Seeking Alpha
Cory Renauer, Cory Renauer (10 clicks)
Biotech, healthcare, value, long-term horizon
Profile| Send Message| ()  

Eli Lilly and Company (LLY) is heading straight for a patent cliff. Zyprexa lost patent protection in most major markets in 2011. The antipsychotic's worldwide sales for Q1 2013 fell 49% year on year to $284.8 million from $562.7 in Q1 2012. Evista, which comprised 4.3% of Q1 2013 revenue, will lose U.S. patent protection in March of 2014. Its biggest seller, Cymbalta, which comprised 24% of Q1 2013 revenue, will lose U.S. patent protection in December 2013.

To control the damage, Eli Lilly has already announced heavy reductions to its U.S. sales staff, and is tenaciously pursuing new revenue streams. According to the latest 10-Q, the company has approximately 60 potential new drugs in human testing or under regulatory review, 12 of which were in Phase 3 clinical trial testing at the end of March 2013.

Sadly, on May 10, Eli Lilly announced it would halt development of Lymphoma drug, enzastaurin, after it failed a Phase 3 study. Given Eli Lilly's string of Phase 3 failures in recent years, it's easy to understand why investors have allowed Eli Lilly's share price to descend into what, on the surface, looks like undervalued territory.

Dulaglutide To The Rescue

After years of falling behind the likes of Sanofi (SNY) and Novo Nordisk (NVO), it appears that Eli Lilly is finally getting its diabetes mojo back. Eli Lilly has partnered with Boehringer Ingelheim for two basal insulin analogs and a SGLT2 inhibitor.

On its own, the company is getting closer to having a competitor to Byetta and Bydureon from partners Bristol-Myers Squibb (BMY) and AstraZeneca (AZN), and Victoza from Novo Nordisk. The market for long lasting GLP-1 drugs is already large and rapidly expanding.

Sales data in USD of GLP-1 drugs

Byetta - BMY

Bydureon - BMY

Byetta/Bydureon - AZN

Victoza - NVO

Total

Q1 2013

$85M

$52M

$69M

$474M

$680M

In April 2013, Eli Lilly released some positive results from its Phase 3 studies of its once-weekly Type 2 Diabetes drug, dulaglutide. The long-acting glucagon-like peptide 1 [GLP-1] receptor agonist demonstrated superior HbA1c reduction compared to insulin glargine at 52 weeks in patients with type 2 diabetes on metformin and glimepiride. Also, dulaglutide in combination with insulin lispro demonstrated statistically superior reduction in HbA1c from baseline compared to insulin glargine in combination with insulin lispro at 26 weeks.

We've Only Just Begun

Recently I published an article here describing six of the largest, publicly traded molecular diagnostics companies by market cap. Among them was Qiagen (QGEN), a Dutch biotech that snagged its first FDA approval for a companion diagnostic in July of last year.

Its therascreen KRAS RGQ PCR Kit provides guidance on the usage of Erbitux for treatment of metastatic colorectal cancer. About 40% of colorectal cancer patients have a KRAS gene mutation that renders them unresponsive to Erbitux. The Qiagen test weeds out those patients before they're given several expensive and uncomfortable intravenous Erbitux treatments.

Some Erbitux Background

Erbitux is an ImClone product. ImClone became infamous near the end of 2001 when its founder Samuel D. Waksal, his family, and Martha Stewart sold millions of dollars worth of shares one day before the FDA denied Erbitux approval.

After a great deal more drama, including a Carl Icahn acquisition, Eli Lilly and Company purchased ImClone in 2008. Currently, the company is a wholly owned subsidiary of Eli Lilly and Bristol-Myers Squibb (BMY). The two companies market Erbitux in the U.S. and Canada. Merck KGaA -- the German Merck -- markets the drug everywhere else.

Eli Lilly's Co-Diagnostics Deals

In January of 2013, Eli Lilly entered into an agreement with Dako, a company Agilent Technologies (A) purchased in 2012. Eli Lilly and Dako haven't given up any details of their master framework agreement that I can find. Although Agilent devoted a significant amount of time to the Dako acquisition during its latest earnings call, no mention of the company's partnership with Eli Lilly was made. Also, Eli Lilly's management never mentioned the Dako agreement during its latest earnings call.

In February of this year, Eli Lilly also entered a similar agreement with Qiagen for more companion diagnostics. The company hasn't released any specific details about which products the partnership will focus on first. Given the success of Qiagen's Erbitux screen, it's likely Qiagen will also take a crack at Eli Lilly's Alimta, its advanced nonsquamous non-small cell lung cancer [NSCLC] and malignant pleural mesothelioma (MPM) drug.

On May 22, 2013 Eli Lilly entered a third companion diagnostics deal with Corgenix Medical (OTCQB:CONX). The company will be working with Eli Lilly to further advance proprietary diagnostic technology originally developed by Eli Lilly.

Eli Lilly's Oncology Pipeline

During Eli Lilly's Q1 2013 earnings call CFO Derica Rice announced a presentation of first -line breast cancer treatment Ramucirumab's Phase 3 trial data on June 24. On June 1-2, Eli Lilly will also present data from key molecules that make up its clinical oncology pipeline at the 49th Annual Meeting of the American Society of Clinical Oncology, in Chicago.

In January of this year, Bristol-Myers Squibb let go of its contested rights to Necitumumab. Also during the Q1 2013 earnings call, Rice said the "Phase 3 trial for Necitumumab in combination with gemcitabine and Cisplatin for first line squamous non-small cell lung cancer" may produce data later this year, although presentations if this data would likely occur in 2014.

Earlier this month, Eli Lilly halted development of Phase 3 candidate enzastaurin. The diffuse large B-cell lymphoma [dlbcl] drug "failed to show a statistically significant increase compared to placebo in disease-free survival in patients at high risk of DLBCL relapse following rituximab-based chemotherapy."

Although lousy data from enzastaurin is a kick in the pants for Eli Lilly, the company still has a promising oncology pipeline. Also, the company's active pursuit of companion diagnostics partners is a promising sign that it will repeat the Erbitux success enjoyed in 2012.

Conclusion

Eli Lilly is hardly the only drug company taking advantage of companion diagnostics -- the list here will make your head spin. Still, its moves into highly specialized medicines with better margins are a smart, inexpensive bet. If its co-diagnostic partnerships prove fruitful, as was the case with Erbitux, a position in Eli Lilly doesn't seem so foolish.

Additionally, Eli Lilly's diabetes pipeline also looks promising. Add those factors to a strong history of shareholder appreciation, including a $1.5 billion share buyback approved in December 2012, plus a recent dividend yield of over 3.5%, and starting a long position in Eli Lilly is looking even better.

Source: Diabetes And Oncology Might Cushion Eli Lilly's Fall Off A Patent Cliff