Biotechnology company Exelixis ( EXEL) said it will get $40 million in upfront and milestone payments in a cancer drug development deal with Genentech ( DNA).

Under the deal, Exelixis will develop the drug, dubbed XL518, through the end of phase I trials. If Genentech exercises its option to further develop the drug, Exelixis will receive an additional payment and Genentech will continue later-stage trials and be responsible for further development, including all further development costs, the company says.

Additionally, Exelixis has the option to co-promote the drug in the U.S. with Genentech, and has a substantial share in marketing costs. Its initial equal share in U.S. profits will decrease as sales increase, the biotech said in a press release Wednesday. Exelixis will receive royalties on any sales of the drug outside of the U.S.

Exelixis submitted an investigational new drug application for the cancer treatment to the Food and Drug Administration on Dec. 20.

"Genentech is a leading innovator of important new cancer therapies, and we believe that this collaboration validates the significant potential of XL518 to be the first in a new class of drugs targeting critical intracellular signaling pathways," said CEO George Scangos.

The company's shares were gaining 2.6% to $9.23.

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