Pharmaceutical companies are considered the most defensive investments in the volatile market and are traded on their underlying fundamental value. We are analyzing one such company from this industry, Eli Lilly (LLY) trading at a beta of 0.41. The company has won a patent-extension for one of its top selling drugs and is focusing on improving its other drugs, which have potential to be blockbusters in the future.
Patent-extension of blockbuster drug
The company has strongly placed its foothold in the antidepressant market with its blockbuster drug "Cymbalta". It has generated peak sales of $5 billion last year for the company. It is used for the treatment of major depressive disorder, or MDD, and generalized anxiety disorder, a kind of mental disorder that results in excessive depression, worrying, and uneasiness in adults. It also helps in lowering arthritic pain and reducing nerve pain in diabetic patients. This drug patent was expected to expire in June 2013; however, upon successful testing of this drug for treatment of depression in teenagers the company received a six month patent extension from the FDA under pediatric-exclusivity program, a law granting six-month patent extensions in return for conducting pediatric studies. Simultaneously, in second quarter, Cymbalta reported year-over-year sales growth of 22% to $1.5 billion, mainly driven by the U.S. sales of $1.2 billion, which showed the year-over-year increase of 27%. It is contributing around 25% in EPS, and the company raised its full 2013 EPS guidance from $4.05-$4.15 to $4.28-$4.38 due to the patent-extension.
We expect this drug will report the same growth it did last quarter before its patent expiry, and the company's 2013 EPS guidance looks quite achievable. The antidepressant market including MDD is expected to grow at a CAGR of 1.8% to $13.4 billion from 2011 to 2018. The U.S. will provide more growth opportunities to the company as it generates more than 81% of Cymbalta revenue.
The company is now focusing on strengthening and developing other drugs especially for Alzheimer disease that could be the next blockbuster drug for the company, as this disease has a significant untapped market.
On the other hand, in July 2013 Forest Laboratory (FRX) received FDA approval for its MDD drug, "Fetzima". It was co-developed by Pierre Fabre Laboratories and Forest. Fetzima should be available on the market by the fourth quarter of 2013. Forest has license to sell this drug in the U.S. and Canada, and Pierre Fabre acts as Active Pharmaceutical Ingredient, or API, supplier. We expect growth in the U.S. MDD market will generate a huge opportunity for this drug also, as Cymbalta patent is going to expire by the end of this year.
According to Forest CEO; "Because people respond differently to different medications, Forest Laboratories is dedicated to bringing a range of treatment possibilities to adults living with MDD, as part of our growing mental health portfolio."
Fetzima is available in three different doses -- 40mg, 80mg, and 120mg. We expect this will help treat patients who are at different stages of MDD and can be treated more efficiently.
Alzheimer drug may come-out as blockbuster drug
Alzheimer disease, or Dementia, is a degenerative disorder resulting in loss of cognitive function and may be fatal. According to Alzheimer's Disease International, there are 5.2 million people affected by dementia in the U.S. and more than 35 million worldwide. According to a Deutsche Bank estimation, Alzheimer's disease has a market of around $20 billion annually.
Eli Lilly and Merck (MRK) are the two biggest contenders working on developing next-stage Alzheimer drugs. With several products in its pipeline, Eli Lilly is expected to change its overall growth trajectory. In its trial phase of Alzheimer drug, "Solanezumab," failed to treat advanced Alzheimer patients, however it was successful in slowing down memory loss by 34% in patients who are in the early stages of Alzheimer.
In August 2013, Eli Lilly began the new trial named as Expedition3 on 2,100 patients between the ages of 55-90. This sample population is 60% higher than its earlier trials. It will run Expedition3 studies in 11 countries, with around two-thirds of the patients in the U.S. and the remaining patients in Japan, Australia and Europe. The patients in this trial phase will be treated on the same 400mg dosage per month for 18 month and will take around 22 months for completion. Side by side, it is focusing on research and development to build a more effective drug that can treat patients with significant memory loss. After the failure in treating advanced stage Alzheimer patients, Eli Lilly is focusing on the success of Expedition3, which will help it receive approval for Solanezumal to treat Alzheimer disease. However this drug will be available by 2017 looking at the current trials and we expect the company's sincere efforts towards this drug will generate strong growth opportunities in the future.
On other hand, Merck is developing an Alzheimer drug with its Bace inhibitor, MK-8931 that removes fragments of beta-amyloid plaques. These plaques are the kind of amino acid that accumulates in the brain, resulting in memory loss or mental disorder. In phase I clinical trial this drug was effective in reducing the formation of beta-amyloid plaques. After this success, the company is working on phase II clinical trial and expects the results by the end of 2013. But, the market isn't optimistic due to Eli Lilly's trial failure, which adopted the same procedure. Over the course of 7 days of treatment, Merck found a significant reduction in amyloid plaque, and when the patients were dosed with 60mg of MK-8931, the plaque reduced around 84%. If MK-8931 is able to show positive results in its trial phase II, it would be a huge success for the company, which is expected to drive its earning and create a meaningful jump in its stock too.
Merck is trailing at a PE multiple of 28.93 and forward PE of 13.10, depicting high growth potential in its future earnings. Further, Merck's payout ratio of 102% generates the dividend yield of 3.60% compared to the industry's 3.40%, making the company more attractive to value investors.
After establishing its strong footprints in MDD market with its blockbuster drug Cymbalta, Eli Lilly is aiming to treat Alzheimer disease and pursuing trial phases. We expect the patent expiry of Cymbalta will affect the overall fundamentals of the company. However, it's expected successful response of Solanezumab in treating Alzheimer in its ongoing trial phase and the FDA approval would drive its stock upward. Moreover, Eli Lilly generated average dividend yield of around 4.90% in last five years and its trailing dividend yield is 3.70%, interesting value investors.
Eli Lilly is trailing at PE multiple of 11.86 and, according to the company's latest guidance, it expects EPS of $4.28-$4.38 this year, building a strong stock base and making the investors' confident about the company's stability.
Additional disclosure: Fusion Research is a team of equity analysts. This article was written by Satya Prakash, one of our research analysts. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.