Lilly execs: $8B acquisition feeds into cancer drug strategy

Drug industry analysts on Monday generally applauded Eli Lilly and Co.’s $8 billion cash deal to purchase a startup drugmaker that focuses on cancer treatments, characterizing the buy as a “solid acquisition.”

Lilly executives said the blockbuster deal feeds into its recent strategy of focusing on cancer drugs and padding its pipeline through partnerships and acquisitions.

It’s a rich deal for biotech firm Loxo Oncology Inc., with Indianapolis-based Lilly offering investors a 68 percent premium for their shares over Friday’s closing price of $139.87. Loxo holders will get $235 per share.

Wall Street seemed at peace with the purchase price, as Lilly shares rose about 1 percent to $115.64 in late-morning trading. Loxo shares were bid up to $232.

Tyler Van Buren, an analyst for Piper Jaffray, said he entered the year viewing Loxo as “a prime takeout candidate,” given the quality of its medicines currently available and in development. He said Lilly’s $235-per-share acquisition price was fair.

Lilly’s emergence as Loxo’s buyer “is a little surprising,” said Stephen Willey of Stifel. But the acquisition makes sense given the drugmaker’s existing products for cancer and the eventual expiration of its patents related to cancer drug Alimta.

The purchase is Indianapolis-based Lilly’s biggest takeover ever, according to data compiled by Bloomberg.

“Replenishing Lilly’s pipeline is a key focus in upcoming years,” Lilly CEO David Ricks said on a conference call with analysts Monday. The company will look at targets in cancer, neuroscience and immunology, he said.

Stamford, Connecticut-based Loxo is developing cancer treatments that target a tumor’s genetic markers regardless of where in the body they’re located.

The deal gives Lilly access to potentially game-changing drugs, including one that is being studied for multiple tumor types that recently was fast-tracked by the U.S. Food and Drug Administration. The FDA’s granting of “breakthrough therapy” status positions the drug for possible launch in 2020.

In addition, Loxo in November won FDA approval for another cancer drug that it is commercializing with Germany-based Bayer AG. In a research study, that medicine shrank tumors in 75 percent of patients with a rare type of genetic mutation.

The Loxo acquisition "is clearly part of our oncology strategy that we set forward a year ago" targeting tumor dependencies and genetically defined cancer, said Levi Garraway, Lilly’s senior vice president of global development and medical affairs. “So when looking for opportunities like this, we think there's a lot of synergy.”

Cancer has become a major area of focus for Lilly. Long a stalwart in diabetes, the company suffered a series of costly setbacks in efforts to develop what would have been the first treatment for Alzheimer’s disease.

Ricks, a veteran Lilly executive, said soon after becoming CEO in 2017 that the company's drug development strategy would rely more on partnerships and acquisitions.

In May, Lilly agreed to buy Redwood City, California-based ARMO BioSciences Inc. for $1.6 billion in cash. ARMO develops medicines that activate the immune system of cancer patients to recognize and eradicate tumors.

Analysts expect Loxo to generate $1.14 billion in sales in 2023, according to estimates compiled by Bloomberg. They expect about $200 million in revenues this year.

The deal is expected to close by the end of March, the companies said.

Analyst Geoff Meachum of Barclays said Loxo’s strong pipeline should help drive top- and bottom-line growth for Lilly beyond 2020. He said the purchase will bolster Lilly's new product cycle, “which we would characterize as one of the strongest cycles across biopharma.”