Eli Lilly - The 'Never Say Die' Pharmaceutical

Mar.11.14 | About: Eli Lilly (LLY)

Summary

Eli Lilly meeting patent expiration with acquisitions and aggressive perusal of pipeline.

Boosts animal division by acquiring German poultry vaccine company.

Results of AWARD 6 trials establish shows once-weekly diabetes drug, Dulaglutide as good as same class Novo Nordisk drug, Victoza.

Ramucirumab for lung cancer meets primary endpoint in Phase III trial.

Rejection of empagliflozin type 2 diabetes SGLT2 inhibitor drug on technical grounds, not due to safety and efficacy.

There hasn't been a dull moment this year for the pharmaceutical giant Eli Lilly (NYSE:LLY). Actually, it started on January 30, 2014 when the company released its financial numbers for the fourth quarter 2013. Results were pretty tough; income fell by 16 percent (non-GAAP) compared to the same period prior year.

Results showed that patent loss of many of its blockbuster drugs, including the top selling Cymbalta and the resultant competition from generics were playing heavy on the company's bottom line. 2014 didn't look better either with the osteoporosis drug Evista going off patent in March this year.

The same day came news of Sanofi (NYSE:SNY) initiating legal action against Eli Lilly, putting Lilly's version of the long-acting basal insulin analogue on hold. Sanofi alleged that it is an imitation of its product Lantus and infringes four of its patents.

Positive news galore

Fortunately, that was about all for bad news - the rest of the month had nothing but positive tidings pouring in. The most encouraging, however, was results of its experimental diabetes drug, dulaglutide.

Dulaglutide

On February 25, 2014, Eli Lilly announced top line results of the sixth AWARD trial for its experimental, once-a-week, long acting glucagon-like peptide 1 (GLP-1) receptor agonist, dulaglutide, being studied for treatment of type 2 diabetes. The study achieved its primary endpoint of non-inferiority to Victoza. Victoza is an existing type 2 GLP-1 agonist diabetes drug from the world's largest insulin maker, Novo Nordisk (NYSE:NVO) and the best selling drug in its class.

The noticeable point here is that Eli Lilly's dulaglutide, 1.5 mg dose was not inferior to Victoza 1.8 mg dose and if approved, would be the only once-weekly and ready-to-use GLP-1 agonist in the market. The study demonstrated that dulaglutide did as well as Victoza in a head to head study involving 599 patients who were also taking an older diabetes treatment, metformin.

While other data from the study, including the drug's effect on weight, will have an impact, Timothy Anderson, an analyst with Sanford C. Bernstein & Co said that the results met investor's expectations and the drug is "well-positioned in the marketplace by virtue of attributes like its once-weekly dosing and its small needle size."

In earlier AWARD trials, dulaglutide had already established its superiority to diabetes treatments such as metformin, Byetta of AstraZeneca (NYSE:AZN) and Januvia of Merck & Co. (NYSE:MRK).

The company has submitted dulaglutide to the FDA for approval. According to analysts' estimates polled by Bloomberg, if approved, sales of dulaglutide are expected to reach $583 million by 2019.

Type 2 diabetes

Type 2 diabetes is the most common form of diabetes. The condition, known as insulin resistance, refers to the body's loss of ability to properly use insulin produced by the body. Initially, the pancreas work harder to produce more insulin but eventually loses the ability to produce enough insulin to keep blood sugar at normal levels.

According to World Health Organization (WHO) statistics, around 347 million people worldwide have diabetes and 90 percent of those are type 2 patients. In the U.S., an estimated 25.8 million people have diabetes. The global type 2 diabetes market size is forecast to reach $38.8 billion by 2019.

In the once-weekly space, dulaglutide faces competition from Bydureon, the once a week version of Byetta. However, dulaglutide is better placed as Bydureon needs to be mixed before injecting and also requires a bigger and thicker 23-g needle.

Going forward

Patent expirations have hit most of the big pharmaceuticals pretty badly in the last couple of years. However, Eli Lilly's investors would want to look at AstraZeneca for getting solace for the situation arising from blockbuster drugs going off patent. AstraZeneca has lost more patents than Eli Lilly and faces competition from cheap generics. However, investors are warming up to the company's efforts for coping with the challenge - the stock has gained as much as 50 percent in one year.

Like AstraZeneca, Eli Lilly's strategy is to replace the revenue loss due to blockbuster drugs going off patent through acquisitions and aggressive development of its pipeline candidates. Eli Lilly's strategy is to have a drug in every major therapeutic class for diabetes so that it has on offer a broad range of diabetes treatments. This puts the company in a better position to negotiate with pharmacies and insurers.

In mid February 2014, ramucirumab, the company's candidate for treatment of lung cancer met its primary endpoint of overall survival in Phase III trial.

Later in February, the company went ahead and bought a German poultry vaccine company, Lohmann SE for an undisclosed amount. The acquisition, which the company anticipates will have a negative impact of 5 cents on FY 2014 EPS, will eventually boost Eli Lilly's Elanco animal health subsidiary.

Investor's take

There is usually a never ending news flow on large pharmaceuticals that have numerous irons in the fire at the same time.

As recently as March 5, 2014, the FDA issued a complete response letter for the company's SGLT2 inhibitor empagliflozin for treatment of type 2 diabetes, saying that it could not be approved for marketing. However, the rejection by the FDA is not on merits of the drug but due to "deficiencies" in manufacturing facility of Boehringer Ingelheim, where it was to be produced. Both Eli Lilly and Boehringer Ingelheim have assured that they will work with the regulator and shall be submitting a response as soon as possible.

Eli Lilly is a stock that should be in every healthcare portfolio - for its 3.27 percent yield as well as growth prospects. Going forward, while there is always a possibility of minor news-based short term declines - lawsuits, rejections et al - I do not see any major downside in stock price.

Disclosure: I am long LLY, SNY. 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.