Expectations For Eli Lilly's Lung Cancer Drug Rise, But Revenue Concerns Continue

| About: Eli Lilly (LLY)

Eli Lilly Co. (NYSE:LLY), in desperate need of a blockbuster new drug, may have struck gold when its lung cancer drug, necitumumab (IMC-11F8), was shown to extend patient survival in a phase 3 study. Necitumumab has met its primary endpoint in improving overall survival in patients who received the drug in combination with gemcitabine and cisplatin as a first-line therapy for metastatic squamous non-small cell lung cancer (NSCLC) when compared with chemotherapy alone. Necitumumab is a fully human IgG1 monoclonal antibody designed to block the ligand binding site of the human epidermal growth factor receptor (EGFR), which is a target in several anti-cancer treatments because it sparks cancer progression, both by promoting angiogenesis, or the formation of new blood vessels for tumors, and by inhibiting apoptosis, or cell death.

Necitumumab: From The Ash Heap To Blockbuster Drug?

Lilly expects to submit necitumumab for approval to the Food and Drug Administration (FDA) by the end of the year and, if approved, it could be a great revenue source for the company. Globally, the non-small-cell lung cancer (NSCLC) drug market is expected to reach $6.9 billion in 2019 and climb to $7.9 billion in 2022. There are over 1.2 million new cases of lung cancer diagnosed every year and over 1 million lung cancer patients will die each year, and non-small cell lung cancer (NSCLC) accounts for approximately 80% of all lung cancers. The positive results from the drug came as a surprise according to Mark Schoenebaum, analyst with ISI Group LLC, since not so long ago analysts had given up on necitumumab, with "basically zero" expectations as the drug failed in a prior non-squamous lung cancer trial. Bristol Myers Squibb (NYSE:BMY), Lilly's partner in the drug, even gave it up as the company terminated the collaboration in late 2012. Mr. Schoenebaum added however, "We really need to see the full data to understand risk/benefit."

While necitumumab could be a potent boost to Lilly's product portfolio, the drug could also bring a much-needed new therapy for NSCLC, a cancer that has been proven difficult to treat with the current drugs on the market, such as Genentech's Avastin, which directly target tumors, as opposed to more broadly active chemotherapy drugs. Richard Gaynor, vice president of product development and medical affairs for Lilly Oncology, said in a prepared statement, "If approved, necitumumab could be the first biologic therapy indicated to treat patients with squamous lung cancer." And it is quite conceivable that the drug will dominate the NSCLC market with sales expected to reach $1.75 billion by 2022.

But necitumumab is not without some possible stiff competition, as Merck (NYSE:MRK) plans to initiate late-stage clinical trials of lambrolizumab in the third quarter of 2013 for both non-small cell lung cancer and advanced melanoma. Lambrolizumab, which received "breakthrough status" in late April by the FDA, is an investigational antibody therapy designed to disrupt the action of the immune checkpoint protein PD-1 and therefore inhibit the ability of some cancers to evade the body's immune system.

Generics Continue To Chip Away At Revenue

Eli Lilly will be in need of new successful drugs to market, as sales of its $4.99 billion blockbuster treatment to combat depression, Cymbalta, are expected to plummet when the company loses U.S. patent protection in December. Cymbalta accounted for 22% of the $22 billion in global product sales in 2012, and $1.5 billion in second quarter of 2013. When a blockbuster drug falls off patent it can be devastating to revenue, as witnessed with Zyprexa, Lilly's once best-selling schizophrenia treatment, which had $2.17 billion in domestic sales the year before its patent expired. However, after the drug came off patent the company sold a mere $360 million in the U.S. as 63% of its sales were gobbled up by generic competition. And Lilly will experience more revenue declines as some of the company's other drugs fall off patent, like its $2.4 billion mealtime insulin, Humalog, which expires in June 2014. And the company will also lose its $1 billion osteoporosis medication, Evista, which falls off patent in March of 2014.

Solid Pipeline May Bring Solid Revenues Down The Line

The future is not glum for Lilly, as the company has spent heavily on R&D over the past few years, with $5.28 billion on R&D in 2012, and has no less than 60 potential new drugs in testing, including three in regulatory review and ten in phase 3 trials. For example Lilly submitted empagliflozin for a new drug application (NDA) for the treatment of type 2 diabetes in adults. Empagliflozin is one of a new class of glucose-lowering drugs which work by increasing urinary glucose excretion with a consequent lowering of plasma glucose levels. The company expects to receive a decision by the end of the second quarter 2014.

Lilly's advanced gastric cancer drug, ramucirumab, showed promising results from its phase 3 trials as the drug showed the median overall survival was better in 238 patients who received ramucirumab than in the 117 patients who received placebo. Earlier this year, the company initiated a fast track review to the FDA. Lilly also submitted the drug for approval for breast cancer patients, which could be where the real revenue success for the drug would be found. According to a recent CitiGroup report, peak sales potential could exceed $3 billion.

Cost Cutting: A Leaner Lilly In The Works

Ely Lilly's management team feels confident that over the next few years it will be able to mitigate the negative revenue impact of its drugs' patent expirations with successful launches of its late stage portfolio. The company is also mitigating its lost revenue with a series of cost cuts by slashing jobs and raising prices on Cymbalta before the patent expires. And these cuts have helped as Lilly's second-quarter earnings are up with reported earnings of $1.21 billion while worldwide revenues rose 6% to $5.93 billion, beating Wall Street expectations of $5.82 billion. Lilly also raised its EPS guidance for the year, to earn between $4.28 and $4.38 per share for the year on revenues between $22.6 billion and $23.4 billion.

The cost cutting will continue according to Lilly's Senior Director of Global Corporate Communications Ed Sagebiel, "We continue to face the most significant challenges in our history." The company will suspend base pay increases for most of its employees next year till 2015. Plus the company will be reducing bonuses by 25% for 2014, and it won't be paid out till 2015. These cuts are expected to shave $400 million through 2016. In May the company announced that roughly 1,000 sales staffers would be laid off, which amounted to 40% of the U.S. salesforce.

Ely Lilly is a $50.09 billion market cap company. Year-over-year the stock is up just under 20%, however the stock's growth has slowed from its late April high of $58.40. The company still has a solid dividend with a yield of 3.74, and carries one of the lower P/E ratios of the major drug companies, at 11.67. And the company holds more than $4.6 billion in short-term liquidity.


Big Pharma is experiencing a glut of generics eating away at what were once their revenue cash cows. However there seems to be new cash cows working their way down the pipelines. Lilly too has been hit hard and will continue to be hit hard by the generics, though the company has done some much needed "belt tightening" to get it through the tough times. And CEO John Lechleiter is quite confident that these measures will get them through, as he commented in a prepared statement: "Continued operating and financial discipline, along with a maturing pipeline of potential new medicines, gives me great confidence in the company's ability to meet the challenges we face from upcoming patent expirations and to resume growth after 2014."

While Lilly may experience a rocky road for the next few quarters, for an excellent dividend stock and a patient investor, Eli Lilly, with its cost cutting measures and perhaps a few blockbuster drugs in the pipeline, should be a good long-term stock to have in one's portfolio.

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. I have no business relationship with any company whose stock is mentioned in this article.