Eli Lilly’s $8bn Acquisition of Loxo Oncology

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