What happened

Shares of XBiotech (NASDAQ:XBIT) more than doubled today after the tiny company agreed to sell its lead drug candidate, bermekimab, to Johnson & Johnson (NYSE:JNJ) subsidiary Janssen for $750 million up front and up to $600 million in potential milestone payments. XBiotech will also generate revenue by manufacturing the asset for Janssen for the next two years. 

The unusual deal means XBiotech will need to get to work to reinvent itself, especially considering the offloaded asset is involved in 14 clinical programs that comprised nearly the entirety of the company's pipeline.

As of 3:21 p.m. EST, the pharma stock had settled to a 72.6% gain.

A cluster of white paper airplanes being led higher by a red paper airplane.

Image source: Getty Images.

So what

Bermekimab is an antibody that inhibits interleukin-1 alpha, which triggers inflammation that contributes to a wide range of diseases spanning cancer, autoimmune disorders, and type 2 diabetes. Whereas most antibody drugs on the market or in development are monoclonal antibodies, bermekimab is a human antibody, meaning it's taken directly from the human immune system. That could boost the safety and efficacy of the drug candidate.

The enormous potential of the drug candidate was good enough for Janssen to pull the trigger. If the potential milestones seem a little light for a drug involved in 14 clinical programs, that's likely because XBiotech included a clause in the deal allowing it to develop next-generation interleukin-1 alpha drug candidates. That's also likely why only the drug was sold, not the whole company.

Now armed with $750 million in cash on top of the $40 million it had at the end of September, the small-cap biotech shouldn't have many obstacles in the way of kicking off new research and development efforts.

Now what

XBiotech is a small, inexperienced company with few assets outside of its massive cash balance (assuming the transaction closes). It will take time to develop its next-generation pipeline, but at least now it will be on the radars of investors. For now, there's not much cooking, so keep this small-cap biotech on your watch list.