Eli Lilly's anti-takeover superpower? A shield forged by Indiana lawmakers

Eli Lilly ($LLY) won't be needing pepper spray to fend off unwanted suitors. That's not because it lacks charm or offers few attractive assets, Bernstein analyst Tim Anderson says. A quirk in Indiana law protects the drugmaker from hostile takeovers.

Indiana's Control Shares Act "substantially complicates" hostile takeovers of companies based in the state, Anderson wrote in a note to investors. Though an M&A-hungry drugmaker like Valeant Pharmaceuticals ($VRX) could theoretically swoop in, it would have to work hard to make the deal. Too much work for most would-be buyers, Anderson figures.

"[S]atisfying these terms would be quite onerous and would certainly frustrate any efforts by an acquirer," he writes, citing some deal statistics to back his case. Of the 110 hostile transactions since 1988 in the U.S., none took place in Indiana. "The bottom line is that the odds of Lilly being acquired in a hostile deal seem low."

Lilly could agree to merge with another company, of course. That company isn't likely to be an aggressive partner like Valeant, whose buy-and-cut philosophy would no doubt apply. Lilly is "an icon in the state," and it would want to keep its workforce in Indiana, Anderson notes.

All of this begs one question: Who would yearn for Lilly enough to go hostile, and why? Anderson sees strong growth in Lilly's long-term future. He cites the company's diabetes franchise, its build-up in animal health, and potential products in its "full late-stage pipeline."

He's not the only believer, but some others don't agree. By its own admission, Lilly will struggle to meet its own targets this year. The company has suffered a string of R&D failures, one reason why its patent cliff has been so painful. The one drug approved last year, an Alzheimer's imaging agent called Amyvid, was nixed by Medicare, slashing the size of its potential market. Its biosimilar version of Sanofi's ($SNY) blockbuster diabetes drug Lantus hit a wall when Lilly lost a related patent fight in the U.S.

But Lilly's diabetes franchise got a boost last year when Express Scripts ($ESRX) chose two meds for its newly restrictive formulary. Its GLP-1 dulaglutide was delayed by the FDA, but only for manufacturing problems at a plant that have since been fixed. And Cyramza, the gastric cancer drug that FierceBiotech called its "first major regulatory OK" in years, has shown promise in lung cancer, a much bigger market. And it won a patent fight over its cancer treatment Alimta, giving it more time to reap blockbuster sales from the brand.

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