Eli Lilly (NYSE:LLY) shares finished Monday on a slightly positive note after the company announced an agreement to acquire Loxo Oncology (NASDAQ:LOXO) for $8 billion in cash. That's not an outrageous sum to pay for a biotech that's already earned its first FDA approval, but Lilly might have more trouble selling Loxo's recently acquired drug than imagined.

Can Lilly make this deal work for shareholders? Let's look at what to expect.

Red question mark on a pile of money.

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Should have seen it coming

Every year, the J.P. Morgan Healthcare Conference fills up with biopharma industry executives who can't wait to tell investors how their innovative company's robust pipeline will make everyone rich with first-in-class treatments that target unmet needs. When Loxo Oncology didn't include the year's largest investor conference in its previously active event calendar, we probably should have expected an acquisition announcement.

At least Lilly tried to play it cool by scheduling a cozy-sounding "fireside chat" at the investor conference for the day following its acquisition announcement. Investors wondering how Lilly plans to squeeze $8 billion from Loxo Oncology are going to make that a well-attended chat. For the sake of sweating colleagues jammed into the conference hall, let's hope they remember to shut off the fireplace.  

Saving with patience 

Eli Lilly agreed to pay a 68% premium to Loxo's closing price the previous day. That looks steep, but it's only around 25% above a peak Loxo traded at last summer, months before Vitrakvi earned approval. 

Vitrakvi is the first cancer drug to earn its first approval for a tumor agnostic indication. The easy-to-swallow capsules are available for patients with tumors that harbor NTRK gene fusion mutations, regardless of where those tumors are found.

Loxo priced Vitrakvi at around $400,000 per year because only around 1% to 2% of solid tumors harbor NTRK mutations. At this price, there are probably more than enough NTRK mutated tumors out there to drive annual Vitrakvi sales past $1 billion annually at its peak.

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Not much left for Eli Lilly

Although there's a chance Vitrakvi and a follow-on treatment in development called LOXO-195 could become blockbusters, Lilly will have to share proceeds of their sales with Loxo's collaboration partner Bayer.

The German pharma and chemicals giant will split U.S. profits related to Vitrakvi with Lilly. Outside the U.S., Bayer's responsible for commercialization costs and will pay Lilly a tiered double-digit royalty on net sales.

Loxo Oncology didn't discover its drugs. Array Biopharma did and licensed them to Loxo in 2013 in return for mid-single-digit royalties on global net sales. Analysts following Loxo expect annual Vitrakvi sales to reach around $770 million by 2024. With around half of that heading toward Bayer and Array, though, Eli Lilly needs another candidate, LOXO-292, to succeed as well if this deal's going to pay off for investors.

Next in line

Eli Lilly will also take control of another tumor-agnostic candidate getting close to the finish line called LOXO-292. This oral treatment is aimed at tumors with RET fusion mutations, and earlier this year Loxo impressed analysts by shrinking tumors among 77% of patients treated.

It won't be long before we know more about LOXO-292's future. Lilly will probably present data from an ongoing pivotal study, and a new drug application could be ready for the FDA by the end of the year.

Sales of LOXO-292 are expected to reach $800 million annually if approved. Eli Lilly will still need to funnel roughly 5% of LOXO-292 sales to Array Biopharma, but Bayer doesn't receive a cut. That means success with LOXO-292 could allow Eli Lilly to earn a nice return on its Loxo Oncology investment -- but there's still a big problem to overcome.

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Some risky assumptions

Eli Lilly's treatments are aimed at an extremely limited patient population that might be hard to find in the years ahead. Although tumor profiling is more common than ever, there aren't nearly enough patients getting their biopsies screened for mutations that could make them eligible for Vitrakvi or LOXO-292 yet.

Getting patients to realize they have the right kind of tumors for these treatments is just the first step. Insurers generally don't offer to pay for off-label prescriptions, and proving you meet all the criteria for Vitrakvi could be a real challenge. Patients need evidence their tumors have an NTRK gene fusion without a known acquired resistance mutation, and prove they have no satisfactory alternative treatments.

That gives insurers a lot of potential excuses for withholding reimbursement. Bayer has agreed to refund payers if the treatment doesn't lead to a response, but there's still a chance reimbursement could be a big sticking point.

We've seen some troubling big pharma deals recently, but Eli Lilly's offer for Loxo Oncology isn't one of them. That said, earning a return on its $8 billion investment is far from guaranteed.

Check out the latest Eli Lilly earnings call transcript.