It May Be Time for Amylin and Lilly to Head to Divorce Court

| About: Bristol-Myers Squibb (BMY)

By Stephen D. Simpson

It's not unusual for business partnerships to have their ups and downs, but it looks like the relationship between biotech company Amylin Pharmaceuticals (AMLN) and major pharmaceutical Lilly (NYSE:LLY) may well be damaged beyond repair. Between Lilly's decision to market drugs from Boehringer Ingelheim, Amylin's decision to sue in response, and the information revealed through court documents that Lilly was apparently not expecting much from Bydureon, it seems as though the days of constructive partnership are over.

Restraining Order Has Only Limited Benefit

Despite nearly a decade of partnership, Amylin recently filed against Lilly, arguing that Lilly's decision to market competing diabetes drugs with the same salesforce that markets Byetta will compromise the company's sales strategy and revenue potential. Although the agreement between Lilly and BI was reached in January of this year, it is likely that Amylin attempted to resolve this more amicably. What's more, prior to the FDA's approval of linagliptin in mid-May, it was more of a theoretical risk anyway.

On Thursday morning, a judge partially agreed with Amylin's position – granting the company a temporary restraining order that prevents Lilly from using the same sales personnel to sell both linagliptin and Byetta. It is important to note, though, that the order does not preclude Lilly from marketing the drug, it just forces the company to establish separate salesforces.

Amylin No Longer The Leader

Amylin was a hot property years ago when Byetta was one of the best drugs on the market for dealing with Type 2 diabetes. Since then the market has moved on and Amylin has not kept pace. Novo Nordisk's (NYSE:NVO) Victoza has steadily captured share of the GLP-1 drug market and while this market is growing nicely, the benefits of that growth are overwhelmingly going to Novo Nordisk.

Making matters worse, Bydureon, the once-weekly GLP-1 drug that Amylin had hoped would rebuild its leadership in the class, was dealt a major setback months ago when the FDA rejected the drug application and demanded additional studies before reconsidering approval. That was bad enough, but Amylin then released results from a non-inferiority study that showed Victoza was more efficacious than Bydureon, reducing the benefit of Bydureon to just its dosing schedule and likely limiting the sales potential of the drug.

Unfortunately, it just gets worse for Amylin. DPP-4 inhibitors have not made a huge dent in the market yet, but Bristol-Myers Squibb (NYSE:BMY) has its relatively new drug Onglyza on the market and linagliptin could be a winner. Beyond that, an entirely new class of drugs called SGLT-2 inhibitors is showing early promise, with companies including Bristol-Myers, GlaxoSmithKline (NYSE:GSK), Johnson & Johnson (NYSE:JNJ) and Lexicon Pharmaceuticals (NASDAQ:LXRX) all working on candidates.

Has Lilly Shown Its Hand?

As part of the court documents related to the restraining order, it appears that Lilly was prepared to devote over half of its diabetes drug sales efforts to the BI portfolio. While it may well be the case that these sales reps could be reassigned years from now if and when Bydureon gets approval, this glimpse at Lilly's internal strategy suggests that Lilly is no longer planning on Bydureon being a major future contributor to profits. Couple that with fairly widespread rumors that Lilly did not handle the clinical trials and regulatory submission of Bydureon all that well, and it is easy to see why Amylin is livid with their partner.

What Now?

There is no guarantee that Amylin will continue to prevail in court and succeed in reorienting Lilly's diabetes sales strategy. After all, neither of the BI drugs are GLP-1 drugs and Lilly may be able to argue that there is no conflict of interest or risk of injury to Amylin.

That said, even a court victory does not give clear upside to Amylin. Litigation is expensive and time-consuming and Amylin does not have the cash to waste. What's more, Amylin may be able to prevent Lilly from assigning the same marketing personnel to Amylin's drugs and BI's drugs, but it is much harder (if not impossible) to compel Lilly to devote their best resources to Amylin's drugs. Said differently, it is hard to imagine that Lilly has especially warm and fuzzy feelings about Amylin right now.

A Break-Up On The Way?

If Lilly is no longer committed to Amylin's GLP-1 platform, Amylin may see it as preferable to just dissolve the partnership and go its own way. Perhaps the company assumes that it could find another marketing partner to handle OUS sales, while capturing 100% of the profitability of Byetta and Bydureon for itself.

At the same time, Amylin may believe that breaking this arrangement makes it a more attractive buyout target. Takeda is already on board with the company's obesity program and Takeda may be interested in additional branded diabetes drugs to offset the loss of patent protection on Actos. For that matter, maybe Amylin believes a favorable court ruling would push Lilly to make an offer to acquire the company as a way of resolving the matter (as unlikely as that seems).

What To Do With The Shares

For Lilly investors, this is a lot of sound and fury, but it signifies relatively little. It seems highly unlikely that the company will walk away from the BI drugs it licensed and those may be the higher-potential drugs for the long term. On top of that, it is hard to see a level of financial risk to Lilly that would move the stock.

None of this is good news for Alkermes (NASDAQ:ALKS), the company that has contributed drug delivery technology for long-acting exenatide formulations, but investors seem to have largely written off the potential of Bydureon here anyway. Risperdal Consta, the acquisition of Elan's (NYSE:ELN) drug technology business, the cash on hand, and the pipeline outside of Amylin offer plenty of valid reasons to own the stock.

While I still own some Amylin shares, I can no longer suggest than anyone else should. The obesity and lipodistrophy programs may be off the table now due to safety issues, and it is increasingly difficult to get excited about the long-term value potential of the exenatide platform. Given that I am a big advocate of avoiding biotechs with only one advanced clinical program, it is hard to be very positive on Amylin with so little in the pipeline. Perhaps Lilly will decide that Amylin's exenatide programs are more trouble than they're worth, but it is increasingly difficult to see a path for Amylin garnering major drug sales or a lucrative buyout offer.

Disclosure: I am long AMLN, LXRX.