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Eli Lilly (LLY -2%) is feeling the heat today after announcing it would acquire POINT Biopharma (PNT +85%) for $12.50 per share, or roughly $1.4 bln. Conversely, given the ~87% premium LLY is paying for PNT, the biotech firm's shares are skyrocketing toward the agreed-upon price tag. PNT is a pharmaceutical firm boasting a pipeline of preclinical-stage radioligand therapies to treat various forms of cancer. PNT's lead programs are currently in late-phase development, with topline data from its most mature program, PNT2002, expected in 4Q23.

Shares of LLY have exploded this year following multiple encouraging developments, climbing as high as +65% YTD as of last month before encountering selling pressure over the past several weeks. The stock took off on a huge beat-and-raise Q2 report in early August as LLY's type 2 diabetes treatment, Mounjaro, soared in popularity as a weight-loss drug. The U.S. FDA has yet to even approve Mounjaro specifically for weight loss, which could happen this year, potentially adding more fuel to LLY's massive run this year.

With Mounjaro and LLY's Alzheimer's disease treatment donanemab being the central focus of investors given their lucrative potential, today's announcement of a $1.4 bln purchase is likely not driving today's selling pressure. In fact, bolstering its oncology pipeline is a good move for LLY; oncology revenue comprised roughly 18% of FY22 revs. Instead, LLY's negative reaction today likely reflects lingering concern over how much enthusiasm surrounding the potentially lucrative weight-loss drug market has already been priced in and uncertainty around donanemab, which should see regulatory action from the FDA by year's end.

• LLY's forward earnings multiple has spiked considerably over the past several months, hitting 50x when shares hit highs in September compared to around 35x in early March, reflecting bubbling excitement over Mounjaro.
• However, weight-loss drugs, including Ozempic from Novo Nordisk (NVO), could still face meaningful headwinds. For example, robotic clinical product manufacturer Intuitive Surgical (ISRG) noted in July that despite increased patient interest in weight loss drugs, it continued gaining share in the bariatric surgical market, underpinning healthy demand. Management pointed out that there are still several factors patients must consider regarding weight-loss drugs, including costs, side effects, what happens when one stops taking the medication, etc., which could adversely impact long-term demand.
• Also, although LLY submitted donanemab for approval, commercial success is not guaranteed. There are potential side effects and insurance hurdles that could hinder growth.

LLY's PNT purchase may have carried a premium price tag. However, its selling pressure today is likely more related to the broader market pullback as well as shares trading at a relatively frothy valuation, especially given that the weight-loss drug market is still in its early stages and may not blossom into the profitable market investors are anticipating.