Wall Street punishes Lilly for latest drug setback; analysts grasp for answers

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Let the guessing games begin.

After Friday’s stunning news that the Food and Drug Administration rejected Eli Lilly and Co.’s much-anticipated new drug for rheumatoid arthritis, investors and analysts are searching hard for answers.

The biggest question: Is it a temporary setback or something more serious?

The Indianapolis-based drugmaker’s announcement, however, raised more questions than answers. The company only said the FDA wanted “additional clinical data” to determine the most appropriate doses, and to further “characterize safety concerns.”

Investors didn’t seem in the mood to take chances. The market was closed for Good Friday when the news came out. But when the market reopened Monday morning, Lilly’s stock tumbled as much as 5.5 percent.

Over the next few hours, the stock recovered a bit, bouncing back to $82.60 in afternoon trading, down 3.8 percent.

Meanwhile, analysts are offering theories on why the drug, called baricitinib, ran into trouble with regulators. Many had expected the drug to ring up annual sales of $2 billion or more.

Jeffrey Holford at Jefferies LLC told clients the guessing game is “likely to persist until clarity is given.” The FDA’s possible safety concerns, he said, could include excess malignancy, infection and/or cardiovascular risk.

“We suspect that the issues are tied to rare events…potentially requiring additional safety studies to address the concerns fully before approval,” he wrote in a report Monday.

Leerink analyst Michael Schmidt said a delay of one year “now seems likely in our view, in a best-case scenario.”

Analysts at BMO Capital Markets were more pessimistic, saying the FDA’s concerns might require new clinical trials, which could push the drug’s launch back three years. BMO called the FDA’s move a “surprising and significant setback for Lilly.”

BMO downgraded Lilly's stock to underperform from market perform and lowered its price target on the shares to $71 from $73. Likewise, Morgan Stanley downgraded its recommendation on Lilly stock from overweight to equal weight.

Lilly said it disagreed with the FDA’s conclusions, but offered no guidance on the timing of a possible resubmission.

“We will continue to work with the FDA to determine a path forward and ultimately bring baricitinib to patients in the U.S.,” Christi Shaw, president of Lilly Bio-Medicines, said in a statement.

The drug was developed by Delaware-based Incyte Corp. Lilly paid Incyte $90 million for global rights to the drug, and led it through clinical trials. It has already received European approval.

The setback follows by just a few months another disappointing outcome on another highly touted Lilly drug. Last fall, the drugmaker pulled the plug on solanezumab, a drug to treat Alzheimer’s disease.

It’s a disappointing turn of events from just a year ago, when Lilly executives were whipping up excitement on Wall Street, saying they expected to launch 20 new products in the 10 years between 2014 and 2023.

Analysts were estatic over Lilly's optimism, and its full pipeline. “Return to growth period is finally here!” wrote Dr. Tim Anderson, a drug analyst at Sanford C. Bernstein & Co.

The return to growth period just got its second big setback. And based on market reaction, it could take Lilly a couple of flawless product launches to get investors to start rushing back.

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