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Eli Lilly and Co 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 Lilly’s 143-year history.

The price represents a 68 per cent premium to Loxo’s Friday share price close, which some analysts said was high for a company with one approved drug that it shares with a partner.

Loxo shares surged 65.5 per cent to $231.51, close the offer price of $235 per share. Lilly shares were up 1.4 per cent at $116.26.

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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 health care deals.

Loxo gained prominence in 2017 – just three years after going public – with impressive clinical trial results showing its drugs to be highly effective on cancers driven by single gene mutations 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 options. Yet some 80 per cent who received Loxo’s first drug experienced dramatic, often long-term improvement.

The Connecticut-based company won approval in November for its first commercial medicine, Vitrakvi, which is sold in partnership with Bayer AG.

Loxo is also developing LOXO-292 targeting a different rare gene mutation than Vitrakvi for which 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.

On a conference call, Lilly 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.

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.

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Targeted therapies, often pills, 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.

CREAM OF THE CROP

“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 outbid the competition.”

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

Loxo’s drugs present the particular challenge of finding the 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 per cent of patients with solid tumour cancers.

That effort got a boost last year, when the U.S. government said its Medicare program 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.

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

Vitrakvi, a pill 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 per cent over the past 12 months, and tenfold since its IPO in 2014, while Lilly’s stock has surged about 35 per cent since last January.

The deal was announced just ahead of the start of the annual JPMorgan health care conference in San Francisco, which began on Monday.

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