Eli Lilly: Point acquisition gives battered biotech sector a boost

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These are tough times to be a biotech company — and an investor in one. Confidence has collapsed. Higher interest rates have dulled risk appetites and dried up funding.

Eli Lilly’s $1.4bn acquisition of Point Biopharma Global is good news for the battered sector. Cheaper valuations have finally drawn cash-rich pharmaceutical makers back to biotechs. Their aim, as always, is to replenish their drug pipelines affordably.

Relief is sorely needed. The market worth of some publicly listed biotechs is now less than their cash reserves. The Nasdaq Biotechnology index has crashed nearly a third from its 2021 peaks. A once-popular fund, the SPDR S&P Biotech ETF, has lost 14 per cent of its value this year, falling 60 per cent from its highs.

Eli Lilly’s $12.50 a share cash offer for Point represents a 50 per cent premium to the stock’s undisturbed three month average. That may appear steep for a company without any approved drugs, or any revenues.

It looks less alarming when you consider that Point shares traded above $16 two and a half years ago. In addition, Point held about $434.8mn in cash, cash equivalents and investments at the end of June.

This is a very small deal for a company as big as Eli Lilly. The drugs giant is riding high on diabetes drug Mounjaro, which has potential use as a weight-loss treatment. It is also seeking a bigger presence in treating cancer. Point has a promising experimental treatment here.

There is no better time to buy than in the wake of an asset bubble popping. This was inflated by low interest rates and a boom for life science companies during Covid-19. The peak came in 2021 with more than 100 biotechs going public, raising nearly $15bn in total.

Most will not be acquired by larger pharma groups. Bold investors with some pharma knowledge should consider stock picking, rather than passively investing in biotech indices. Look out for promising treatments that appear on track for approval. Big pharma is playing the same game.