nical trDid big pharma company overpay for drugs with uncertain futures?

Lilly and Loxo

Eli Lilly shares finished on a slight upswing after the big pharma announced an agreement to buy Loxo Oncology for $8 billion in cash for drugs with uncertain futures, according to Cory Renauer in The Motley Fool. While Renauer believes the price was not an outrageous sum to pay for a biotech that has already earned its first FDA approval, he thinks that Lilly “might have more trouble selling Loxo’s recently acquired drug than imagined.”

Lilly agreed to pay a 68 percent premium to Loxo’s closing price the previous day, about 25 percent higher than the peak Loxo traded at last summer, months before Vitrakvi — the first cancer drug to earn its first approval for a tumor agnostic indication — was approved. Vitrakvi, an easy-to-swallow capsule, is indicated for patients with tumors that harbor NTRK gene fusion mutations, regardless of where those tumors are located.

Loxo priced Vitrakvi at around $400,000 per year, because only about 1 to 2 percent of solid tumors harbor NTRK mutations. That means that there are probably more than enough NTRK mutated tumors to drive annual Vitrakvi sales past $1 billion annually. While it is possible that Vitrakvi and a follow-on treatment in development called LOXO-195 could become blockbusters, Lilly will have to share proceeds with Loxo’s collaboration partner, Bayer. Bayer would will split U.S. profits related to Vitrakvi with Lilly. Outside the U.S., Bayer would be responsible for commercialization costs and paying Lilly a tiered double-digit royalty on net sales.

Loxo Oncology licensed its drugs from Array Biopharma in 2013 in exchange for mid-single-digit royalties on global net sales. Vitrakvi sales are expected to reach about $770 million by 2024. If half goes toward Bayer and Array, Lilly needs another candidate, LOXO-292, to be successful if the deal is to pay off.

LOXO-292, an oral treatment designed for tumors with RET fusion mutations, has shrunk tumors among 77 percent of patients treated. Lilly is likely to present data on it from an ongoing pivotal study, and a new drug application may be ready for the FDA by the end of 2019. If approved, LOXO-292 sales could reach $800 million per year. Lilly will still need to funnel roughly 5 percent of LOXO-292 sales to Array Biopharma, but Bayer will not get a cut. Thus, success with LOXO-292 could enable Lilly to earn a good return on its Loxo Oncology investment if it solves a big problem.

Lilly’s treatments are focused on a very limited patient population that could be hard to find in the years ahead. Showing patients that they have the right kind of tumors for these treatments is one step. Insurers may not pay for off-label prescriptions; proving that a patient meets all of the criteria for Vitrakvi could be a challenge, because patients need evidence that their tumors have an NTRK gene fusion without a known acquired resistance mutation and that there are no satisfactory alternative treatments.