The acquisition of the biotechnology firm Loxo Oncology by pharma giant Eli Lilly & Co., announced at the year’s biggest healthcare conference, started 2019 off with a bang.
That was Lilly’s goal from the start, according to a new financial filing that reveals key details about how the giant deal came together.
Lilly approached Loxo in late December about a transaction, which Lilly wanted to announce at a high-profile spot: the J.P. Morgan Healthcare Conference, the “Super Bowl of healthcare,” which was set to start 18 days later.
Lilly got its wish, though it required bankers and executives to work through weekends and nearly all of the holiday season. Negotiations even took place on Christmas Eve and on New Year’s Day, according to the filing (though everyone apparently got a break on Christmas).
The filing also revealed a few key details that might give Loxo investors pause. Loxo got Lilly to boost its takeover offer by only $5 a share, from $230 to $235. The startup also decided against soliciting third-party offers, fearing it might put the Lilly proposal at risk.
Loxo negotiated down the amount it would have to pay Lilly if the biotech decided to accept a better offer from another company after the deal was announced.
Here’s how the deal came together.
‘Unattractive’ terms from other potential partners
Loxo wasn’t looking to get acquired when it reached out to 15 other drugmakers last spring.
Loxo works in a cutting-edge area of oncology, developing drugs that target gene mutations in cancers.
It would be presenting early research results from its most important drug, Loxo-292, that summer, and wanted to talk with other companies about licensing deals.
The biotech already had a “terrific” global agreement with the drugmaker Bayer for its first drug, Loxo-195, and was similarly interested in a “product-oriented deal,” Steve Elms, who chairs Loxo’s board and is a managing partner of venture-capital firm Aisling Capital, a founding investor in Loxo, told Business Insider last week.
Loxo’s CEO, Joshua Bilenker, also met that spring with Eli Lilly senior vice president Levi Garraway at an annual cancer-research meeting in Chicago, where each talked about their respective businesses.
Loxo announced its new data that June, and then met with more than five companies about licensing opportunities, according to the filing.
Conversations with four of those companies continued on through December, “but the terms that were proposed, including for global licensing partnerships, remained unattractive,” the company said in its filing.
Eli Lilly enters the picture
On December 20, Eli Lilly senior management met with Loxo at the biotech’s Stamford, Connecticut, offices, a meeting arranged about 10 days prior.
The pharma giant came with an enticing pitch: $230 a share — far above the $138 per share that Loxo was trading at that day — and a major announcement, at the J.P. Morgan Healthcare Conference just weeks away.
Due diligence and a definitive agreement would have to get hammered out in time for the January conference, Lilly told the biotech.
Loxo came back asking for more, saying the proposal was “not adequate.” Loxo’s board of directors also considered asking other drugmakers for acquisition proposals, but decided against it.
Lilly and its legal and financial advisers spent a full week poring over an “online data room” with information about the company’s research, plans to bring its products to market, and business agreements.
Meanwhile, on Christmas Eve, Loxo’s board and its financial and legal advisers were mulling how to get a better offer from Lilly, including whether they should reach out to other companies for a proposal.
A pause for Christmas, and then a final offer
The negotiations appear to have been paused for Christmas, according to the Loxo financial filing, but resumed the next day.
On December 30, the next-to-last day of the year, Lilly presented its new, and final, offer: $235 per share, with a deal financed entirely with cash and external financing.
Lilly would not go any higher, the pharma giant’s CEO, David Ricks, told Bilenker.
The Loxo board yet again considered whether to reach out to other companies for a bid, but thought doing so would pose risks to the Lilly offer.
The likelihood of getting another bid also seemed dim, according to the filing.
Why Loxo decided to accept Eli Lilly’s takeover offer
The biotech had met with potential partners earlier that year about a licensing deal for Loxo-292, which it considered its most valuable product, and none of those companies had suggested an acquisition. Those partner proposals, meanwhile, “brought significantly less value” than the deal Lilly proposed, according to the financial filing.
Loxo decided to go ahead with the offer and not reach out to any other companies.
The prospect of paying a “reasonable, non-preclusive termination fee” to Lilly if they got another offer was also part of the board’s considerations. More materials were added to the online data room, which Lilly and its team kept reviewing through early January.
Negotiations continued New Year’s Day through January 5, when the merger was finally executed, just barely two days before it was announced. One topic covered in those final days of negotiations: bringing the termination fee down below what Lilly had initially proposed.
The companies eventually settled on a $265 million termination fee, or 3.3% of the deal’s equity value.
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