Eli Lilly And The State Of The Insulin Battle

| About: Eli Lilly (LLY)

LY2963016 vs Lantus

Lantus is the world's number-one selling insulin brand in terms of both sales and units (source: IMS, 2011 sales) and is available in over 70 countries worldwide.

Made by Paris-based Sanofi (NYSE:SNY), it dominates some 80% of the long-acting insulin market and, according to Sanofi, is used by 7 million patients in the world. Sanofi's Lantus is injected once daily. The injection is administered using syringes or specific pens including Lantus SoloStar, which is a pre-filled disposable pen, or the newer ClikStar, which is a reusable insulin pen.

Eli Lilly (NYSE:LLY) is planning to challenge Sanofi's almost 10-year dominance with its own insulin glargine product called LY2963016, now in phase 3 testing (Trials called Element 1 and Element 2).

Insulin glargine is a long-acting basal insulin analog, given once daily to help control the blood sugar level of diabetic patients. It consists of microcrystals that slowly release insulin, giving a long duration of action of 18 to 26 hours.

LY2963016 is Lilly's most valuable new product. It is being tested in both type 2 diabetics in combination with oral diabetic medications over 24 weeks and in type 1 patients in combination with mealtime Humalog (Lilly's existing product) over 52 weeks, comparing the candidate against Lantus. The type 2 study is expected to announce results by the end of 2012, the type 1 data may come sooner.

Analysts predict that '3016 has a pretty good chance of making a mark in the insulin race. Lilly, of course, has a long tradition in diabetes care since 1923, when it introduced the world's first commercial insulin.

EvaluatePharma's consensus forecasts sales of $416m in 2018, making it Lilly's third biggest growth driver at that time.

Lilly also has a novel basal insulin analog, LY2605541, also in phase 3 since 2011, also for both diabetes Type 1 and 2.

An insulin analog is an altered form of insulin, different from the one occurring in nature, but still capable of functioning like human insulin and control blood sugar in the body. It is a product in which genetic engineering has changed the underlying DNA.

LY2605541, though still some years from reaching the market, is already causing a stir after signs in mid-stage Phase 2 clinical tests that it may help patients lose weight.

If confirmed in later trials, that could give it a unique selling point against other therapies for controlling type 2 diabetes, a disease that is closely linked with obesity.

The insulin market

Diabetes is caused by a lack of insulin, which the body needs to convert blood sugar into energy.

Diabetes type 1 represents complete insulin deficiency due to destruction of beta-cells in the pancreas. Type 2 is characterized by some degree of insulin deficiency. People with type 2 diabetes, about 80% of all diabetics, have trouble processing sugar in their blood, but do not generally require insulin at first to manage the condition.

The companies in the diabetes business stand to make "substantial revenue gains," Standard & Poor's Ratings Services said, with more than 280 million people expected to be diagnosed with diabetes over the next 20 years. The surge in patients will likely boost the global market for diabetes treatment to more than $58 billion in 2018 from $35 billion currently. This will provide a buffer against some industry concerns, such as tighter patenting regulations, rising drug development costs and more restricted use of new drugs in public-health systems.

The condition is seen as a major threat to public health.

Research into how to prevent, treat and possibly even cure both type I and type II diabetes is one of the main areas of pharmaceutical research today, with scores of new treatments in the pipeline.

The two main players of the diabetes market are Sanofi and Novo Nordisk (NYSE:NVO).

Besides Lilly, Novo is planning to challenge Lantus with their candidate Tresiba or degludec. This summer the FDA delayed the decision on Tresiba until 2013.

Novo's past attempt, Levemir has failed to seriously dent Sanofi's grip on the market.

Novo this time is prepared for a lengthy battle. Management feels that it will probably take until 2014 or 2015 for Tresiba to capture a bulk of new patients. By that time Lilly's insulin may also be on the market. Phase 3 clinical data for the Lilly drug LY2605541 is expected in 2013, suggesting it will be snapping at Tresiba's heels.

In 2011 Lantus had global sales of around $5 billion. This figure represents an 11.56% increase over sales in 2010. Lantus revenues grew 20% a year during the period 2007-11.

But analyst Tim Anderson of Bernstein believes sales will slow to an annual rate of 6.5% from 2012-16, and from 2015 onwards sales of the drug are likely to go into decline, assuming competition appears on the market by then.

Thomson Reuters consensus also forecasts that Lantus sales will continue to rise to under $7 billion by 2015 before declining thereafter.

Sanofi, as can be expected, is hard at work defending its franchise by developing an improved, longer-lasting formulation of Lantus and a Lantus plus GLP-1 combination product.

The bigger picture: Lilly's overall health

Failures in the clinic

The bad news from Lilly's late-stage pipeline has been unrelenting in 2012, with 5 straight failures. Lilly has been forced to write off its late-stage schizophrenia drug, the Alzheimer's drug solanezumab failed both primary endpoints, an effort to expand a weak market in Effient failed in a head-to-head study with Plavix, and Forteo failed a comparative study for pain among post-menopausal women.

The Amylin deal

In November 2011, Amylin (AMLN) and Eli Lilly terminated their partnership for development of Byetta and Bydureon, GLP-1 agonists.

In 2012 Bristol-Myers Squibb (NYSE:BMY) purchased Amylin for approximately $5.3 billion in cash, also assuming Amylin's net debt and making a contractual payment to Eli Lilly. The total value of the deal will reach $7 billion.

For a share in the partnership AstraZeneca (NYSE:AZN) will pay $3.4 billion in cash to Bristol-Myers.

The Boehringer deal

More important for the diabetes segment is the partnership between Lilly and the German company Boehringer to develop five diabetes compounds.

Included are Boehringer's two oral diabetes agents,Tradjenta and empagliflozin (BI 10773). In 2011 Tradjenta was approved and launched in the U.S, Japan, Europe, and other countries, empagliflozin is currently in Phase 3 clinical trials.

Also included in the deal Lilly's new insulin glargine product and novel basal insulin analog, both of which began Phase 3 clinical testing in 2011.


For the first six months of 2012 Lilly's revenue decreased 7 percent, to $11.20 billion.

The decrease was driven by the loss of patent exclusivity for Zyprexa in most major markets, partially offset by volume gains for other products.

Gross margin as a percent of revenue declined by nearly 4 percentage points to 77.9% in the second quarter of 2012 from 81.7% for the same period of 2011, ignoring the effect of foreign exchange fluctuations. This is still pretty good considering that the industry's average is 57%.

Eli Lilly received a payment of $1.259 billion from Bristol related to the Amylin purchase by Bristol paying off Amylin's debt to Lilly. Lilly will also receive $425 million in 2013 for transfer of Byetta's commercial rights outside the U.S. to Amylin. Amylin has also repaid in full to Lilly a $165 million loan and accrued interest.

Cymbalta, Lilly's top drug, generated $2.3 billion in sales for the first six months of 2012, up 22% compared to the same period previous year, mainly due to higher prices and demand.

While the loss of Zyprexa exclusivity is expected to impact revenues by more than $3 billion in the long run, products like Cymbalta, Cialis, Humalog, Alimta and Forteo are expected to continue performing well. New products like Effient, Axiron and Tradjenta should also contribute to revenues.

The share price's 52 week range was $35.46 - 48.39 and the market cap is $54.04 billion.

Analysts' opinions are divided, Thomson First Call survey shows 5 Buys, 11 Holds, 4 Underperforms or Sells.

Investor's summary

In spite of all the negative news, such as failures in clinical trials, loss of patent protection for Zyprexa and the resulting decrease in revenue, LLY comes through as a strong company, with fairly solid financials and a hope for growth. Growth is especially expected, among other segments, in diabetics.

The new insulin glargine product LY2963016 is promising and given its biological similarity to Sanofi's Lantus, which it supposed to challenge, success is expected.

A disappointing efficacy or the rise of serious safety issues during the trials would be bad news.

But for now the company must be doing something right: investors are receiving a solid dividend yield in excess of 4.1% and on September 21 the stock hit a new 52-week high.

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

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