Eli Lilly puts faith in drug pipeline

Eli Lilly and Co. started to tip over its massive “patent cliff” this year, yet announced little publicly that will significantly soften its inevitable sales plunge.

On Nov. 15, generic versions of Lilly’s cancer drug Gemzar hit the market in the United States—the first of five blockbuster drugs that will lose patent protection in the United States or Europe over the next five years. Those losses will wipe out half the Indianapolis-based company’s $22 billion in annual revenue. And the picture got even worse this summer, when a court struck down the U.S. patent on Lilly’s drug Strattera.

The drugmaker has 68 experimental drugs in human testing right now, and it hopes to launch two of them per year, beginning in 2013, to revive its sales. But Lilly’s labs have produced that kind of performance only three times in the past 60 years.

Given those long odds—and Lilly’s recent struggles to win market approval for new products—most investors are cool on the stock. Lilly’s share price has been flat for two years, buoyed mainly by its rich dividend.

Lilly did win market approval late this year for a new underarm testosterone treatment it licensed from an Australian firm. But Lilly also suffered more than two years of further delays this year on Bydureon, its once-weekly diabetes medicine. And Lilly’s biggest pipeline hope—an experimental Alzheimer’s drug—failed miserably in a Phase 3 clinical trial, actually making the condition worse for patients.

Analysts have demanded to know what else Lilly plans to do to shore up its revenue and profits before its biggest drug, the antipsychotic Zyprexa, loses patent protection in November 2011 and more than $4 billion of sales evaporate.

Lilly’s answer has been consistent: no big merger, but instead efforts to grow sales in international markets and animal health and diagnostics, while it waits for its pipeline to deliver. At the same time, Lilly is slashing expenses by cutting jobs: It has eliminated more than 2,700 jobs on a path to 5,500 positions by the end of 2011.

“Our fundamental strategy remains intact,” Lilly CEO John Lechleiter said. “Nothwithstanding the setbacks, we’re confident we can execute on that strategy.”•

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