Eli Lilly Will Sink If Solanezumab Fails

Apr.18.12 | About: Eli Lilly (LLY)

Eli Lilly (LLY) is in a questionable position in terms of two of its top-selling drugs, Zyprexa and Cymbalta, which are likely to decline in popularity with the recent advent of generics. Although the company has relied to a large extent on cost-cutting to deal with this situation, the company's CEO recently declared that the focus should return to the development of new medicines.

The biggest problem facing Eli Lilly currently is that a large portion of its best drugs will be open to copy cats by June of next year. Other companies, faced with similar problems recently simply cut costs in order to weather the storm, but that just simply may not be enough for Eli Lilly.

So the focus has turned to the development of new and innovative drugs, and this method is meeting a certain amount of success. The most important focus for Eli Lilly at present is its new Alzheimer's drug, solanezumab, which is currently in the last of the three rounds of testing required to reach the approval of the FDA and become marketable. The drug appears to be a very promising option and the focus on this drug is generally considered to be the company's best move to date.

In an attempt to guard itself against possible future failures with the drug, Eli Lilly has made a point of reminding investors that the new Alzheimer's drug is a risky program and that the future of the company does not depend entirely on it. That being said, it is obvious to most people concerned that this could be Eli Lilly's ticket out of its current difficulties and that a certain amount of hope has to be placed in the development of solanezumab. This is because, to date, there are no treatments for Alzheimer's disease, which means that if Eli Lilly successfully makes a breakthrough in this regard it will be the first drug company to combat the disease. And, considering that it is prepared to continue its attempts to fight the disease even if this drug fails it may still be a very promising stock option to back whatever the outcome of the phase-three drug trials.

Needless to say, if Eli Lilly has any amount of success battling Alzheimer's, a terrible and, unfortunately, common disease, its name will be associated with that advancement for years to come. I don't have to describe the benefits of such a breakthrough.

On the other side of the good-doer coin, PETA has alleged that Eli Lilly is involved with laboratories that are known to violate animal rights laws and the animal rights advocate group is planning to demonstrate against the company as a consequence. The organization claims that, as Eli Lilly outsources its animal testing to companies that are based in places such as China where little emphasis is placed on animal safety, it is in direct contravention of U.S. animal testing laws and regulations. The effects that this scenario will have on the stock, however, is probably not serious, although it something well worth monitoring. Bad press is never welcomed and PETA has a long history of creating bad press in humiliating manners.

Recently, both Eli Lilly and one of its main competitors, Pfizer (PFE), have been "laid low" by generics. Pfizer, which once held the best-selling drug in the industry, Lipitor, recently suffered huge losses as the patent on the drug expired and generics were brought onto the market. Likewise, Eli Lilly's own Zyprexa, an antipsychotic drug, suffered the same fate when the patent was lost and generics became available. Pfizer was able to weather this decline to a certain degree by introducing other drugs that were also successful, such as Enbrel and Celebrex. Eli Lilly is also currently relying on the success of other drugs to make it through the decline. However, although this method is working to an extent, some more of its drugs, such as Cymbalta, will also soon be going generic, begging the question of what Eli Lilly plans to do in the future to recoup these new losses.

The main competitors of Eli Lilly are experiencing mixed success. GlaxoSmithKline (GSK), for example, has received very promising results in terms of its phase III studies of albiglutide in type 2 diabetes. Pfizer, aside from losing profits due to patent expirations, is also engaged in a number of legal battles. The question regarding whether or not Pfizer can be held accountable for the asbestos-related accusations leveled against its subsidiary, Quigley (now bankrupt) have been sufficiently addressed. However, the news is not good for Pfizer. It has been decreed that it is, in fact, accountable. In other news, Pfizer is currently attempting to sue Roxane Laboratories Inc for an infringement of patent laws. Roxane apparently wishes to sell its version of Tarceva before the patent on the Pfizer version expires. Sanofi SA (SNY), another serious competitor of Eli Lilly, is experiencing difficulties with its new cancer drug Zaltrap. Sanofi had removed its application to have Zaltrap approved for marketing December 2011, but resubmitted again in February.

Yet another major player in the news at the moment is Johnson & Johnson (JNJ). Recently it was declared that Johnson & Johnson is in fact guilty of holding back information regarding the potential of its new antipsychotic medication to have adverse side effects on those who use it. The lawsuits that the company is involved in relating to this drug are many and various. Most recently it was made to pay a fine of $1.2 billion in the state of Arkansas for claims related to the medication.

It seems that the pharmaceutical industry in general is suffering from difficulties of various kinds. If we look specifically at Eli Lilly, the best possible outcome is for it to achieve success with its new Alzheimer's drug. If it can get that right then it is more than a safe bet to back. If not, watch out for a sinking price and cash flow.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.