical role in the body's immune system, especially in identifying and killing cancer cells. That's attached to PEG, an inert polymer, to increase the amount of time it circulates in a patient's body -- meaning the same amount of drug can activate more white blood cells.

That's it. That's worth $1.6 billion. Except, it might be worth much more than in the long run.

ARMO Biosciences is currently evaluating AM0010 in a phase 3 trial as a potential treatment for pancreatic ductal adenocarcinoma (PDL), which is responsible for roughly 80% of all cases of pancreatic cancer. But that could prove to be just the tip of the drug candidate's ultimate potential. The developmental treatment's broad activity has also demonstrated promising results in a phase 1/1b trial against 14 different cancers as a stand-alone treatment, in combination with chemotherapy drugs, and in combination with anti-PD-1 drugs.

Now what

The $1.6 billion acquisition is a high-value move by Eli Lilly, which is looking to bolster its oncology portfolio. The nearly $90 billion company has avoided making big multibillion-dollar splashes and has been relatively quiet in the immuno-oncology space that is all the rage in biopharma. If ARMO Biosciences' approach with AM0010 gains marketing approval, that could allow for a stable foundation to build upon over the long haul. Investors still need to await late-stage results, but it's a good use of cash that could pay handsome rewards in the next decade.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.