Shares of Loxo Oncology (LOXO) jumped in pre-market trading before reversing and heading lower after the company announced a partnership with Bayer (BAYRY) to develop and commercialize its two lead drugs.

PARTNERSHIP AGREEMENT: Under the terms of the agreement, Loxo will receive an upfront payment of $400M from Bayer in exchange for global development and marketing rights to larotrectinib and LOXO-195, which both target rare chromosomal abnormalities known as TRK gene fusion found across different types of cancer. Loxo will also be eligible for a total of $650M in milestone payments from Bayer following regulatory approvals and certain sales events for both drugs. Loxo will lead worldwide development activities and U.S. regulatory activities, while Bayer will lead regulatory activities outside the U.S. and global commercial activities. The companies will split global development costs and U.S. commercial costs and profits. Bayer will also book global revenues. "This is a transformational collaboration for the company as we prepare for commercialization," said Jacob Van Naarden, chief business officer of Loxo Oncology.

WHAT'S NOTABLE: In a clinical trial presented in June by Loxo, larotrectinib demonstrated a 76% objective response rate in patients with cancers that contained the TRK fusions but originated in different parts of the body. In those studies 12% saw their tumors entirely disappear while 64% saw theirs tumors partially shrink. David Hyman, MD, of Memorial Sloan Kettering Cancer Center, said at the time that "We believe [these data] demonstrate that larotrectinib is profoundly effective in a durable manner in patients with TRK fusion cancers." Loxo expects to submit an NDA to the FDA for the larotrectinib program in late 2017 or early 2018, with the potential for an FDA decision by mid-2018. As the only selective pan-TRK inhibitor currently in clinical development, larotrectinib could "potentially be the first novel targeted therapy that's developed and eventually used in a 'tumor-agnostic' manner," Hyman said. TRK fusions occur in between 1,500 and 5,000 cancer patients per year, or about 1%-3% of cancer cases.

PRICE ACTION: Though Loxo Oncology initially jumped, the stock is now down about 5.4% to $78.75 after pre-market trading was resumed.