Lilly fights view that fate hinges on Alzheimer’s drug

Eli Lilly and Co.’s shares have been remarkably resilient this year, trading in a narrow band in the mid- to upper-$30s even as the overall market seesawed.

That tranquility likely soon will come to an abrupt end, as Phase III trial data come out on Solanezumab, the company’s potentially game-changing treatment for Alzheimer’s. Interim data is expected in January, and final data by midyear.

Investor “sentiment equates Solanezumab with Lilly’s outlook,” C. Anthony Butler, an analyst with Barclays Capital, said in an Oct. 21 report. “Expect dramatic market reaction to either positive or negative news.”

Lilly executives are doing what they can to temper expectations. In Lilly’s third-quarter conference call with analysts Oct. 20, CEO John Lechleiter said: “While this is a very important readout for us next year, it’s not something, whether it’s positive or negative, that’s going to change our strategy.”

John C. Lechleiter Lechleiter

He added: “Our future does not depend on any single molecule, including Solanezumab. There are soon to be 11 other molecules in Phase III, and we’ll go where the data takes us and proceed accordingly.”

Investors are anxious for a new blockbuster to offset patent expirations for Zyprexa, the antipsychotic that racked up $5 billion in sales last year. The drug lost patent exclusivity in most of Europe in September and in the United States Oct. 23.

Lilly said in a press release announcing third-quarter results that it expects the introduction of generics “to result in a rapid and severe decline in Zyprexa sales.”

Lilly is among a host of drugmakers chasing a ground-breaking treatment for Alzheimer’s—a quest that so far has yielded a string of failures. In August 2010, for instance, Lilly halted development of the experimental drug Semagacestat after data showed it harmed Alzheimer’s patients instead of helping them.

That drug was designed to block an enzyme called gamma secretase that’s tied to production of beta amyloid plaque, considered by researchers to be a main contributor to Alzheimer’s.

Solanezumab aims to fight beta amyloid plaque through a different means—by trying to clear it through the bloodstream.

The good news for Lilly—and for investors—is that because the drug is so high-risk, few analysts have factored hefty sales into their long-term projections. That means failure won’t wreck the company’s outlook, according to analysts, while success would dramatically improve it.

Analysts generally are hedging their bets by projecting less than $1 billion in Solanezumab sales in 2016—even though sales would surely be much higher if Phase III testing succeeds and sets the stage for widespread use. Barclays’ $900 million estimate for 2016 reflects the firm’s estimate that the probability of success is just 15 percent.

Even though caution already is baked into projections, Butler said he’s confident bad news would trigger a wave of selling nonetheless.

That’s the reality of Wall Street. Investors tend to overreact to good or bad news.

While there’s probably little Lilly executives can do about it, they’re trying just the same.

“It’s very interesting science. We’re very hopeful of the potential outcome, but we have recognized that it’s high-risk,” Phil Johnson, Lilly’s vice president of investor relations, said on the third-quarter conference call.

“Essentially for the financial modeling, what that means is it’s assigned a relatively low probability of actually hitting. So … if that low probability goes to zero, it really does not take [our financial projections] down very much.”

Emmis doles out bonuses

Emmis Communications Corp. is still struggling, but board members recently sent a resounding message they think top executives are on the right track.

The board awarded a bonus of nearly $1 million to CEO Jeff Smulyan, $250,000 to Chief Operating Officer Patrick Walsh, and $55,000 to President of Radio Programming Rick Cummings.

The payouts rewarded the executives for their roles in selling three big-market radio stations to Merlin Media, a new Chicago company. Emmis received $120 million in cash and will own 21 percent of Merlin.

The payouts equated to 125 percent of Smulyan’s base salary, 45 percent of Walsh’s salary, and 12 percent of Cummings’ salary.•

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