Eli Lilly: Positive Development Of Gastric Cancer Drug Makes Us Bullish On The Stock

| About: Eli Lilly (LLY)

After the somewhat good news on the results of the phase -III Solanezumab study, which showed that the drug may be active in patients with early stage Alzheimer's, another update has hit the market. The update has made investors and analysts optimistic about the prospects of the drug and the company. The update relates to Eli Lilly's (NYSE:LLY) experimental gastric cancer drug named Ramucirumab, which in a recent study showed that patients with advanced stage stomach cancer can live longer with the drug. Side effects of the drug include high blood pressure, diarrhea and headache. We maintain that the results have more weight than the previous results, relating to the Alzheimer drug, and view this as a substantial improvement on the part of LLY's performance. We have a positive outlook on the stock.

LLY withheld itself from disclosing how great the survival benefit was, and reserved the details for a future medical meeting. LLY got hold of the drug in its acquisition of ImClone back in 2008 to expand its portfolio of cancer therapies and bolster its oncology pipeline. Ramucirumab is not only intended for gastric cancer, in fact, five other studies for its use in the treatment of metastatic breast, colorectal and gastric cancer are lined up. Expectation for the revenue generating ability of the drug amount to $600 million, and if the drug obtains an approval for all indication, sales could hit $1.6 billion by 2020.

Some Statistics:

The National Cancer Institute estimates that 21,000 people will be diagnosed of gastric cancer in the US in the current year with the incidence of the disease in men being higher than in women. IMS estimates that annual global spending on medicines will touch $1.2 trillion by 2016 with therapeutic areas such as cancer, diabetes and asthma/COPD leading the way. Oncology (the study of cancer) will be the top therapy area, accounting for some $83-$88 billion in global spending. Of the 91 New Molecular Entities that emerged in the US during 2006-2010, 17 were from the oncology department.

The news is more impressive than the previous:

In the last article we were of the view that the results of Solanezumab were a step forward, but not substantial and to hope that the company would attain an approval from the FDA based only on these results would be too optimistic. In fact, Cowen and Co analyst Steven Scala maintains that the excitement over the Alzheimer drug is overdone and it is unlikely that the drug will gain an approval.

Unlike the Alzheimer study, the recent one involving Ramucirumab met its primary end points and should the drug prove to be effective for all indications intended initially the market potential is huge. The Street seems to have taken the news positively and the mean price target stands at $50 against a previous $45. We previously highlighted the strong financial position of the company and concluded that LLY would not have problems sustaining its dividend payments. We have grown optimistic about the recent result and view the news as more weighty compared to the earlier Alzheimer study. In light of the recent developments, we have a positive outlook for the company.

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

Business relationship disclosure: The article has been written by Qineqt's Healthcare Analyst. Qineqt is not receiving compensation for it (other than from Seeking Alpha). Qineqt has no business relationship with any company whose stock is mentioned in this article.

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