Eli Lilly, the Indianapolis-based drug giant, said Monday that it will purchase Loxo Oncology, a tiny startup, for $8 billion in cash to gain access to the company’s cancer medicines, one of which is on the market.
The deal price of $235 per share represents a 68 percent premium to Loxo’s closing price on Friday, and a rich gain for Loxo shareholders. Shares in the Stamford, Conn., company had already risen 975 percent since its September 2014 initial public offering. The reason: two experimental cancer pills that worked fantastically well in very small numbers of patients.
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On the face of it, this looks much better than Lilly’s past acquisitions. Upon closer look, I wonder if it is repeating the mistake it made when it bought Imclone, i.e., grossly overpaying for a handful of compounds that are mostly in early development or preclinical. Since Bayer already has the rights to Vitrakvi and Loxo-195, Lilly is basically paying $8 billion for 1 (promising) molecule in late development (Loxo-292), one in early development (Loxo-305), and two preclinical programs. This looks awfully expensive, although an aggressive sales forecast for Loxo-292 could help justify it. Time will tell if this pans out. Ironically, even if it does not, it might still be a good deal if Loxo can teach Lilly how to develop drugs on the cheap. Since it creation in 2013, Loxo’s cumulative R&D spend has been a paltry $400 million. So, $8 billion plus $1.5 billion it reportedly got from Bayer is not a bad payday for 5 years of labor. For Lilly’s board though, the question is why can’t such great ideas germinate inside? What did Loxo have that Lilly lacked? It’s certainly not money.