Shares of Endocyte, which had a market capitalization of about $136.18 million before the deal, more than doubled in value to $8.20 in early Monday trade. The stock was the biggest percentage gainer on the Nasdaq.

Endocyte, which is responsible for a majority of the funding and completion of the ovarian cancer trial, will receive $120 million in cash and up to $880 million in milestone payments.

"We also believe that this transaction definitely cracks the door open for an eventual acquisition by Merck, if they like what they see in the next couple of years ...," Cowen and Co analyst Simos Simeonidis said in a note to clients.

The upfront payment will also give Endocyte the ability to invest in their early-stage pipeline and a couple of years of cash, he added.

Endocyte, which had $128.1 million in cash, cash equivalents and short-term investments at end-December, has three other drugs in early-stage development.

The company will receive an equal share of profits in the United States, if the drug is approved. It will also get a double digit percentage royalty on sales of the product in the rest of the world.

Merck, through a subsidiary, will gain worldwide rights to commercialize the drug vintafolide.

Merck has four cancer drug candidates in mid-stage trials and one that is under review for approval by the U.S. Food and Drug Administration.

In the last four months, it has acquired the rights to two cancer drugs from Threshold Pharmaceuticals and Exelixis Inc.

Vintafolide is currently being tested in a late-stage trial for ovarian cancer and a mid-stage trial for non-small cell lung cancer.

Endocyte had planned to file for marketing approval for Vintafolide in the third quarter of 2012. The drug received an orphan drug status in Europe last month.

Endocyte's shares were trading at $7.85 on Monday morning on the Nasdaq. Merck shares were slightly up at $38.03 on the New York Stock Exchange.

(The story was refiled to fix typo in paragraph 1)

(Reporting by Balaji Sridharan in Bangalore; Editing by Roshni Menon)

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