An experimental cancer pill from Loxo Oncology (NASDAQ:LOXO) is getting heaps of attention going into one of biotech's most important scientific conferences this year. The American Society of Clinical Oncology recently released details from of heaps of drug trials that will be presented at the meeting, and investors thrilled with this company's candidate drove the stock higher overnight.

The society selected one of Loxo's abstracts for its "Best of ASCO" program, because it looks like a well-defined group of cancer patients could get an important new treatment option. Does this interesting new drug candidate make the stock a buy now? To answer that we'll need to see how much lift it can provide this high-flying stock.

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Looks like specificity counts

Multikinase inhibitors are increasingly popular treatment options for a variety of cancers, but they don't seem to work so well for patients who display abnormal activation of rearranged during transfection (RET) kinases. Loxo designed LOXO-292 to specifically shut down runaway RET kinase activity, and investors are pleased because it appears to work as hoped. The early-stage candidate shrank tumors for 22 of 32 evaluable patients with RET fusion-positive tumors during a phase 1 study.

A high response rate on its own wasn't the only reason results from this trial stood out. It also looks like the tablets are effective at easily tolerable doses. Investigators split 57 patients into seven groups receiving different dosages but didn't find any dose-limiting toxicities, and there weren't any serious adverse events attributed to the experimental treatment.

Next steps for Loxo Oncology

Getting tumors to shrink isn't much good if they just come roaring back, and all eyes will be on Loxo's planned presentation looking for confirmation that the tumor responses were the sort that could lead to a big survival benefit. Patient data in the company's celebrated abstract cut off in January, and Loxo's promised to present data that runs through April at ASCO's annual upcoming meeting.   

So far, it looks like the company has every reason to rush this program into larger studies in an attempt at an accelerated approval, but investors might want to cool their jets about its peak sales potential.  The company thinks roughly 5,000 patients with the right genetic aberrations to benefit from LOXO-292 relapse following current treatments. Since there isn't an FDA-approved method of identifying these patients, seeking them out could be awfully difficult, no matter how well the treatment might work. 

In the numbers

If Loxo were still a tiny biotech, I'd say LOXO-292 makes the stock a buy on its own, but its market cap has swelled up to $5.0 billion at recent prices. The company doesn't have any products to sell yet, but investors expect a great deal of success for this fledgling program, plus another candidate with an application already under review at the FDA, larotrectinib.

Loxo's lead candidate inhibits tropomyosin receptor kinases (TRK) but it has an important feature in common with LOXO-292: It acts on its target in a highly selective manner that appears to allow the drug to be effective and tolerable. At the same conference last year, larotrectinib turned heads with a 76% overall response rate across a group of 50 patients with various tumors that express TRK related abnormalities. Investors were especially excited to see 93% of responding patients remained on therapy or stopped to prepare for curative surgery. 

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It looks like the benefit-to-risk ratio is off the charts for larotrectinib as well as LOXO-292, but the number of patients with TRK fusion cancers that fail multiple existing treatments is somewhere between 1,500 and 5,000 each year in the U.S. Investors also need to understand that Loxo Oncology licensed its candidates from Array Biopharma (NASDAQ:ARRY) and owes its partner substantial milestone payments and mid-single-digit royalties on any sales they might generate. Loxo has partnered with Bayer AG (OTC:BAYR.Y), and if approved, the German giant will share U.S. profits with Loxo and pay double-digit royalties on sales abroad.

Biotech stocks generally trade at mid-single-digit multiples of total annual revenues. Loxo's candidates might earn marketing approvals, but it's hard to imagine their annual net contributions to Loxo's top line reaching a combined $1 billion among such small addressable populations after Array and Bayer take their cut.

The existence of new treatments has been known to bring larger than expected numbers of patients out of the woodwork, and there's a chance that later expansion to newly diagnosed patients could allow larotrectinib or LOXO-292 to achieve blockbuster sales. Rather than bet on a tremendous string of good luck, cautious investors might want to keep this promising biotech on their watchlists for now.

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.