Could This Potential Move Boost Eli Lilly's Prospects?

Everything seems to be going well for Eli Lilly (NYSE: LLY). The company's shares have soared in recent years thanks to strong clinical progress within its GLP-1 franchise.

The drugmaker has established itself as a leader in the fast-growing market for weight loss medicines, and with several exciting pipeline candidates in development, it could extend its lead. So, Eli Lilly's prospects appear attractive.

However, the best corporations are never satisfied and continually seek attractive potential growth avenues, as Eli Lilly has been doing. The pharmaceutical giant is rumored to be working on a deal that might improve its outlook further.

An important acquisition in the works

Large pharmaceutical companies routinely resort to acquisitions or licensing deals to improve their pipelines. Developing novel medicines from scratch is expensive and time-consuming. It's often easier to buy out a smaller drugmaker with promising assets in mid- or late-stage clinical trials.

Eli Lilly has been doing so over the past two years through several acquisitions that have enabled it to expand its pipeline in various areas, including oncology and pain management.

Image source: Getty Images.

Apparently, the company is considering another such move, and this time it could be very costly. According to French media reports, Eli Lilly met with government officials to discuss the potential acquisition of Abivax, a French-based biotech company. Nothing is set in stone yet, but it could be an important move for Eli Lilly. Abivax is a pre-revenue company, but it has an incredibly promising pipeline asset in obefazimod, a medicine being developed to treat ulcerative colitis (UC).

There are plenty of UC drugs on the market, including Eli Lilly's own Omvoh, but obefazimod has a novel mechanism of action that could enable it to target a broader patient population in this large corner of the vast immunology market. In a pair of phase 3 studies with patients with moderate to severe UC, 47.3% of whom had had inadequate responses to prior therapies, obefazimod led to significant remission rates compared to a placebo.

The medicine looks highly promising and, if approved, could easily exceed blockbuster status, especially considering it will seek indications beyond UC. It's no wonder Eli Lilly wants it. However, Abivax's shares soared on the news of a possible acquisition, and the company now has a market capitalization of 9.5 billion euros ($11.2 billion). The takeover, if it occurs, will come with a substantial price tag.

What does this mean for investors?

Here's one key takeaway. Eli Lilly isn't content with its dominance in the weight management market. True, this area will be its biggest growth driver for the foreseeable future. But several things could go wrong.

As unlikely as it may seem at present, another drugmaker could potentially steal a significant market share from Eli Lilly within its core therapeutic area. And, of course, the company's top medicines, currently under patent exclusivity, will eventually lose their exclusivity -- although that's far into the future.

Or its amazing drug discovery engine could stop producing breakthrough GLP-1 therapies. This is essentially what happened to Novo Nordisk. Although it had what appeared to be a secure lead in the GLP-1 category, from which it generated almost all of its revenue, several clinical setbacks, coupled with competition from Eli Lilly, led to worsening financial results and a decline in market share for the Denmark-based drugmaker.

Eli Lilly is considering all these risks and planning accordingly, and doing so years in advance. That's also why the pharmaceutical giant has been making a push in oncology. And why it is building an artificial intelligence supercomputer that could help it develop medicines much faster and at lower costs.

Meanwhile, Eli Lilly's financial results are strong, something that should remain the case at least through the next few years. Between that and the solid foundation it is laying for the future, Eli Lilly's shares look attractive, whether or not the acquisition of Abivax happens.

Prosper Junior Bakiny has positions in Eli Lilly and Novo Nordisk. The Motley Fool recommends Novo Nordisk. The Motley Fool has a disclosure policy.