Health Care & Life Sciences and Health Care & Insurance

Price pressures could ground Lilly's growth

May 21, 2012

Most analysts agree with Eli Lilly and Co.’s prediction that, after tough years from 2012 to 2014, the drugmaker will start growing sales and profits again. But in a new report, BMO Capital Markets predicts Lilly will get stuck at a reduced level of revenue and profit in 2014 and stay there for years.

“We doubt Lilly’s late-stage pipeline could drive meaningful growth after 2014 as the company and Street expect,” BMO analyst Alex Arfaei wrote in a 70-page report May 17.

Arfaei acknowledged that Lilly’s picture could be “transformed” if its experimental Alzheimer’s drug solanezumab proves successful. Arfaei gives it a 40-percent chance of success.

Arfaei expects Lilly to successfully launch several drugs over the next three to five years. He just doesn’t think any of them—other than the highly anticipated Alzheimer’s medicine—has shown potential to offset two major headwinds facing Lilly: the string of patent expirations on its existing blockbuster drugs, and the increasing pressure on drug prices from governments and health plans around the world.

The U.S. patent expirations of the cancer drug Gemzar in 2010, the antipsychotic Zyprexa in 2011, the antidepressant Cymbalta in 2013, and the osteoporosis drug Evista in 2014 will sap Lilly of roughly $9 billion in annual sales by 2015. If Lilly’s insulin Humalog faces competition from generics in Europe, the revenue losses could be even greater.

Lilly predicts that growth of other products, especially in overseas markets, will buoy its revenue to no less than $20 billion per year (down from a peak of $24.2 billion last year). It has said profit from operations will never drop below $3 billion a year.

Arfaei generally agrees with that forecast. But the problem, he said, is that Lilly will see another few billion in sales evaporate in the three years after 2014. Cymbalta loses European patents in August 2014, and in 2016 and 2017 the lung cancer drug Alimta and the impotence medicine Cialis will see their patents expire in the United States, Europe and Japan.

“We estimate that, from 2015 to 2017, Lilly’s base business will lose roughly $3 [billion] to $4 billion in annual revenues as Cymbalta, Alimta and Cialis lose exclusivity in major markets,” Arfaei wrote. “To drive growth from 2014 as the new base, the pipeline and remaining core products would need to offset these losses as they occur; an unlikely scenario based on our in-depth assessment of current phase 3 drugs and headwinds facing the core business.”

Arfaei predicts that Lilly’s revenue will drop to $19.9 billion in 2014 and remain flat the following year. Even more significantly, he thinks price increases on mature products will become increasingly rare, and that will hold Lilly’s profits at a low of $3.6 billion.

A 2010 analysis by the consulting firm Deloitte predicted that pressure from generic drugs and squeezed health insurers would reduce revenue in pharmaceuticals 11 percent over what the industry would have earned without any changes.

"Looking forward, we expect ongoing pricing pressure from European austerity measures and the Japan biennial price reductions," Arfaei wrote. "U.S. price increases will likely be more difficult on mature drugs, particularly those facing generic competition."

Arfaei’s analysis is similar to most other analysts', just a bit more bearish. The average of Wall Street analysts’ predictions are that Lilly’s revenue will actually grow 4 percent in 2015 to $21 billion and its profits will grow 12 percent that year to $4.2 billion.

But then there’s solanezumab. Since no effective treatment exists for Alzheimer’s, even a moderately successful solanezumab could reap $8 billion in annual sales, he predicted. Data from Lilly’s trials of solanezumab are expected to come out later this year.

“We estimate that LLY shares could rise at least 50 percent to 75 percent, depending on the quality of the data, because the product could potentially double Lilly’s earnings within two to three years of launch (probably 2014),” Arfaei wrote. “Results are expected between July and October 2012 and we estimate a 40 percent probability of success.”

 

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