Lilly buys ImClone as part of strategy to capitalize on cancer-drug market

October 13, 2008

John Lechleiter sounded gleeful Oct. 6 after writing a $6.5 billion IOU to acquire the cancer drugs of ImClone Systems Inc.

Lechleiter, CEO of Eli Lilly and Co., said, "I couldn't be more excited about what ImClone brings to Lilly."

Pharmaceutical analysts fear Lilly overpaid for New York-based ImClone. But they acknowledge that cancer drugs--particularly of the biotech variety--provide a juicy target for pharmaceutical firms these days.

"The success of companies like Genentech in the area has certainly not been missed," said Bert Hazlett, an analyst at BMO Capital Markets in New York. "Over the past several years, the successes that biotechnology companies have had in oncology have sparked a renewed interest by big pharma."

Genentech, based in San Francisco, has produced cancer blockbusters like Avastin and Herceptin. ImClone sells its one drug, Erbitux, for $10,000 a month to treat colon and head and neck cancers.

Cancer drugs are now the best-selling class of drugs in the world and one of the fastest growing. According to research firm IMS Health, global sales of cancer drugs grew 16 percent last year to more than $41 billion. Other industry research pegs sales and growth rates even higher.

With numbers like that, Lechleiter isn't the only pharma CEO throwing large sums of money into developing cancer drugs. Pfizer Inc. and AstraZeneca plc frequently tout their cancer drug pipelines in presentations to investors.

So what has these companies so excited?

In short, it's a huge unmet need. The World Health Organization estimates that an increasingly aged population will double the worldwide cases of cancer by 2030, to more than 27 million.

But there are other reasons big pharmaceutical companies are surging back into cancer.

Cancer drugs seem to get more lenient treatment from the U.S. Food and Drug Administration, which has become increasingly intolerant of side effects in drugs that aren't targeting potentially fatal conditions.

Once approved, drugmakers can spend less to market new cancer drugs because they don't have to run Super Bowl ads or employ an army of salespeople, as they do when they're trying to sell a sleeping aid or diet pill to millions of patients and their family doctors.

Last, Medicare and health insurance companies are willing to pay large sums for new, targeted cancer drugs that are tailored to be as much as 90-percent effective in a specific group of patients.

That's in contrast to their attitude toward the latest antidepressant, for example, which might help only 30 percent of patients who take it. Health insurers sometimes make patients bear a much larger share of the cost of such drugs, and sales suffer as a result.

"The reimbursement for a targeted therapy is more certain, more sure," said Matthew Hudes, the managing principal for biotechnology at the consulting firm Deloitte.

Chasing cancer

Cancer drugs have been around awhile. The first chemotherapy agents appeared in the 1940s. Lilly itself produced important chemotherapy drugs, called vinca alkaloids, in the 1950s and 1960s.

But there's been a shift in the last decade, linked mainly to the sequencing of the human genome in the 1990s.

The study of genetics is transforming scientists' understanding of diseases. For example, doctors now see breast cancer not as one disease but as many, based on the presence and activity of a woman's genes.

A particularly aggressive form of breast cancer occurs when a woman's genes produce too much of a protein called HER2. No more than 30 percent of breast cancer patients have extra protein.

In 1998, Genentech launched Herceptin, which can stop some women's HER2 genes from making the HER2 protein. Herceptin is now a blockbuster, raking in sales of nearly $1.3 billion a year.

"The science is really moving very rapidly in the oncology area," said Dr. Richard Gaynor, Lilly's vice president for oncology research.

Lilly kicked up its cancer research right about the time Herceptin hit the market.

Gemzar launched in 1996 to treat pancreatic cancer and has since won approval to treat several other cancers. Alimta launched in 2004 to treat a variety of lung cancers.

Last year, those two drugs accounted for $2.5 billion, or 13 percent, of Lilly's total sales.

The company has more than 1,000 people worldwide working on cancer research, Gaynor said. They have moved 13 experimental molecules into clinical testing. The ImClone acquisition would bring in five more experimental drugs that have reached clinical testing.

Just before its ImClone deal, Lilly agreed to pay up to $520 million to Kansas-based Deciphera Pharmaceuticals LLC for any cancer drugs the two companies develop together. And in August, Lilly paid $64 million to acquire cancer-drug development technology from SGX Pharmaceuticals Inc. in San Diego.

"It's one of the major areas where our focus is now," Gaynor said. Cancer is joining diabetes and neurosciences as one of Lilly's signature classes of drugs.

Other companies hope to make cancer one of their signature classes, too.

For example, New York-based Pfizer Inc. announced Sept. 30 that it is abandoning further research in heart drugs, such as the cholesterol-fighting Lipitor, which have been Pfizer's staple for years. It is instead focusing its research dollars on Alzheimer's disease, diabetes and cancer.

That's because Pfizer predicts cancer drug sales will hit $81 billion by 2011.

"We're investing to win in oncology," Ian Reed, Pfizer's president of worldwide pharmaceutical operations, told investors during a conference Sept. 22. "We have the largest and what we believe is one of the best oncology pipelines in the industry. We've 22 compounds in development."

Bracing for generics

Lechleiter is betting that ImClone can vault Lilly into the winner's circle in this cancer sweepstakes.

But analysts have significant doubts about it. Because of the high purchase price, ImClone will hurt Lilly's profits initially and provide no boost until 2013.

That's about the time Lilly will face competition from generic copies of four of its best-selling drugs.

ImClone receives less than half of Erbitux's $1.3 billion in annual sales because it relies on two other companies to market the drug. New York-based Bristol-Myers Squibb Co. receives 61 percent of Erbitux revenue in the United States. And Germany-based Merck KgaA receives 90 percent of international sales.

The same sales splitting will apply even if Lilly wins approval for Erbitux to treat other kinds of cancers, as it intends to do.

Bristol-Myers also claims it has exclusive American and Canadian marketing rights to the heir-apparent to Erbitux, a drug called IMC-11F8. ImClone disputes that claim, and analysts said Lilly might end up in court if it tries to fight Bristol-Myers on that point.

For the ImClone deal to make sense, Lilly needs one of the five cancer compounds in ImClone's pipeline to hit it big on the market. The leading candidate is a drug called IMC-1121B. The drug, which just entered Phase Three testing, works like Genetech's Avastin, depriving the blood vessels that feed tumors from the nutrients they need for further growth. Avastin now has annual sales of more than $2 billion.

"Justifying the purchase price based on current operations and potential synergies is not possible," wrote David Moskowitz, an analyst at Caris & Co., in a research note. Referring to ImClone by its ticker symbol, he added, "The success of IMCL's pipeline is key to making the acquisition successful on a long-term basis, financially."

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