Red Hot Eli Lilly Rolls the DICE With Its Latest Biotech Takeover

Key Points

• This week, Eli Lilly announced an agreement to acquire immunology specialist DICE Therapeutics for $2.4 billion.
• DICE’s immunology pipeline will reduce Lilly's dependence on cancer, diabetes and obesity drugs and help strengthen its limited immunology portfolio.
• During its first quarter update, management raised full-year EPS guidance to $8.65 to $8.85 which, at the midpoint, equates to a 2023 P/E ratio of 52x.
• Given the company’s pipeline and regulatory momentum, analysts think the premiums are well deserved.

Like other mature drug manufacturers, Eli Lilly and Company NYSE: LLY is banking on innovative biotechnology platforms to drive its next growth phase. 

On Tuesday, the nearly 150-year pharmaceutical giant announced an agreement to acquire San Francisco-based immunology specialist DICE Therapeutics. Under the terms of the deal, Lilly will pay $48.00 per share in cash for all outstanding DICE shares, a 42% premium to the small cap’s Friday close.

Despite the hefty $2.4 billion price tag, the company’s latest biotech buyout may prove not to be a stretch. Lilly has shown an innate ability to target and integrate promising biopharmaceutical upstarts over the years, thereby diversifying its growth prospects. 

In October 2022, Lilly paid $600 million for gene therapy innovator Akouos which has since shown positive pipeline developments. It has entered into several biotech collaborations, including a hookup with immune-mediated disease leader TRexBio earlier this year.

The DICE Therapeutics takeover comes at a time when Lilly is trading at an all-time high. The stock has advanced every year since 2017, shunning last year’s market downturn with a 32% surge. Up another 23% year-to-date, the Indy-based company is off to the races again. 

The market’s initial positive reaction to the DICE Therapeutics news suggests Lilly shares will continue to sizzle this summer. With Wall Street’s price targets creeping above $500 in recent weeks, Lilly’s roll of the DICE may only keep the party going. 

Why Is Eli Lilly Buying DICE Therapeutics?

DICE Therapeutics develops novel oral therapeutic candidates based on its proprietary DELSCAPE platform. The technology is designed to discover small molecules with the potential to modulate protein-protein interactions (PPI), an alternative to systemic biologics used by competitors. Its pipeline includes several IL-17 inhibitors that are being developed to treat chronic immunology diseases. DICE’s lead candidates are DC-806 and DC-853, which are undergoing clinical trials for the treatment of psoriasis and other autoimmune diseases.   

In the first quarter of 2023, Lilly’s growth products accounted for approximately two-thirds of total revenue — Emgaility, Jardiance, Taltz, Trulicity and others. This means a significant one-third of sales are coming from low or no-growth areas. With sales of COVID-19 antibodies continuing to slow, the company is on the lookout for new growth drivers. 

DICE’s immunology pipeline will reduce its dependence on cancer, diabetes and obesity drugs that account for the bulk of its portfolio. It will also strengthen an advancing but limited immunology portfolio that includes just one FDA-approved drug — ulcerative colitis treatment Omvah. 

The global immunology market is expected to grow around 9% annually through 2027. Given the opportunity in this accelerating space, Lilly’s DICE buyout may not be its last roll.

Is Eli Lilly Stock Overvalued?

The only thing hotter than Lilly’s share price is its valuation. On a trailing 12-month basis, the stock is trading at 71x earnings — more than double the industry average. Mega-cap pharmaceutical peers Johnson & Johnson and Merck trade at 35x and 22x, respectively.

During its first quarter update, management raised its full-year EPS guidance to $8.65 to $8.85. At the midpoint, this equates to a 2023 P/E ratio of 52x, the highest among 26 mega- and large-cap pharmaceutical companies. 

But given the company’s pipeline and regulatory momentum — especially promising Phase 3 results for Alzheimer’s disease candidate donanemab — analysts think the premiums are well-deserved (if not low). 

Wall Street’s last 14 Lilly refreshes have been bullish. On Monday, Berenberg Bank reiterated its buy rating and boosted its price target to $500. In the last 30 days, five other firms said they see the stock heading to at least $500. 

Not only does Lilly have industry-leading growth prospects (and a relatively low 2.9x PEG ratio), but it also pays a rising dividend. Although the forward yield is only 1%, the dividend has been raised for 9 consecutive years, putting the company on the brink of joining the Dividend Contenders club.

With yet another growth business under its belt and shareholders’ total returns rising, Lilly has discovered the perfect formula for a growth and income stock.