Is There Any Hope for Lilly?

Are we beating up too much on Eli Lilly (NYSE: LLY  ) ?  The company was tagged as having the "most perilous pipeline" in the industry by my Foolish colleague Sean Williams. Another Motley Fool contributor (namely, me) piled on by dubbing Lilly as the "frailest big pharma of all." Some might say that we're being overly critical of the company and are overlooking some of its positives.

It is certainly true that we have been looking at the company's prospects over the next few years. This time horizon focuses on late-stage drugs only. But what about Lilly's phase 2 pipeline? Could there be reason for hope down the road? Let's take a look.

Steady but stirring
One number jumps out when examining Lilly's phase 2 pipeline over the past few years: 21. That's the number of drugs in the company's mid-stage pipeline until 2012.

Source: Company annual reports and pipeline updates.

However, the relative steadiness of the total number of drugs in phase 2 masks a lot of activity. Over the past three years, 20 new drugs have entered phase 2 testing. Seven drugs advanced from phase 2 to phase 3. That's the good news.

The bad news is that one drug previously in phase 3 was sent back to phase 2. Eleven programs in phase 2 were canceled. Lilly also sold one mid-stage drug -- its CD20 antibody, which targets treatment of non-Hodgkin's lymphoma.

Not so bad?
How do Lilly's phase 2 numbers stack up against other drug companies? Actually, they look pretty good in comparison. 

Source: Company annual reports and pipeline updates.

Of the companies shown, AbbVie (NYSE: ABBV  ) is the closest to Lilly in terms of annual revenue. In terms of sheer numbers, Lilly greatly outpaces the newly formed spin-off. Lilly's number of drugs in phase 2 even compares favorably to larger pharmaceutical companies, also -- edging out Merck (NYSE: MRK  ) and only slightly trailing Pfizer (NYSE: PFE  ) .

There is one area where Lilly stands out from the pack. Its proportion of phase 3 drugs to phase 2 drugs is lower than all of the other companies shown. That's bad for the immediate future because Lilly has fewer opportunities for new products. With several drugs going off patent, this presents a big dilemma for the company.

However, it could be good in the longer run -- but only if Lilly is able to advance a large number of the drugs now in phase 2 on to phase 3 and ultimately to approval. The company has at least some grounds for optimism. Its number of discontinued drugs in phase 2 has been steadily declining over the past few years. 

Playing to strengths
The number of drugs in the pipeline is important but not nearly important as the caliber of the drugs. Unfortunately, it can be difficult to determine how much potential mid-stage drugs really have.

Results from phase 1 don't tell us a lot. And there's always the possibility that a drug that experiences great success in phase 2 won't have nearly the level of success in late-stage studies. We can, though, at least look at the therapeutic areas addressed by the drugs. 

Source: Company website

Lilly seems to be playing largely to its strengths. The company's top mid-stage focus is in oncology, an area where the company has see considerable success in the past with Gemzar, Alimta, and Erbitux. Lilly is also a major player in the diabetes market with Humalog, Humulin, and Tradjenta. The presence of four phase 2 drugs targeting diabetes fits in well with the company's direction in that market.

Neuroscience is an area where Lilly needs new drugs to stay competitive, with Zyprexa already going off patent and Cymbalta losing exclusivity this year. The company counts three phase 2 drugs in this therapeutic category (plus another two in late-stage trials.) Similarly, Lilly loses patent protection for osteoporosis drug Evista next year. One of the two musculoskeletal drugs in phase 2 target this indication, while the other addresses disuse atrophy.  

Positively speaking
Not everything looks totally bleak for Lilly. The company's phase 2 pipeline looks strong (at least in volume) compared to several other drug makers. Lilly is also focusing on several areas that fit it well. There -- I feel better for being able to say something positive about the company.

But (you knew one of those was coming), Lilly still has the most perilous pipeline considering how badly it needs new drugs quickly. And it is still the frailest big pharma overall. Maybe somewhere down the line we can have plenty of good things to say about Lilly, but the next few years just don't look too promising. Of that outlook, I'm quite positive.

Is Eli Lilly a buy or sell?
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  • Report this Comment On March 06, 2013, at 12:07 PM, DannyHaszard wrote:

    Eli Lilly did make $69 billion on Zyprexa and they still expect to capture 20% of the US market as well as a billion year on ZyprexaXR.

    The patent only expires in the US and some Euro,Lilly announced they have an *authorized* distributor of generic Zyprexa.

    Zyprexa can cause diabetes.

    I took Zyprexa Olanzapine a powerful Lilly schizophrenic drug for 4 years it was prescribed to me off-label for post traumatic stress disorder was ineffective costly and gave me diabetes.

    *FIVE at FIVE*

    The Zyprexa antipsychotic drug,whose side effects can include weight gain and diabetes, was sold to Veterans,children in foster care, elderly in nursing homes.

    *Viva Zyprexa* *five at five* was the Zyprexa sales rep slogan, meaning *5mg dispensed at 5pm would keep patients quiet*.

    *Tell the truth don't be afraid*-- Daniel Haszard

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