(Reuters) – Loxo Oncology on Tuesday signed a collaboration agreement for its promising cancer drugs with Germany’s Bayer AG that could be worth up to $1.55 billion to the tiny U.S. company, but its shares fell 11 percent as the deal appeared to end near-term likelihood of a takeover.
Loxo caused a great deal of excitement at last year’s biggest cancer meeting when its larotrectinib, which targets a specific genetic defect, led to significant tumor shrinkage in three quarters of patients with more than a dozen different tumor types, including several complete remissions.
The deal, which includes Loxo’s follow-up drug LOXO-195, gives Bayer entry into the fledgling field of drugs that attack cancer based on genetics rather than the organ where the disease originates.
But Loxo investors were not pleased with the news and its shares fell $9.39 to $73.84.
“I think there were a number of shorter term investors … that had hoped for an outright sale of the company ahead of an expected launch of their lead asset,” said BTIG analyst Dane Leone. He forecast peak annual larotrectinib sales of $1.5 billion by 2026.
The deal also gives Bayer rights to 50 percent of future U.S. sales.
“Most development stage oncology companies go to great pains to maintain rights to what is by far the most valuable of markets,” noted Cowen and Co analyst Eric Schmidt.
Loxo will receive $400 million upfront and the two companies will split development costs. Loxo is also eligible to receive $450 million and $200 million for each of the drugs in milestone payments once they are approved and sold.
Larotrectinib and LOXO-195 belong to a new class of medicines that target an acquired genetic defect called TRK fusions in which TRK genes abnormally attach to other genes, triggering accelerated cancer cell growth.
“What is unique is that the response rates have been remarkably consistent, which tells us that the mutation is the driver of the disease regardless of what tumor type you have,” said Robert LaCaze, Bayer’s head of oncology.
The deal comes as Bayer is buying U.S. seeds giant Monsanto, but struggling to develop new drugs that could offset a revenue decline when its bestselling anti-clotting drug Xarelto loses patent protection in 2024.
Loxo expects to apply for U.S. marketing approval of larotrectinib later this year or early next. Bayer will be responsible for seeking approvals outside of the United States and pay Loxo tiered double-digit percentage royalties on future ex-U.S. sales.
Additional reporting by Ludwig Burger in Frankfurt; editing by David Gregorio and Hugh Lawson