Is This $6.3 Billion Deal a Game Changer for Eli Lilly?

Typically, when a company spends billions of dollars on an acquisition, its share price takes at least a short-term hit. No matter the asset's value or potential, any price tag in the 10-figure-plus range raises concerns about affordability. How will the company pay for it without taking on mountains of debt?

Then again, most companies aren't Eli Lilly (NYSE: LLY). At the end of March, the elephant of the U.S. pharmaceutical sector announced a deal worth over $6 billion, and its stock jumped in response. Let's look at Lilly's latest big-ticket asset buy, and why the market's reaction was so positive.

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Deep coffers

Said asset is U.K.-based Centessa Pharmaceuticals (NASDAQ: CNTA), a clinical-stage biotech focused on neuroscience. On March 31, Centessa and Lilly announced in a joint press release that the giant pharmaceutical company would acquire all of Centessa's current and future share capital, including its U.S.-listed American depositary shares (ADSes). Lilly is to pay $38 plus one nontransferable contingent value right (CVR) per Centessa share.

In the pharmaceutical/biotech worlds, CVRs are not unusual in deals for pre-commercial and other early-stage businesses. This one is worth up to $9 per share if Centessa's lead drug candidate, sleep-wake disorder treatment cleminorexton, achieves at least one of three regulatory milestones.

The up-front payment amounts to roughly $6.3 billion for Lilly, while the CVRs put it on the hook for potentially $1.5 billion more. The two companies didn't hesitate to note that the $38-per-share initial payout represents more than a 40% premium to the 30-day volume-weighted average price of Centessa's ADSs as of the day before the deal was announced.

The boards of directors of both companies have approved the buyout. It's now subject to approval by the relevant regulatory authorities, not to mention that of current Centessa ADS investors and holders of its ordinary shares. Lilly and Centessa believe the acquisition will close as soon as the third calendar quarter of this year.

Financial firepower

In the press release, no mention was made of how Lilly intends to fund the acquisition. That positive investor reaction to the news, however, suggests this isn't much of a concern.

After all, Lilly, flush with greenbacks thanks in no small part to the runaway success of weight-loss drug Zepbound, has enough in its coffers to fund the up-front payment in full. At the end of last year, its pile of cash alone reached almost $7.2 billion. That was more than double its level at the same point in 2024.

The company also has the means and obviously the willingness to borrow, as its long-term debt stood at over $42 billion on New Year's Eve. That sounds high, but given the company's $65 billion-plus in annual revenue, it's not as burdensome as it might appear.

In my view, Lilly's management has concocted a good formula to keep what's already a huge business on a growth path. The company is an active acquirer that can pursue choice assets thanks to its growing financial power; meanwhile, it has established a lively and productive research and development effort. After all, this produced Zepbound and its brother medication, diabetes jab Mounjaro.

The day after the Centessa buy was announced, Lilly earned Food and Drug Administration approval for a weight-loss pill, Foundayo. This new product is sure to keep it competitive in the still burning-hot obesity segment (like Mounjaro, Zepbound is administered via injection).

A unique approach to neuroscience

So could owning Centessa change the game for Lilly?

That's not so easy to answer. One great appeal of Centessa is its science, as it takes a unique approach to sleep-wake disorders and related afflictions. It targets both the root cause of such maladies and a specific receptor in the brain, known as OX2R and considered the "master switch" for wakefulness.

In the biotech world, cleminorexton is considered one of the most promising potential treatments for such disorders. In phase 2a clinical trials, it has demonstrated efficacy in the treatment of narcolepsy type 1 and type 2, and rare sleep affliction idiopathic hypersomnia.

But it's got some distance to go; Lilly aims to move cleminorexton into phase 2b/3 pivotal trials as soon as it can. However, I should stress that no matter how promising, novel medications can take significant time to develop and (ideally) bring to market. And, it probably goes without saying, there's never a guarantee of either regulatory or commercial success.

Centessa also has two other drugs in its pipeline, both essentially cousins of cleminorexton that target the same receptor.

So yes, Lilly's latest buy certainly has game changer potential in the neuroscience space, as we have to consider cleminorexton a possible blockbuster drug. Zooming out, though, it's good to realize how massive and sprawling the healthcare company's business is these days, with that yearly top line that tops $65 billion.

At this point, no matter how wildly successful out of the gate, even a blockbuster would contribute only modest flow to that gushing revenue stream. Ultimately for me, then, the Centessa deal is more of a validation of Lilly's clever strategy to both build and buy for continued growth.

Eric Volkman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Centessa Pharmaceuticals Plc. The Motley Fool has a disclosure policy.