By Marcus Falck, Carlos Asorey and Isak Muhr (SSE & Georgetown University) - Date: 09/03/2019
Overview of the deal
Acquirer: Eli Lilly and Company - Advisors: Deutsche Bank
Target: Loxo Oncology - Advisors: Goldman Sachs
Estimated value: $8bn - Announcement date: 07/01/2019
In the middle of the year’s biggest healthcare conference, the annual J.P. Morgan Healthcare conference, Eli Lilly announced their tender offer to acquire all outstanding shares of Loxo Oncology in a deal worth $8bn. The cash offer of $235 per share represents a premium of about 68% to Loxo Oncology’s closing price on January 4, 2019. The transaction is not subject to any financing condition but is structured through a two-step merger. Thus the deal was completed by a back-end merger where Eli Lilly acquired all shares that were not tendered into the tender offer.
The deal was announced only one week after the pharmaceutical industry’s largest deal announcement ever, Bristol-Myers Squibb’s mega-acquisition of Celgene in a deal valued at $74bn. In order to extend and broaden its portfolio of cancer treatment offerings and selective medicines, Eli Lilly has been an active acquirer lately, where the Loxo Oncology acquisition represents its latest and largest in a series of transactions. With the deal, Lilly obtains one recently FDA-approved drug and three drugs within the investigational phase.
"Lilly Oncology is committed to developing innovative, breakthrough medicines that will make a meaningful difference for people with cancer and help them live longer, healthier lives." - Anne White, president of Lilly Oncology
Company Details (Eli Lilly and Company)
Eli Lilly and Company engages in the discovery, development, manufacture, and sale of products in the pharmaceutical products business segment.
- Founded in 1876, headquartered in Indianapolis, USA
- President and CEO: David A. Ricks
- Number of employees: 40,655
- Market Cap: $131.51bn - EV: $136.54bn
- LTM Revenue: $24.56bn - LTM EBITDA: $7.87bn
- LTM EV/Revenue: 5.56x - LTM EV/EBITDA: 17.35x
Company Details (Loxo Oncology)
Loxo Oncology is a biopharmaceutical company focused on targeted cancer therapies for genetically-defined patient populations.
- Founded in 2013, headquartered in Connecticut, USA
- President and CEO: Joshua H. Bilenker
- Number of employees: 59
- Market Cap: $7.22bn - EV: $5.94bn
- LTM Revenue: $144.08m - LTM EBITDA: -$86.54m
- LTM EV/Revenue: 41.23x - LTM EV/EBITDA: -68.63x
Projections and Assumptions
Short term consequences
The acquisition of Loxo Oncology represents a pivotal moment in Eli Lilly’s evolution and its largest acquisition ever made. Loxo’s innovative capabilities and competitive edge in new technologies that can isolate genetic drivers of tumour growth, improve as well as diversifies Lilly’s oncology portfolio. Through extensive in-house R&D operations, partnerships and high M&A activity, Lilly’s management has been determined to provide the market with new medicines; hence enabling a strong foundation to grow their business. During the past five years, they have managed to increase their dividend four times on a year-over-year basis with an average annual increase of more than 3%. Yet, due to deal-related charges and a negative phase 3 trial for Lartruvo, Lilly missed analysts’ EPS expectations on the fourth quarter report and lowered their earnings and revenue outlook for the full-year 2019.
Even though high premiums are not unusual for biotech M&A’s, the premium of 68% and a price tag of $8bn is steep considering Eli Lilly’s standards. However, Loxo’s recently approved “Vitrakvi”, a drug targeting specific genetic abnormalities, has been well-received by the market and did certainly de-risk the acquisition. This served as a contributing factor to Lilly's share price not declining following the acquisition announcement. Except the “Vitrakvi”, Loxo possesses two drugs with a potential launch in the near-term. A successful approval of these would not only contribute to the global oncology science but would also provide a short-term upside and hence create significant shareholder value.
Long term upsides
In the past, Lilly has relied more heavily on organic growth rather than acquisitions to bolster its drug pipeline. Nonetheless, this deal represents the second large acquisition by Lilly in the past two years: it acquired immunotherapy cancer drug developer Armo Biosciences for $1.6bn just last year. Both deals unlock various synergies across the company’s oncology business segment, enhancing a key pillar in Lilly’s long-term strategy.
From a pharmaceutical perspective, Lilly’s recent bullishness in immuno-cancer treatments and precision medicine indicates a refocus in line with both expected industry CAGR and regulatory environment. Immuno-cancer treatments are those that bolster the body’s own immune system to target and destroy cancerous cells, while precision medicine are those that specifically target patients with certain genetic content - in this context, that would be patients with certain genomically defined cancers. These are both areas with very high expected growth rates over the coming years, as well as areas in which regulators recently seem to be more willing to approve treatments. Thus, it seems that in the long-term investors can expect to see fierce competition in the oncology and precision medicine spaces, with more smaller players potentially being bought out for their pipelines and breakthrough therapies.
Furthermore, this deal continues to fuel investor speculation over additional healthcare and pharmaceutical M&A activity. With additional cash unlocked by the lower tax rate, lower - and arguable more realistic - biotech company valuations, and a more lenient regulatory environment, M&A activity has begun to pick-up across the healthcare industry. If this trend were to continue, investors would be in for a large shift in the pharmaceutical industry landscape over the long-term.
Risks and Uncertainties
On February 15, 2019, Eli Lilly announced the successful completion of the Loxo Oncology acquisition - nonetheless, as with any large acquisition and especially in the pharmaceutical industry, there are certain risks to a successful transaction.
A key driver of most pharmaceutical transactions is a company’s drug pipeline - that is the drugs they sell or are currently developing. For Eli Lilly’s acquisition of Loxo Oncology, this is no different: Loxo Oncology bolsters Lilly’s immuno-oncology pipeline significantly. Thus, a major risk to the value this deal unlocks is the failure of drugs currently in development: specifically, the Phase 2 RET Inhibitor and Phase 1 TRK and BTK Inhibitors. In order to successfully market a drug, the drug must first pass three phases of clinical trials and then be reviewed by the relevant regulatory body. In Lilly’s case, the two drugs with the highest potential of failure are the TRK and BTK Inhibitors, as these are in the earliest stages of the process. The RET Inhibitor has much less risk as it is currently in Phase 2 and has achieved significant milestones thus far - nonetheless, the RET Inhibitor was singled out as a key driver of the acquisition by Eli Lilly’s CEO and thus any negative results from this drug could very negatively impact Eli Lilly and place the acquisition of Loxo Oncology in bad light.
Finally, as with any M&A involving large companies there are risks to successful integration, especially for a company like Eli Lilly that has historically relied more heavily on organic growth. Nonetheless, this is less significant of a risk as successful pharmaceutical company integration is less complex than in other industries, and Eli Lilly arguably has sufficient resources to successfully unlock value through this acquisition.
"We are excited to have reached this agreement with a team that shares our commitment to ensuring that emerging translational science reaches patients in need.” - Jacob Van Naarden, chief operating officer of Loxo Oncology
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