Lilly makes $8 billion bet on drugs for rare cancers with Loxo Oncology buy

Eli Lilly said on Monday it will buy Loxo Oncology Inc for $8 billion, an expensive bet on a pipeline of cancer drugs that target rare genetic mutations and the biggest acquisition in the drugmaker`s 143-year history. The price represents a 68 percent premium to Loxo`s Friday share price close, which some Wall Street analysts said was high for a company with only one drug on the market that it shares with a partner.

Loxo shares surged 66 percent to $232.65, close to the offer price of $235 per share, and prompted stock price rises for a other small developers of targeted cancer therapies, including Array BioPharma , Blueprint Medicines Corp and Clovis Oncology Inc . Lilly shares rose 0.5 percent to $115.28.

The cash deal comes on the heels of Bristol-Myers Squibb Co`s agreement last week to buy Celgene Corp for $74 billion in the largest pharmaceutical deal ever, spurring investors` hopes of a new wave of large healthcare acquisitions.

Loxo gained prominence in 2017 - just three years after going public - with impressive clinical trial results showing its drug to be highly effective on cancers driven by a single gene mutation known as TRK fusion, regardless of where in the body the tumours originated.

These patients, with more than 17 different types of advanced cancer but all with the same genetic mutation, had run out of other treatment options. Yet some 80 percent who received Loxo`s first drug, a pill called larotrectinib, experienced dramatic, often long-term improvement.

The Connecticut-based company won U.S. approval in November for the treatment under the brand name Vitrakvi, which is sold in partnership with Bayer AG . Lilly said it "very much" wants to continue the agreement with Bayer, which sells Vitrakvi outside the United States and shares U.S. commercial costs and profits with Loxo.

Loxo is also developing LOXO-292 targeting a different rare gene mutation, and analysts have forecast eventual annual sales of over $1 billion. Lilly would gain full control of that drug as it is not part of Loxo`s Bayer collaboration.

In an interview, Lilly Chief Executive David Ricks said that drug targeting a mutation known as RET, seen in thyroid, lung and other cancers, was a major driver of the deal. It received breakthrough therapy designation from U.S. regulators, which could speed its path to approval.

Loxo was quick to take advantage of new technologies that can isolate genetic drivers of tumor growth, and the willingness of regulators to approve treatments across tumor types when a specific defect is present, Ricks said at the annual JPMorgan Healthcare Conference in San Francisco on Monday.

"Loxo sort of predicted that and then capitalized on that in a way that created value," Ricks said, adding that the acquisition will help Lilly identify new targetable mutations. He said Lilly was also interested in expanding in immuno-oncology through its own research and possible deals.FINDING THE PATIENT

Targeted therapies offer the promise of potentially dramatic results if patients most likely to benefit are correctly identified, and are seen as a potential alternative to chemotherapy and its many adverse side effects.

"The acquisition of Loxo, along with last week`s acquisition of Celgene, may represent the cream of the crop in biotech being harvested by big pharma," IFS Securities analyst David Bouchey said. "The size of the deal may indicate Lilly`s willingness to pay up to out-bid the competition."

BMO Capital Markets analyst Alex Arfaei said the $8 billion valuation seemed high as Wall Street does not expect Loxo revenue to reach $1 billion until 2023.

Loxo`s drugs present the particular challenge of finding advanced cancer patients with the rare genetic mutations, which will require significantly increased use of advanced sequencing of tumours. The TRK mutation targeted by Vitrakvi only occurs in about 1 percent of patients with solid tumor cancers.

That effort got a boost last year, when the U.S. government said its Medicare programme will cover so-called next generation sequencing, which looks for hundreds of mutations across all solid tumours, for advanced cancer patients.

Lilly has typically eschewed large deals, preferring to develop its own drugs. But last year it paid $1.6 billion for Armo Biosciences, a developer of immunotherapy cancer drugs, and said in November it was open to more deals.

Lilly`s oncology portfolio includes lung cancer chemotherapy Alimta, which had third-quarter sales of $520.5 million.

Vitrakvi, priced at $32,800 per month, and experimental follow-up drug LOXO-195, on which Bayer is also a partner, together could generate annual sales of about $750 million, according to Piper Jaffray & Co.

Bayer said it does not expect the Lilly deal to impact its contract with Loxo for the time being.

Loxo`s shares have run up nearly 65 percent over the past 12 months, and ten-fold since its IPO in 2014, while Lilly`s stock has surged about 35 percent since last January.

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