What happened

Shares of Arcus Biosciences (RCUS -0.18%), a clinical-stage biotechnology company developing novel cancer therapies, are getting beaten down following an announcement that should be highly positive. Instead of a juicy buyout offer, Gilead Sciences (GILD 3.62%) has decided to forge a collaboration agreement. As a result, the stock has fallen 19.44% as of 3:55 p.m. EDT on Wednesday.

So what 

Back in April, shares of Arcus soared after an article in Bloomberg suggested Gilead Sciences would acquire a large stake, or perhaps all of Arcus Biosciences. Instead, Arcus will receive $175 up front and a $200 equity investment as part of a partnership to co-develop potential new cancer therapies.

Coins falling through someone's hands.

Image source: Getty Images.

Despite its relatively small size, Arcus' pipeline already boasts four novel cancer therapy candidates in 10 separate clinical trials. This flurry of clinical activity boosts the chances of success, but it also comes at a price. Arcus finished March with $158 million in cash after losing $27.5 million in the first quarter.

Now what

In addition to $375 million in upfront consideration, Arcus is eligible to receive up to $1.2 billion in the form of opt-in and milestone payments. Gilead Sciences gains access to the company's current and future cancer drugs with immediate rights to zimberelimab, an experimental anti-PD1 drug that works along the same lines as Keytruda from Merck (MRK 0.09%).

Further down the road, Gilead Sciences has the right to opt into all other current Argus clinical candidates for a fee that ranges between $200 million and $275 million per program. Gilead also retains the right to opt in to all other programs that emerge from the Arcus research portfolio over the next 10 years for the relatively low price of $150 million each.

In the U.S., the partners will co-commercialize any cancer therapies that earn FDA approval. Gilead will handle international sales and give Arcus a tiered royalty percentage that tops out in the low 20s.