Eli Lilly and Co. and Drug discovery and Health Care & Life Sciences and Health Care & Insurance and Pharmaceutical

Lilly’s path to redemption: Turn new drugs into sales

February 3, 2014

The numbers this year will be bad for Eli Lilly and Co.; there’s no getting around that.

In the past 2 1-2 years, the Indianapolis-based drugmaker has watched patents expire on not one, but two $5 billion-a-year drugs. That will send Lilly profit tumbling an estimated 32 percent this year.

But 2014 will also give Lilly an opportunity it hasn’t really had for nearly a decade: to grow sales and profit by launching new drugs.

Wall Street analysts say Lilly could win approval from the U.S. Food and Drug Administration for four new drugs: ramucirumab for gastric cancer, necitumumab for lung cancer, and dulaglutide and empagliflozin—both for diabetes.

“We continue to view Lilly as an earnings recovery story and while we do not anticipate near-term outperformance for the stock, we could see a longer-term opportunity for LLY shares to the extent the company is able to successfully commercialize its next-generation product portfolio and maintain cost discipline over the next several years,” Chris Schott, a pharmaceutical analyst at J.P. Morgan, said in a Jan. 30 note to investors.

Since 2005, Lilly has launched just three new drugs—none of them remarkable. The blood thinner Effient, once expected to be a blockbuster, had 2013 sales of $509 million. The diabetes pill Tradjenta, developed by Lilly partner Boehringer Ingelheim GmbH, had sales last year of just $249 million.

Lilly also helped a Japanese firm launch a cholesterol drug, Livalo, in 2010, but that relationship ended.

Some of the things that limited those drugs could hamper Lilly’s new drugs: Competing products, some already in a cheap generic form, do similar things.

Also, state-run health plans in foreign countries and private health plans in the United States are scrutinizing new drugs more aggressively before agreeing to reimburse patients, and narrowing their formularies to favor generic drugs and drugs discounted by the companies that make them.

Also, far more U.S. physicians are now employed by hospital systems, which are also pushing drugmakers to prove their drugs are superior before agreeing to allow their doctors to use them.

All those factors mean it will take Lilly longer to ramp up sales of new drugs—if it’s able to ramp them up at all.

Jami Rubin, a pharmaceutical analyst at Goldman Sachs, expects Lilly’s four new drugs to bring in sales this year of $261 million, with that total rising to $1.9 billion in 2017.

But that same year, Lilly stands to lose its patent on Cialis, its $2 billion-a-year pill for impotence, which would offset gains of the drugs launched this year.

Analysts have been repeatedly impressed with Lilly’s ability to wring additional revenue out of existing products. In the fourth quarter of 2013, for example, Lilly raised U.S. prices 10 percent, helping hold overall revenue fairly flat—even though U.S. patents on its bestseller Cymbalta expired in December.

Lilly will have to apply some of that magic to its new products if it hopes to reverse generally negative views on Wall Street. Twelve of 20 analysts rate Lilly a hold or worse, according to a Thomson/First Call survey.

“Given the still-skeptical view of LLY by the majority of investors, and what still seems to be under-ownership of the name, there is more ‘runway’ left should additional investors turn positive, which itself will be a function of LLY executing on various fronts, the most important of which is its pipeline,” Tim Anderson, a pharmaceutical analyst at Bernstein Research, wrote in a Jan. 31 note to investors.

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