Is Loxo Oncology's Deal With Bayer Bad News?

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After reporting that global biopharma giant Bayer AG (NASDAQOTH: BAYRY) has inked a licensing deal for its most advanced clinical-stage drug, shares in Loxo Oncology (NASDAQ: LOXO) tumbled. Is teaming up with Bayer a bad move for the company?

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In this clip from The Motley Fool's Industry Focus: Healthcare, analyst Kristine Harjes and contributor Todd Campbell explain why Loxo Oncology investors were disappointed and what could be next for the company.

A full transcript follows the video.

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This video was recorded on Nov. 15, 2017.

Kristine Harjes: Our next segment, we've giving an update on Loxo Oncology, company we discussed on the June 7 show, coming off of the American Society of Clinical Oncology's meeting, ASCO. I was just looking at iTunes and realized that, because this was more than 100 episodes ago -- which is kind of crazy -- it has fallen off the list on the desktop version of iTunes. So, if you're struggling to find it, that's another reason you can email me, industryfocus@fool.com. The short story from what we covered is, Loxo shares got a 50% boost after they reported a fantastic combination of efficacy and safety in their drug that I'm just going to call Laro. It's an abbreviation, but it's not even worth saying the full name. It's a drug that treats solid tumors that have a specific genetic mutation called a TRK fusion. On Tuesday of this week, we got some more news related to the company and Laro, as well as one other drug.

Todd Campbell: Larotrectinib. [laughs]

Harjes: Oh, you went for it.

Campbell: Yeah, these are so much fun to say, to practice at home, listeners.

Harjes: I copped out.

Campbell: I like to call this one Larry. Larry is friendly. We'll talk about Larry.

Harjes: He seems like a good dude.

Campbell: What was really fascinating about this -- absolutely reach out to Kristine so you can get a copy of that June episode, because we talked about three different companies that are exciting companies that presented some really, really interesting data at the American Society of Clinical Oncology meeting in June. Larry is really interesting because it approaches treating cancer in a way that's kind of unique. Historically, we've gone and looked at cancer treatments based on the origin of the cancer. So, we've developed breast cancer drugs or lung cancer drugs or whatever. And this drug doesn't really work that way. Instead, it targets a specific abnormality, a mutation, where you see these TRK, basically it's a signaling pathway, incorrectly fused together. And that fusion creates activity that leads to the development of tumors and their proliferation. Now, TRK activity is not very common in adults, so it's pretty easy to go in there and see, "OK, we have a problem, this person has TRK fusions." And sure enough, those tumors exist in melanoma, they exist in breast cancer, they exist in lung cancer. So, there's a potential to approve Larry at some point, and then be able to use that across multiple indications regardless of the origin of the cancer. That's kind of exciting, this cool concept of using biomarkers, it gets us a little bit closer to the concept of personalized or precision medicine. And that's great.

I think what's really interesting about this story from this past week is, a lot of people bought shares in Loxo because they had pie in the sky expectations for what this could mean if they launch it as soon as next year, if all things go well, maybe later next year. And they were thinking, either they're going to benefit 100% because it's a wholly owned drug, or they're going to get bought outright, lock stock and barrel, or gobbled up hook line and sinker by some other larger player. That didn't end up happening. I think that's one of the reasons that shares actually sold off on this deal, Kristine. It's a huge deal, but because it's just a licensing deal for Larry, I think some people were disappointed, because now they're going to have to split profit on this drug, and they didn't get bought out. But, still, it's a good deal in my view, because they get Bayer, which has a global sales force that can hit the ground running right out of the gate, they still get to share in the U.S. profit on this drug. Bayer is going to pay them royalties on ex-U.S. sales. And, they solidify their balance sheet with this really big, $400 million upfront payment that now gives them plenty of money to work on other things that are in their pipeline.

Harjes: Yeah, exactly. To me, it was a little bit surprising that the stock fell on the news. But I think you hit the nail on the head with these pie in the sky expectations, and this wasn't really what people were expecting. But, I think it's good news for anybody who wants to see this drug hit the market and it be successful.

Kristine Harjes has no position in any of the stocks mentioned. Todd Campbell has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.