Hedgie Warns "Big Shake-Out Looms" After Banking $480 Million On Biotech Buyout

Steve Elms of Aisling Capital made a huge score on one of the biggest deals of his career: Eli Lilly's purchase of Loxo Oncology, Inc. 

Elms is chairman of the board of Loxo and his investment firm, Aisling Capital, is one of the company's largest shareholders. Aisling's stake in the company is worth about $480 million when valued at the $235 per share deal price. Some of those shares were purchased in the company's earliest funding rounds for a fraction of the price, after Elms started attending the J.P. Morgan Healthcare Conference decades ago.

His response to the buyout was measured for a guy that just made hundreds of millions of dollars:

“We’re very pleased with the outcome. It really demonstrates that being a patient-focused company like Loxo can lead to very attractive shareholder benefits.”

As a Bloomberg article notes, Elms has been attending the J.P. Morgan Healthcare Conference for so long, he was going before it was even J.P. Morgan's conference. And like Elms, the J.P. Morgan Healthcare Conference has evolved in more ways than one. What used to be a small intimate gathering has now turned into a healthcare industry free-for-all. Hotels book up months in advance and rooms sometimes sell for more than five times what they normally would, per night.

Biotech continues to evolve at a rapid pace, ensuring that the J.P. Morgan healthcare conference is going to continue to garner interest. Not only that, but the money that comes with this type of rapidly evolving industry is also enticing. Some treatments bring in hundreds of thousands of dollars per year per patient and it likely isn’t far off until that number moves into the seven figures.

This is what makes smaller biotech firms obvious buyouts at large premiums, like Eli Lilly‘s purchase of Loxo at a 68% premium. In fact, this premium looks conservative when compared to the buyout of Juno Therapeutics by Celgene, which happened last year at a premium of 91%.

That deal came as a result of not only of trying to add to the company's pipeline, but also as Celgene tried to appease its investors. The news that Celgene itself was going to be acquired just days ago set the tone for what is likely to become a blistering merger and acquisition pace in the biotech space in 2019.

Elms said the same thing, telling Bloomberg that he thinks the acquisition of Loxo will continue to fuel mergers and acquisitions. He notes that not all companies in the space are going to be bought out for massive premiums, however. His concerns lie with companies that have tapped the public markets recently and are already running low on capital.

He is forecasting a "big shake out on the horizon" for these types of companies in 2019.

He concluded:

 “Biotech is still a very treacherous investment. When you listen to the science, everything sounds fantastic. You really have to do a lot of work to try to divine at the end of the day which drugs are going to get approved.”