Loxo Oncology, the research and development group of Eli Lilly and Company (NYSE: LLY) has signed a strategic collaboration agreement with Foghorn Therapeutics, Inc. (FHTX), a clinical-stage biopharmaceutical company. Following the news, shares of the American pharmaceutical company closed 1.8% higher on Monday, while Foghorn exploded 55% to close at $18.58.
Through the partnership, Eli Lilly and Foghorn will focus on creating novel oncology medicines with the application of Foghorn’s proprietary Gene Traffic Control platform.
The collaboration also includes a co-development and co-commercialization agreement for Foghorn’s selective BRM oncology program and an undisclosed oncology target. Further, three additional discovery programs using Foghorn’s platform are also included in the deal.
Terms of the Agreement
As per the terms of the deal, an upfront cash payment of $300 million will be made to Foghorn. Further, an equity investment of $80 million will be rendered by Eli Lilly in Foghorn at a price of $20 per common share. (See Eli Lilly stock price charts)
For the BRM oncology program and the additional undisclosed targets, Foghorn will execute discovery and early research activities, while development and commercialization activities will be catered by Eli Lilly. Notably, Foghorn will share the operational activities and costs.
Per the terms, Foghorn and Lilly will share equally in the U.S. economics, while Foghorn will receive royalties on ex-U.S. sales in the low double-digit range into the twenties based on revenue levels.
For the additional discovery programs, discovery and early research activities will be executed by Foghorn and it will receive up to a total of $1.3 billion as milestone payments. Additionally, Foghorn has the option to share a percentage of the U.S. economics and is eligible for tiered royalties in the mid-single-digit to low-double-digit range on sales outside the U.S.
Markedly, the terms of the deal have cleared the requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR Act).
Financial Impact
The impact of the deal will be reflected in Eli Lilly’s GAAP results and financial guidance, while non-GAAP earnings per share guidance for 2021 will not be affected.
Official Comments
The CEO of Loxo Oncology at Lilly, Jacob Van Naarden, said, “Oncogenic mutations in BRG1 impact a large population of cancer patients and we believe are best addressed therapeutically with a highly selective BRM inhibitor, though designing such a drug is a difficult chemistry challenge…Foghorn has a differentiated platform and we look forward to the prospect of leveraging it to discover multiple new drugs against similarly challenging targets with strong biologic rationale.”
Dividend Hike
In a separate release, Eli Lilly has announced an increase in its quarterly cash dividend by 15% to $0.98 per share of its common stock. The new dividend will be paid on March 10, 2022, to shareholders of record as of February 15. The company’s annual dividend of $3.92 per share now reflects a dividend yield of 1.58%.
Analysts Recommendation
Recently, Wells Fargo analyst Mohit Bansal initiated coverage of Eli Lilly with a Hold rating and a price target of $270 (8.64% upside potential).
Based on the company’s valuation, Bansal remains on the sidelines.
Shares of Eli Lilly have rallied 57.4% over the past year. The stock scores a Strong Buy consensus rating based on 7 Buys and 2 Holds. The average Eli Lilly price target of $280.22 implies 12.75% upside potential to current levels.
Smart Score
Eli Lilly scores a 9 of 10 from TipRanks’ Smart Score rating system, indicating that the stock has strong potential to outperform market expectations.
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