Eli Lilly's Big Bet On Diabetes

Apr.23.13 | About: Eli Lilly (LLY)

Eli Lilly (NYSE:LLY) has suffered a number of setbacks lately.

Its profit fell 6 percent last year as it lost its U.S. patent protection for top-selling schizophrenia drug Zyprexa. At the end of 2013, the Lilly antidepressant Cymbalta will lose patent protection, and copycat forms of the company's $1 billion-a-year Evista osteoporosis drug will probably appear on the market in early 2014. The company is forecasting flat sales for 2013. It plans to lay off about 1,000 domestic sales reps, or 30 percent of its U.S. sales force.

To compensate for the bad news, Eli Lilly is making a huge bet on diabetes. Expectations are running high that the longtime insulin maker, which has fallen behind rivals such as Sanofi (NYSE:SNY) and Novo Nordisk (NYSE:NVO), will now manage to catch up.

Plants

To prepare for the anticipated growth, Lilly is doubling up on its $140 million insulin plant it started building just 5 months ago in Indianapolis. Lilly will spend $180 million more than planned, to double the plant's capacity to fill cartridges for insulin-injecting pens. This will be the first U.S. site to fill cartridges in the increasingly popular pens that diabetics use to inject insulin to control their blood sugar.

Filling insulin cartridges is a new technology for Lilly's US operations. Lilly's US sites currently only fill insulin vials, which are used with a traditional syringe or an insulin pump. Cartridges are used in insulin pens and Lilly currently fills cartridges only in Italy and France.

But the market for the pocket-portable pens, which replace the traditional vial and needle, is growing in the US, so there is a need for a new cartridge plant. The Indianapolis plant will employ some new technology not used in Europe to make the operation faster.

The first cartridge line will add 84,000 square feet of factory space and will open in 2016. A second cartridge line will be added to the original 80,000-square-foot footprint of the plant and open a year later.

Also, the company will invest in insulin-active-ingredient manufacturing capacity, where it is making a powdered crystal that is later liquefied and put into the cartridges.

Construction work in the insulin-active-ingredient production area is to be completed by December 2013 and become operational by March 2014.

Insulin makers are coming under pricing pressure from governments that largely pay for the drugs. The coming expiration of patents on bio-synthetic insulins will also lead to lower-priced biosimilar competition.

Pipeline

Insulins are a key product line for Lilly, making up about 16 percent of sales. Lilly also has four new products in development, including one that could give the market leader, Sanofi's Lantus, a run for its money.

LY2605541 is a basal insulin analog that has been touted as a potential long-acting rival to Sanofi's Lantus, the $6.5 billion (2012 sales) mega-blockbuster.

Lilly took full control of development of the product after Boehringer Ingelheim bowed out of the partnership in the drug in January. Success in Phase 3 would put it on track for a regulatory submission in 2014. The potential for that drug was improved with Novo Nordisk's Tresiba's recent failure to get FDA approval. A basal insulin, also known as a long-acting insulin, is often the first insulin prescribed by doctors for type 2 diabetes.

Empagliflozin is an SGLT2 inhibitor developed with Boehringer Ingelheim for the reduction of blood glucose levels in adults with type 2 diabetes mellitus. This new class of SGLT2 inhibitors removes excess glucose through the urine by blocking glucose re-absorption in the kidney.

Empagliflozin trials represent a major undertaking: 12 multinational clinical trials are running simultaneously, including a large cardiovascular outcome trial. The results will be available in 2013 and 2014.

LY2963016 is another basal insulin which could possibly qualify as a biosimilar in some European countries, but in the US it will probably be viewed as a new drug. The drug has the same amino acid sequence as Sanofi's Lantus (insulin glargine), and the differences between the two, like possible tweaks in the formulation, are not obvious to an outsider.

Positive results from the final Phase 3 trials are expected. The therapy is tested in Type 1 and Type 2 diabetes. The Type 1 diabetes study is estimated to complete in April 2013, while the Type 2 diabetes trial has been completed in September 2012.

Dulaglutide is a once-weekly GLP-1 analog to replace sales of similar products from Amylin after Lilly ended a long-standing collaboration last year with the San Diego-based biotech. In April Lilly announced that dulaglutide proved as good as insulin in controlling blood sugar in Type 2 diabetics in two late-stage studies.

The medicine met the studies' key goal of demonstrating non-inferiority to insulin glargine, a longer-acting form of insulin, in lowering hemoglobin A1c, a measure of controlling diabetes. Dulaglutide combined with insulin lispro (Lilly's Humalog), a fast-acting form of insulin, also was statistically superior in reducing hemoglobin A1c compared to insulin glargine in combination with insulin lispro at 26 weeks. The company expects to submit the drug for approval in 2013.

Competition

There is plenty of existing and potential competition in the diabetes field.

Bristol-Myers Squibb (NYSE:BMY) and AstraZeneca's (NYSE:AZN) dapagliflozin was turned down by the FDA in January, but Johnson & Johnson's Invokana was approved in March as the first approved SGLT2 inhibitor.

Merck's (NYSE:MRK) investigational MK-3102, a once-weekly DPP-4 inhibitor for the treatment of type 2 diabetes, is chemically distinct from Merck's Januvia. It is taken daily, it has significantly lowered blood sugar in a 12-week Phase 2 study compared with placebo and is now in Phase 3 trials.

Novo's Tresiba was turned down, while Sanofi's lixisenatide, the first once-daily prandial (meal-associated) GLP-1 receptor agonist for the treatment of adults with type 2 diabetes is being reviewed by the FDA.

And the FDA in January approved three new formulations of a drug from Takeda Pharmaceuticals designed to help patients control their blood sugar and sold under the brand name Nesina.

If it's any solace, Lilly's two major competitors are also going through a rough period. Sanofi hasn't yet found a good successor for Lantus, the world's best-selling insulin. The drug is Sanofi's top earner, but its patent expires in 2015.

Novo Nordisk has suffered a setback with Tresiba, the product it developed to challenge Lantus. The medicine was rejected by the FDA, delaying its entry into the biggest drug market by at least two years and leaving Novo reliant on the older Levemir, which lags behind Lantus.

Investor summary

Eli Lilly has a lot on the line this year. Company executives have promised delivering two new drug approvals a year beginning in 2013.

The late-stage diabetes efforts represent one of the best shots for achieving those badly needed approvals. Lilly plans to maintain its dividend and continue stock buybacks. The company's board authorized a new $1.5 billion share repurchase program, which the company anticipates completing in 2013. It repurchased $400 million of its shares in 2012.

In the short term, Lilly has frozen all executive salaries and will lay off hundreds of U.S. sales reps between now and July 1.

For 2012, worldwide total revenue decreased 7 percent to $22.6 billion compared with 2011, driven by the loss of patent exclusivity for Zyprexa in most major markets, partially offset by growth in other products. In 2012 net income and earnings per share decreased 6 percent to $4.1 billion and $3.66, respectively.

Diabetes products are expected to be one of the biggest growth areas in pharma in the next decade as the populations in the US and around the world get older and fatter, and Lilly is expected to benefit from that growth.

According to the statistics compiled by Jefferies analyst Jeffrey Holford, diabetes markets will have a "sustainable high-single-digit growth," reaching about $54 billion annually by 2020, supported by changes in demographics and in the healthcare law that gives patients access to more and better drugs.

While Holford predicts that Novo Nordisk will remain the top diabetes drug player, he sees Eli Lilly taking the No. 2 spot from Sanofi by 2017.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.