Success often breeds success. Highly profitable companies have more capital to reinvest in the business and pursue high-growth opportunities.
Take Eli Lilly (LLY -2.37%), a pharmaceutical giant that has been performing well in recent years. The drugmaker is not resting on its laurels. Lilly has been signing deals and looking for the next big thing. It recently penned an agreement worth nearly $1 billion in another promising potential avenue. Let's find out what that is and whether it makes the company's shares more attractive.
Looking for a new class of drugs
On July 24, Gate Biosciences, a privately held biotech, announced it had signed an agreement with Eli Lilly to co-develop a potential new class of drugs called "Molecular Gates." Gate Biosciences received an up-front payment of an undisclosed amount and will be eligible for milestone payments and potential future royalties, in a deal valued at about $856 million, which also includes an equity investment for Gate.
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Eli Lilly appears to be interested in Gate's approach, which could revolutionize the way we treat many diseases by targeting "difficult to drug" proteins.
Here's the basic idea: Many therapies work by modifying, inhibiting, or otherwise disrupting the proteins that play a role in the diseases they treat. However, some proteins involved in certain conditions have characteristics that make them hard to target with the traditional approaches -- these are what Gate Biosciences calls difficult-to-drug proteins.
The biotech is developing a novel mechanism that could help target even these proteins and unlock potential therapies for many conditions that are currently untreated or undertreated.
Focusing on the bigger picture
Any company that can create a new class of drugs and target otherwise difficult-to-treat diseases could make a fortune. However, Gate Biosciences, founded in 2021, is still in the early stages of this project. It will take many years before we see the results of its efforts, and they might not be positive.
So this approach is still somewhat speculative for now. Eli Lilly knows that, although the pharmaceutical company probably sees some promise in Gate's work. Even so, this investment won't move the needle anytime soon for Lilly, but there is an even more important point to focus on.
The company has achieved considerable success in recent years, generating rapidly growing revenue and earnings. Its core therapeutic areas continue to perform well, with sales of products such as Mounjaro for diabetes and Zepbound for obesity moving in the right direction.
But management is not satisfied. That's why it has made a series of moves recently, including acquisitions and licensing agreements. In July, it closed its buyout of Verve Therapeutics, a smaller biotech working on medicines for cardiovascular diseases.
In May, it announced it would acquire SiteOne Therapeutics, a drugmaker with a promising investigational medicine for pain. In January, it grew its oncology pipeline through the acquisition of a candidate called STX-478 from the privately held biotech Scorpion Therapeutics.
These moves and others show that Eli Lilly is thinking years ahead, a sign of good management. By themselves, none of these licensing deals or acquisitions make the stock a buy. There are better reasons to consider it.
The company remains a top player in diabetes and is emerging as the leader in the burgeoning market for weight management, all while growing its revenue significantly faster than its similarly sized peers. It also has a deep lineup that includes such promising programs as orforglipron, a potential oral weight-loss medicine, and retatrutide, which mimics the action of three gut hormones and could prove more effective than current leading anti-obesity drugs.
Newer medicines and pipeline candidates in other areas -- including immunology, oncology, and Alzheimer's disease -- strengthen the company's business. And it pays a regular dividend that has more than doubled over the past five years.
All this makes the stock attractive. However, Eli Lilly's commitment to continually seeking out the next big thing and planning for patent cliffs well in advance are even better reasons to buy.
