What happened

Shares of Surface Oncology (NASDAQ:SURF) were down by 13.6% as of 3:32 p.m. EST on Thursday. The decline came after the company announced a deal with GlaxoSmithKline (NYSE:GSK) to license its preclinical program SRF813 for $85 million up front. Surface is also eligible to receive up to $730 million in milestone payments, plus tiered royalties on any sales of the product in the future.

So what

Ordinarily, a major licensing deal with a big pharmaceutical company would be seen as good news for a small drugmaker like Surface. So why did the biotech stock fall instead of climbing?

Scientist looking through a microscope

Image source: Getty Images.

It could be that some investors didn't think Surface received enough for what it gave up. An upfront payment of $85 million won't last too long: Surface lost nearly $16 million in its latest quarter. SRF813 also represents one-fifth of the company's pipeline. Surface arguably could be less attractive as a potential acquisition target in the wake of this deal.

Still, the licensing agreement underscores the potential of its immuno-oncology platform. Surface Oncology CEO Jeff Goater described the transaction as a big plus for his company. He said that "the economics of the transaction position us well to continue to drive the development of our wholly owned clinical programs, SRF617 and SRF388, while also advancing SRF114, our CCR8 targeted program."

Now what

For clinical-stage biotechs like Surface, maintaining enough cash to fund clinical development is paramount. The company said in November that its cash stockpile of $102.5 million as of Sept. 30 was enough to carry it into 2022. The upfront payment from GSK should extend that cash runway out even further.

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