Loxo Licensing Deal: A Good Deed Goes Punished

(Bloomberg Gadfly) -- Generally, it's seen as a good thing for a small pharma firm to get a giant pharma company to license its medicine. It's a vote of scientific confidence, a nice cash infusion, and puts substantially more commercial and regulatory muscle behind the drug. 

Loxo Oncology Inc. announced one of the biggest such deals of the year Tuesday. For a stake in two Loxo cancer drugs, Bayer AG has agreed to pay $400 million up front and possibly $1 billion or more in future milestone payments, while sharing development costs. 

But Loxo shares fell more than 7 percent on the news, ostensibly on fears this deal means the company is less likely to be acquired.

There's logic to the idea that pharma acquirers would rather buy firms that fully own their leading assets. But it isn't a universal truth.

Loxo Licensing Deal: A Good Deed Goes Punished

For one thing, investors should give Loxo some credit for the size of this deal. Both the up-front payment and total deal value comfortably exceed the average size of such deals.

Loxo Licensing Deal: A Good Deed Goes Punished

And licensing agreements are not M&A poison. For a truly successful medicine, partnership is no barrier to acquisition. 

Pharmacyclics Inc., for example, gave Johnson & Johnson a major stake in its lead drug Imbruvica in 2011. The company was later acquired for $21 billion by AbbVie Inc. in one of the biggest deals in sector history, inflated by a bidding war between AbbVie and J&J.

Medivation Inc. -- acquired by Pfizer Inc. for $14 billion in 2016 after another bidding war -- signed a 2009 deal to co-market its lead medicine Xtandi with Astellas Pharma Inc. 

Loxo Licensing Deal: A Good Deed Goes Punished

Both acquisitions happened after the firms' medicines had already launched successfully. Loxo's drugs are still in development. But Bayer's money and experience may help give them a better chance of hitting the ground running.

And now Loxo won't have to worry about cash. It has been successful at raising funds, but its spending is on an upward trajectory. It could also emulate Regeneron Pharmaceuticals Inc. -- a company that built itself into an independent biotech giant using money from partners Sanofi and Bayer. 

Loxo Licensing Deal: A Good Deed Goes Punished

Loxo's near-term acquisition prospects may have been dampened slightly. But its long-term potential is just as bright. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Max Nisen is a Bloomberg Gadfly columnist covering biotech, pharma and health care. He previously wrote about management and corporate strategy for Quartz and Business Insider.

To contact the author of this story: Max Nisen in New York at mnisen@bloomberg.net.

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