Will Pipeline Disasters Devour Eli Lilly Stock?

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Eli Lilly (NYSE: LLY  ) investors just can't catch a break lately. This Big Pharma member had high hopes for replacing lost revenue from Zyprexa, Cymbalta, and Humalog -- all staring down fierce generic competition -- with various late-stage pipeline candidates. Things aren't looking so promising four major failures later. It's far from being the only company facing the dire straits of the patent cliff, but some peers have done remarkably well in planning for futures without former blockbusters. Is Eli Lilly stock about to be devoured?

It's not so bad here
Last summer, Eli Lilly announced that development of pomaglumetad methionil for schizophrenia would be stopped because of lack of efficacy. The drug was expected to complement the company's expertise in neurological disease treatments, although peak annual sales were expected to be only about $250 million. More recently investors learned that enzastaurin for large b-cell lymphoma failed a phase 3 trial. Luckily, the cancer drug candidate was not a major part of the company's plans, either.  

While we can say that neither drug was significant, Eli Lilly was surely looking forward to eventual revenue from both. Atypical antipsychotic therapies such as Risperidone from Johnson & Johnson (NYSE: JNJ  ) and Zyprexa haven't been improved upon much in decades. Each now has generic alternatives, which has left Big Pharma looking for proprietary treatments that are safer and more effective and have bigger impacts on the top line. Meanwhile, the lymphoma market has no shortage of competition. So investors shouldn't worry too much about these failures.

Reality check
Failures were also announced for solanezumab in Alzheimer's disease and tabalumab in rheumatoid arthritis. Solanezumab simply didn't meet its primary endpoint in either of two phase 3 trials, although the drug has since been moved into trials evaluating milder cases of the disease. It would have been a great product in a best-case scenario, but Eli Lilly isn't alone in its unsuccessful search for new ways to treat Alzheimer's disease. Johnson & Johnson and Pfizer (NYSE: PFE  ) recently discontinued a trial for bapineuzumab after limited efficacy as well. An effective treatment for the disease would be a major breakthrough but remains elusive to date.

The company was also hoping to crack into the rheumatoid arthritis market with tabalumab, which kept the streak of ineffective treatments going for shareholders. Despite losing out on this massive market initially, Eli Lilly does have a promising JAK inhibitor (baricitinib) being developed with Incyte (NASDAQ: INCY  ) for the disease and an additional trial for psoriasis. If successful, safe, and effective, the oral treatment could be more convenient for patients currently taking injectable biologics.  

The bad news is that by the time baricitinib is potentially approved years from now, it will have to compete with Xeljanz from Pfizer, which hit the market shortly after being approved in November. The good news is that Xeljanz will have to suffer the growing pains of being a first-in-class therapy in an established market and could very well pave the way for a successful launch for Eli Lilly.

The real danger to shares
So if these highly publicized failures won't devour Eli Lilly stock, what will? Falling revenue. While late-stage failures and revenue are connected, the most promising trials for Eli Lilly are still in phase 2 trials. In fact, the company has a total of 24 compounds in mid-stage development. The market seems to be looking a little further into the future and has actually sent shares to a five-year high. 

LLY Chart

LLY data by YCharts

Should investors take a cue from the market before hitting the panic button?

Foolish bottom line
I can't give the company a free pass on soon-to-be plummeting revenue, but I can say that the pipeline probably holds a few big winners. Unfortunately for investors holding on to Eli Lilly stock, I just don't see it beating out many of its Big Pharma peers. Other pharma companies have brighter immediate futures than Eli Lilly and have done quite well in preparing for the patent cliff. Shareholders of Johnson & Johnson and Pfizer will experience limited exposure to falling revenue, while it will be a more painful and prolonged process for Eli Lilly investors. Am I off the mark? Let me know in the comments section below.

Is Eli Lilly a buy or sell?
With two of its top three drugs poised to lose patent protection this year, is Eli Lilly a dividend stock headed nowhere fast? In a new premium report, The Motley Fool's senior pharmaceuticals analyst breaks down all of Lilly's moving parts, including an in-depth analysis of the company's must-know opportunities and reasons to buy and sell today. To find out more click here to claim your copy today.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 27, 2013, at 5:03 AM, DannyHaszard wrote:

    Zyprexa still profitable for Lilly.

    Generic Zyprexa (Olanzapine) still a cash

    cow for Lilly.

    Well, Lilly did make an astounding $70 billion to

    date on Zyprexa and sales off-patent are still at $2 billion year.Not a bad hunk

    of change.-Daniel Haszard Zyprexa patient who got diabetes from it's side


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