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BEHIND THE NEWS: Setbacks up pressure on Eli Lilly scientists

March 17, 2008

Hoosiers fretting over Eli Lilly and Co.'s future have new reasons to worry.

Even in the best of times, the pharmaceutical business is a highstakes gambit, with every company's fate hinging on ushering new blockbusters through its R&D pipeline.

But those stakes never have been higher at Lilly, which faces a devastating onslaught of patent expirations between now and 2014.

The problem isn't just Zyprexa, the antipsychotic that loses U.S. and European protection in 2011. It accounted for 26 percent of Lilly's $18.6 billion in sales last year, and an even bigger percentage of profits.

Even more unnerving: Four other drugs with more than $1 billion in annual sales-the insulin Humalog, the cancer treatment Gemzar, the osteoporosis therapy Evista and antidepressant Cymbalta-all are in their twilight of patent coverage.

Collectively, the five drugs accounted for 58 percent of Lilly's 2007 sales. Their patent expirations will open the floodgates to generic competition.

So this is no time for R&D miscues. Yet we're seeing them just the same.

The latest: The company this month pulled the plug on development of an inhaled insulin treatment for diabetes.

It's a product that until recently company officials and analysts thought would be a sales gusher. Just last fall, President John Lechleiter told analysts, "We believe there's a place for more convenient administration of insulin. ... We're not backing away an inch" from the product. The Florida-based investment firm Raymond James had projected peak annual sales of $1 billion.

The excitement was understandable. The product seemed sure to attract patients tired of injecting themselves several times a day. It also would have helped some needle-phobic patients embrace insulin earlier in treatment, thereby improving their health.

Yet the optimism began to fade after New York-based Pfizer Inc. rolled out an inhaled insulin in late 2006 that failed to win acceptance from doctors, health insurers or patients. Exubera was such a colossal flop that Pfizer dropped it last fall-ultimately taking a $2.8 billion charge and dismissing 660 workers at a Terre Haute plant that made the product.

Another Lilly rival, Denmark-based NovoNordisk, canceled work on an insulin inhaler this January.

Lilly's product, developed in partnership with Massachusetts-based Alkermes Inc., appeared to have competitive advantages. For one, the inhaler was about twice the size of a lipstick tube-far smaller than Pfizer's bong-like dispenser, which some women found embarrassing to use in public.

Even so, Lilly decided to reverse course, citing "the evolving commercial and clinical potential of the product compared to existing medical therapies." It expects to take a $90 million to $120 million charge in connection with the failed product.

Other setbacks

The setback comes on the heels of the U.S. Food and Drug Administration's surprise rejection last month of Lilly's application for a long-acting, injectible version of Zyprexa that would have patent coverage until 2018.

New York-based Morgan Stanley had projected that annual sales could reach $400 million. The FDA told Lilly it needs more information on the drug's primary side effect, excessive sleepiness.

The most important drug in Lilly's pipeline is the blood thinner prasugrel, which Lilly submitted for U.S. regulatory approval in late December.

It could be a mega-blockbuster for Lilly if it supplants the current best-selling blood thinner, Plavix, which racked up $8.5 billion in sales last year for New York-based Bristol-Myers Squibb and France-based Sanofi Aventis.

A study released in November found prasugrel reduced the risk of heart attack and stroke 19 percent compared with Plavix. However, prasugrel also led to more serious bleeding, some of it fatal-a finding that left some analysts less optimistic about its potential.

Pumping out blockbusters

Getting a handle on the sales firepower of pipeline drugs always has been a dicey business. Lilly need only look at its disappointment with Xigris as a reminder.

The company announced positive study results for the sepsis drug in the summer of 2000, causing its stock price to leap $14 in a single day. But the FDA ultimately approved Xigris only for the most severe sepsis cases; its sales reached just $183 million last year.

On the other hand, Lilly also has rolled out drugs that blasted past expectations. Take Cymbalta, whose sales success has long been overshadowed by Zyprexa's. The antidepressant topped $2.1 billion in annual revenue in 2007 and might approach $5 billion by the time generic competition begins to erode sales in 2014, New York-based Goldman Sachs said in a report.

That kind of success is great. But it also puts the onus on Lilly scientists to pump out successor drugs with at least as much financial muscle. Lilly spent $3.5 billion on R&D last year, and the company's scientists are under unprecedented pressure to make sure the investment pays off.

As New York-based Bernstein Research said in a report: "Growth for [Lilly] over the next few years looks decent, but the company faces a daunting generic cliff that starts in 2011 and worsens for several years thereafter."
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