Eli Lilly Could Sink On Drug Collusion In India

| About: Eli Lilly (LLY)

Recent discoveries have placed Eli Lilly (NYSE:LLY) in the spotlight for colluding with India's drug regulators.

Eli Lilly, along with other Big Pharma names such as GlaxoSmithKline (NYSE:GSK) and Novartis (NYSE:NVS), has been colluding with Indian drug regulators to speed up approval procedures and put drugs on the Indian market that are not yet available or even legal in other countries. Thirteen of the drugs being investigated are not allowed to be sold in United States, Canada, Britain, European Union and Australia. The question of course arises how exactly the companies involved can justify selling such drugs in India. Several other major drug companies and firms have also been implicated. It took an 18-month investigation to reach this conclusion, but it does appear to be true.

What I gather from this information is that there is a lack of adequate supervision in emerging markets in India, where drug companies and other major industries are starting to focus their attention more intensively. The reason for this strong focus is that drug companies like Eli Lilly are feeling the pressure that comes from patent expirations. The only way for the company to maintain a good profit is by focusing on these emerging markets. Because of this sudden "dash" into new markets, the U.S. government has grown suspicious of the activities of drug companies. This led to the investigation under the Foreign Corrupt Practices Act and consequently resulted in the report regarding the activities of Eli Lilly and others.

The report references collusion between drug companies such as Eli Lilly, the Central Drugs Standard Control Organization (CDSCO), and independent medical experts. It is interesting to note that the CDSCO is not accused of wrongdoing outright. None of the officials of the firm have been named. To me, it seems that the blame will rest mostly with the pharmaceutical companies involved, which would threaten Eli Lilly's future. The report focuses instead on the series of procedural failures that have led to the various companies involved being accused of marketing drugs that are not, strictly speaking, safe.

If Eli Lilly is found guilty in this regard, it will mean that its stock should decline significantly. Perhaps the worst effect it will have is that investors will lose faith in the company and its ability to provide them with a reliable stock to back.

Novartis announced its intention to look into the allegations that it colluded with Indian drug regulators. A number of drugs were randomly assessed and in 11 cases, including Novartis' everolimus and aliskiren, it was found that "mandatory" Phase III clinical trials had not been conducted as required. In its defense, Novartis claims that it conducted trials as per one global standard. It stands by the safety and efficacy of its drugs. Regardless of the final outcome, it is clear that companies such as Novartis and Eli Lilly are going to be painted in a very bad light for the next few months.

In other news, Eli Lilly has won a small victory in court. Recently, courts sided with the company in rejecting the idea that companies must pay overtime to their sales force. The plaintiff argued that, as she did not close any sales and as she does not fall under the same heading as administrative exemption, that she should be entitled to overtime. This is at least something positive for the company. If it had lost the suit, it would have become instantly vulnerable to multiple class action cases leveled by sales employees demanding back pay for the many years that they did not receive overtime benefits. Longstanding federal labor law exempts salespeople from overtime requirements. However, this is not the only case of its kind that has recently been made against pharmaceutical companies. If the high court rules against pharmaceutical companies in another case, Eli Lilly -- along with many other players in the market such as Abbott (NYSE:ABT) and Johnson & Johnson (NYSE:JNJ) -- will still be significantly affected.

Eli Lilly competitor Pfizer (NYSE:PFE) has finally decided to give up once and for all on Lipitor. Following an aggressive marketing campaign to make as much money as possible following the expiration of the Lipitor patent, Pfizer has now ceased all marketing efforts related to the drug. The company is now focusing more intensively on the other medications in its pipeline, such as tofacitinib, which the company hopes will soon be approved by the FDA. At this stage, new drugs are the only way for Pfizer to get back in the game.

Sanofi (NYSE:SNY) appears to be downsizing as well, although in this case it may be against the company's will. Recently, it announced its intention to close a plant in Newcastle that is likely to leave 450 employees, some of whom have been working at the plant for decades, without jobs. In addition another plant will also be closed, which means that even more employees will lose their jobs. Clearly, the company is in some sort of trouble if so many plants are being shutdown at once.

Last but not least, GlaxoSmithKline made a bid to take over the drug manufacturer Human Genome Sciences (HGSI). The two companies have a long history of cooperation and so it is hoped by GSK at least that the deal can be closed on friendly terms. Glaxo is offering $13 cash per share for the company, a very good deal that Human Genome is unlikely to beat. In fact, no other buyers have stepped forward and it seems that Human Genome, which thus far attempted to hold on Glaxo, may just have to give in and merge with its stronger partner.

Eli Lilly just gotten caught red-handed in this collusion fiasco. Look for it to make some play that will help it avoid long-term consequences from it. Anything less, I'm afraid, could drive the company further down than you'd want it to be.

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