Stop us if you’ve heard this one: A local pharmaceutical company develops an industry-changing drug, profits handsomely, and then, when the patent expires, scrambles to fill the void as revenues plummet.
Having recently lost U.S. market exclusivity on Zyprexa, the bestselling antipsychotic medication, Eli Lilly and Company might look like a company doomed to repeat its own past. Prior to its U.S. patent expiration in 2001, the antidepressant Prozac had been one of the company’s most successful launches ever; it became, in the words of one executive, “a metaphor for psych meds.” When Zyprexa came along in 1996, and then crossed the billion-dollar-a-year threshold a few years later, it looked like a cure for the blues the company and investors expected to feel after losing the U.S. patent on the blockbuster happy pill that preceded it.
And what a cure. Developed as a treatment for schizophrenia, Zyprexa became the prescription of choice for a host of psychotic illnesses—and the main driver of Lilly’s revenue for a decade. Last year, the drug accounted for nearly 20 percent of the company’s earnings, with $4.6 billion in revenue.
Over the next year, Lilly might experience a little discomfort (beyond the nagging litigation that has complicated Zyprexa’s success). The company lost exclusivity on the drug in most of Europe last September, and then here at home in October. As a result, Lilly officials expect Zyprexa to shed more than $3 billion in revenue this year. And there’s more trouble on the horizon: Lilly’s next-best-selling drug, the antidepressant Cymbalta—which contributed more than $4 billion in revenue last year—is set to lose its U.S. patent in 2013.
The remedy to these patent ills, appropriately enough, is more drugs. Lilly’s pipeline currently includes a dozen potential treatments in late-stage, Phase III development, which involves “eligible clinical-trial participants” (humans). Lilly officials say it’s the biggest Phase III group they can remember. In a recent interview, Jan Lundberg, head of Lilly Research Laboratories, shared a printout outlining points of emphasis driving the company’s R&D; it included a picture of a smiling elderly gentleman with thinning gray hair. That pretty much sums up the company’s strategy: Identify growth areas—age-related diseases, for instance—and then go after them. “You can look at that picture and realize what’s happening in society in general,” says Lundberg. “We want high quality of life as long as possible, don’t we? Many of our current diseases are chronic, and they accumulate with age, so there are major demands coming from the aging population.”
Accordingly, Lilly scientists are making promising—and potentially lucrative—discoveries in the areas of Alzheimer’s disease. Currently awaiting regulatory approval is a product called Amyvid, which can aid in the detection of beta-amyloid plaque in the brain; Lundberg thinks it could be on the market as soon as this year. One of Lilly’s Phase III molecules, solanezumab, is purported to help prevent amyloid damage in the brain. An estimated 5.2 million Americans aged 65 and older currently have Alzheimer’s, and that number is expected to grow to 5.7 million by 2020. “If solanezumab works, it is a game-changer,” says Lundberg.” And we have several other efforts in Alzheimer’s disease coming after that.”
Several potential diabetes treatments in Lilly’s Phase III group also represent a return to an earlier area of strength for the company, the first to produce insulin commercially. More importantly, though, they cover another major growth area: An estimated 25.8 million people in the United States have diabetes, and some reports predict that as many as half of all Americans could be diabetic or pre-diabetic by 2020. (To put those numbers in the context of Lilly’s fat returns on Zyprexa, consider that only about 1 percent of American adults currently suffer from schizophrenia.)
Lundberg hopes the company receives regulatory approval on at least some of these new products in 2014, and early research data from some of the Phase III molecules could be released as early as this year. In the meantime, the company will try to make ends meet with what Lilly execs call “counter-cyclical growth engines,” management-speak for scraping the barrel until the next big thing comes along. Areas of improving strength such as animal health and growth in emerging markets should carry it through the lean times. At least, that’s the hope. “But if for some reason earnings get hit to a greater degree than expected,” says Linda Bannister, an industry analyst with Dow Jones, “that could be the catalyst for management to take some other action, whether selling the company—which we don’t think is likely—or making an acquisition, or just restructuring the firm.”
Long-term, Bannister is advising investors to take a wait-and-see approach. “We have a ‘hold’ rating on Lilly right now,” she says. “If a couple of these late-stage drugs prove to be efficacious, Lilly could be a growth company again. But if the pipeline kind of peters out, we could be faced with a company that is forced to make what I would expect to be some pretty drastic decisions strategically.” She notes that the really big boys are working in the same areas of need driving Lilly’s research, and that numerous potential Alzheimer’s therapies developed by other companies have already failed.
Lundberg seems to understand the stakes. “It’s a little like football,” he says. “This is the final five minutes, and we need to score.”
Considering Lilly’s recent track record—and 135-year history—our money is still on the home team.
Having recently lost U.S. market exclusivity on Zyprexa, the bestselling antipsychotic medication, Eli Lilly and Company might look like a company doomed to repeat its own past. Prior to its U.S. patent expiration in 2001, the antidepressant Prozac had been one of the company’s most successful launches ever; it became, in the words of one executive, “a metaphor for psych meds.” When Zyprexa came along in 1996, and then crossed the billion-dollar-a-year threshold a few years later, it looked like a cure for the blues the company and investors expected to feel after losing the U.S. patent on the blockbuster happy pill that preceded it.
And what a cure. Developed as a treatment for schizophrenia, Zyprexa became the prescription of choice for a host of psychotic illnesses—and the main driver of Lilly’s revenue for a decade. Last year, the drug accounted for nearly 20 percent of the company’s earnings, with $4.6 billion in revenue.
Over the next year, Lilly might experience a little discomfort (beyond the nagging litigation that has complicated Zyprexa’s success). The company lost exclusivity on the drug in most of Europe last September, and then here at home in October. As a result, Lilly officials expect Zyprexa to shed more than $3 billion in revenue this year. And there’s more trouble on the horizon: Lilly’s next-best-selling drug, the antidepressant Cymbalta—which contributed more than $4 billion in revenue last year—is set to lose its U.S. patent in 2013.
The remedy to these patent ills, appropriately enough, is more drugs. Lilly’s pipeline currently includes a dozen potential treatments in late-stage, Phase III development, which involves “eligible clinical-trial participants” (humans). Lilly officials say it’s the biggest Phase III group they can remember. In a recent interview, Jan Lundberg, head of Lilly Research Laboratories, shared a printout outlining points of emphasis driving the company’s R&D; it included a picture of a smiling elderly gentleman with thinning gray hair. That pretty much sums up the company’s strategy: Identify growth areas—age-related diseases, for instance—and then go after them. “You can look at that picture and realize what’s happening in society in general,” says Lundberg. “We want high quality of life as long as possible, don’t we? Many of our current diseases are chronic, and they accumulate with age, so there are major demands coming from the aging population.”
Accordingly, Lilly scientists are making promising—and potentially lucrative—discoveries in the areas of Alzheimer’s disease. Currently awaiting regulatory approval is a product called Amyvid, which can aid in the detection of beta-amyloid plaque in the brain; Lundberg thinks it could be on the market as soon as this year. One of Lilly’s Phase III molecules, solanezumab, is purported to help prevent amyloid damage in the brain. An estimated 5.2 million Americans aged 65 and older currently have Alzheimer’s, and that number is expected to grow to 5.7 million by 2020. “If solanezumab works, it is a game-changer,” says Lundberg.” And we have several other efforts in Alzheimer’s disease coming after that.”
Several potential diabetes treatments in Lilly’s Phase III group also represent a return to an earlier area of strength for the company, the first to produce insulin commercially. More importantly, though, they cover another major growth area: An estimated 25.8 million people in the United States have diabetes, and some reports predict that as many as half of all Americans could be diabetic or pre-diabetic by 2020. (To put those numbers in the context of Lilly’s fat returns on Zyprexa, consider that only about 1 percent of American adults currently suffer from schizophrenia.)
Lundberg hopes the company receives regulatory approval on at least some of these new products in 2014, and early research data from some of the Phase III molecules could be released as early as this year. In the meantime, the company will try to make ends meet with what Lilly execs call “counter-cyclical growth engines,” management-speak for scraping the barrel until the next big thing comes along. Areas of improving strength such as animal health and growth in emerging markets should carry it through the lean times. At least, that’s the hope. “But if for some reason earnings get hit to a greater degree than expected,” says Linda Bannister, an industry analyst with Dow Jones, “that could be the catalyst for management to take some other action, whether selling the company—which we don’t think is likely—or making an acquisition, or just restructuring the firm.”
Long-term, Bannister is advising investors to take a wait-and-see approach. “We have a ‘hold’ rating on Lilly right now,” she says. “If a couple of these late-stage drugs prove to be efficacious, Lilly could be a growth company again. But if the pipeline kind of peters out, we could be faced with a company that is forced to make what I would expect to be some pretty drastic decisions strategically.” She notes that the really big boys are working in the same areas of need driving Lilly’s research, and that numerous potential Alzheimer’s therapies developed by other companies have already failed.
Lundberg seems to understand the stakes. “It’s a little like football,” he says. “This is the final five minutes, and we need to score.”
Considering Lilly’s recent track record—and 135-year history—our money is still on the home team.
