Loxo Purchase Fills Eli Lilly's Cancer Pipeline

Eli Lilly LLY announced the acquisition of Loxo Oncology for $8 billion, and we don't expect any major changes to our fair value estimate based on the deal, with the expected revenue from acquired cancer drugs offsetting the purchase price and increased R&D expenditures. Strategically, the deal brings Lilly targeted cancer drugs focusing on tumors with mutations in TRK, RET, and BTK, which should fit well with Lilly's strong position in oncology with already approved cancer drugs. Further, the deal helps fill Lilly's late-stage cancer pipeline. The deal also reinforces Lilly's strong competitive advantage and wide moat by strengthening its portfolio with drugs that carry strong pricing power. Loxo's only approved drug Vitrakvi is priced at close to $400,000 per annual course of treatment.

The Loxo acquisition gives Lilly focused cancer drugs targeting smaller patient groups, but the strong efficacy of the drugs should support continued pricing power and robust sales. Vitrakvi (and follow-on drug Loxo-195) are partnered with Bayer with close to a 50-50 split in profits. These drugs target TRK positive cancers (0.5%-1% of solid tumors) and we expect peak annual sales of close to $1 billion. Loxo's late-stage drug LOXO-292 targets cancers with RET fusions (2%-3% of lung cancer and higher rates in thyroid cancer). The drug has already shown strong data in non-small cell lung cancer with a response rate of 68% in a refractory patient population that had already taken three other therapies on average. We project the drug can reach peak sales of over $500 million annually and with potentially registrational Phase II data likely in late 2019, the drug could reach the market by 2020. Additionally, Loxo's last later stage drug LOXO-350 targets cancers with BTK mutations, but we don't ascribe any sales potential for this drug, as early-stage data is not expected until later in 2019.

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