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Follow Eli Lilly's (NYSE:LLY) Lead, and Make a Big Purchase

Tuesday, December 15, 2020 | Steve Anderson
Follow Eli Lillys (NYSE:LLY) Lead, and Make a  Big Purchase

Drugmakers have been closely watched over the last several months, whether it's because they had direct skin in the game in the race for a COVID-19 vaccine, or because they were working on addressing some of the diseases out there that had nothing to do with COVID-19. Eli Lilly (NYSE:LLY) recently made some advances on the non-COVID front, as it agreed to spend as much as $1.04 billion to acquire Prevail Therapeutics (NASDAQ:PRVL).

The Prevailing Deal

With the acquisition of Prevail, Eli Lilly will bring some powerful new tools under its control, with a particular focus on the gene therapy market. The move will also give Eli Lilly access to new tools in terms of discovering new drugs and putting these discoveries to practical application.

Among the new drugs Eli Lilly will land, reports note, is a treatment for a variant of Parkinson's disease that involves what are called “GBA1 mutations”, along with “neuronopathic Gaucher disease”. Additionally, there will also be a treatment for frontotemporal dementia with what are called “GRN mutations”, giving Eli Lilly new tools to address a range of diseases. The Gaucher disease treatment, known as PR001, has already landed Fast Track Designation from the Food and Drug Administration, so the purchase is likely to start bearing fruit for Eli Lilly in rapid fashion.

The deal also calls for a “contingent value right,” which may adjust the price as much as $4 per share depending on the outcome of a potential FDA approval on one new drug. It was already in the pipeline when the deal was struck, so the contingency play was established to accommodate a development on that front. All told, Eli Lilly was poised to pay roughly an 80% premium for Prevail shares.

Better yet, Eli Lilly also offered some insight into its upcoming year in revenue, that was better than expected. The company projects revenue for the year between $26.5 billion and $28 billion outright, with between $1 billion and $2 billion coming in from COVID-19 treatment options. This is well above analyst expectations, even on the low end, which looked for the company to bring in $26.47 billion. Just to round it out, the company also noted a hike in quarterly dividend payments, from $0.74 per share to $0.85.

Gaining Ground on Consensus Figures Too

Our latest research on the broader analyst picture suggests that sticking with Eli Lilly will be a good plan, as the company has enjoyed a “buy” consensus for the last six months. In fact, it's a consensus that's recovered in recent days. Last month, the company had five “hold” ratings, nine “buy” ratings and one “strong buy” rating. Today, it's identical, but there's one more “buy” rating to add. Things did look a little better three months ago, but only due to fewer ratings and a better ratio; three months ago the company had three “hold”, eight “buy” and one “strong buy” rating.

The price target has fluctuated, though, in this time. Six months ago it was $164.64. Three months ago, it rose to $172.27. A month ago, it fell to $169.50, until today, where it sits at $169.87. So we can see some gains in the target, but these are gains off lows, not highs. About a month ago, Mizuho lowered its price target from $164 to $156, but last week, Wolfe Research boosted its target from $147 to $183.

Hefty Payout, Hefty Payoff?

The big question here is not really so much whether or not Eli Lilly made a smart move. Buying Prevail likely was just that, since it gives Eli Lilly access to not only new drugs outright, but also a way to develop more, and in a better fashion. That's a recipe for solid return. No, the real question here, I'd say, is why the massive premium was necessary. Sure, it's not exactly a lot proportionally—the company is looking to bring in as much as $28 billion next year—but with reports of an 80% premium, it's easy to wonder why such a move was made.

Normally, offering a huge premium is a means to scare off interest from other corners, a show of force to keep other potential buyers out of the pool. It was clear Eli Lilly wanted those new drugs and development measures, and would have them by any means available. That's a positive sign; the company isn't just looking for new drugs to peddle, it's also looking for new development tools to make new drugs to peddle. That's going to help keep Eli Lilly in the pharmaceutical market for a long time to come, and should make its shares well worth purchasing too.

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Companies Mentioned in This Article

CompanyMarketRank™Current PricePrice ChangeDividend YieldP/E RatioConsensus RatingConsensus Price Target
Eli Lilly and (LLY)1.9$196.21flat1.73%32.06Buy$200.75
Prevail Therapeutics (PRVL)1.1$23.00flatN/A-10.00Hold$24.20
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