Eli Lilly and Company (LLY +0.80%) generates over 40% of its sales from diabetes medications, including insulin, and its sales could grow significantly over the coming decade because of an increasingly larger and longer-living global population. In the United States alone, the number of people with diabetes is expected to grow to nearly 55 million in 2030, from about 30 million in 2017, according to the Institute for Alternative Futures (IAF).
The company's in a position to benefit from growing demand for diabetes treatments, but diabetes isn't the only market Eli Lilly's tackling. It also has a history of successfully developing cancer drugs. If you're considering whether to include Eli Lilly in your portfolio, here's what you need to know about its past, present, and future.
The diabetes drug market is huge
Diabetics either are unable to produce insulin (Type 1 diabetes) or have become resistant to the insulin they do produce (Type 2 diabetes).
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In healthy people, insulin is created by beta cells in the pancreas in response to elevated levels in the bloodstream of glucose, a sugar found in carbohydrates. The insulin produced in the pancreas is used by the body to convert glucose into energy, or to store it in the muscles or liver as a future source of energy.
Unfortunately, diabetes is a life-threatening disease. It can lead to nerve damage that contributes to infections, kidney disease, and cardiovascular disease. Overall, diabetes is the No. 7 cause of death in America.
Currently, over 30 million Americans are living with diabetes, and according to the Centers for Disease Control, about 1.5 million people develop it every year. As baby boomers age and diets that contribute to obesity -- thought to be a factor in Type 2 diabetes -- become more common, the number of people with diabetes is expected to increase significantly.
IAF estimates there were 90 million Americans with prediabetes in 2015, and that by 2030, that figure will increase to 108 million. As more patients with prediabetes develop full-blown diabetes, the number of people with diabetes will increase by over 20 million in the next 12 years.
There's no cure for diabetes yet, and eventually, most diabetics require daily medication, including insulin. The chronic nature of the disease and the sheer size of the patient population mean that spending on diabetes is massive. Between 2007 and 2012, the cost of diabetes -- including economic costs such as lost wages -- increased 74%. And those costs are forecast to increase from about $400 billion in 2015 to over $620 billion by 2030, according to IAF.
The cancer drug market is huge, too
Our bodies are made up of cells produced by genes, but sometimes mutations produce abnormal cells that multiply and spread. When that happens, it's called cancer.
Cancer is unfortunately common. Over 15 million Americans either are cancer survivors or are currently receiving treatment for cancer, and according to the American Cancer Society, there's a 1 in 3 chance of developing some form of cancer over a person's lifetime. In the U.S. alone, about 1.5 million people are diagnosed with cancer, and over 600,000 Americans pass away from it every year.
In men, the most common cancers are in the prostate, lung, and colon. In women, breast cancer is the most common, accounting for about 30% of new diagnoses; lung cancer and colon cancer are also common in women.
Cancer treatment has been improving, but there's still significant need for improvement. For instance, the American Cancer Society reports that the rate of deaths associated with female breast cancer has declined by 39% since 1989, to 20.3 per 100,000 people, yet roughly 41,000 women with breast cancer will pass away this year in the United States. Similarly, lung cancer's death rate has fallen 45% since 1990 (largely due to fewer people smoking), yet over 154,000 people will die from it in 2018.
Because cancer treatment requires significant intervention that often includes pricey medications, over $80 billion is spent in the U.S. on direct medical costs associated with cancer, according to the Agency for Healthcare Research and Quality. A good chunk of that spending is on drugs. According to information research company IQVIA, annual spending on cancer drugs has doubled since 2012 to $50 billion, and the median price for newly approved cancer drugs has increased since 2013 from $79,000 to over $160,000.
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Eli Lilly's history
Eli Lilly was founded by an ex-Union colonel of the same name in 1876. Since then, Eli Lilly has grown into a global powerhouse that's been a member of the S&P 500 index since 1971.
In the late 1800s, when Eli Lilly was started, it was common for medicine to be sold from the back of wagons by questionable salespeople. Those products rarely disclosed their ingredients, and due to haphazard compounding, there was significant variability of ingredients from batch to batch.
To change that, Eli Lilly focused initially on producing standardized prescription medicines that fully disclosed their ingredients. As part of the quest toward standardization, the company pioneered the use of gelatin capsules that could more precisely control dosage. It also developed flavorings so that medicine was easier to take.
The company's focus on improving existing medications began shifting in earnest to research and development in the 1920s. After George Henry Alexander Clowes was hired as director of biochemical research in 1919, Eli Lilly secured the rights to research on insulin by University of Toronto scientists J.J.R. Macleod, Frederick G. Banting, and Charles H. Best in 1922. Eli Lilly launched its first commercially available insulin, Iletin, in 1923, the same year that Banting and Macleod won a Nobel Prize for their research.
Due in part to Iletin, Eli Lilly and Co.'s sales grew to $9 million in 1926. That helped fund its development of Liver Extract 343, a treatment for a blood disorder called pernicious anemia that launched in 1928, and Liver Extract 55, a blood-disorder drug developed in collaboration with the University of Rochester that launched in 1930.
Sales growth for these drugs largely offset headwinds from the Great Depression. As a result, Eli Lilly and Co. was able to invest in new research facilities, and expand outside of the United States, while other companies were retrenching.
The company's expansion gave it an advantage when World War II broke out. During the war, Eli Lilly played a major role by supplying soldiers with penicillin, an antibiotic, and merthiolate, an antifungal and antiseptic. It also provided the military with blood plasma, an alternative to blood that's easier to store and transport on the battlefield. Revenue tailwinds as the war ended resulted in sales reaching $117 million in 1948, up from about $13 million in 1932.
In 1952, Eli Lilly and Co. became a publicly traded company. During the 1950s, Eli Lilly's successes included the development of the antibiotics vancomycin and erythromycin. More importantly, it was chosen as one of five manufacturers of the polio vaccine, and by 1955 it was manufacturing more than half the polio vaccine produced in the United States.
In the 1970s and 1980s, the company launched Keflex, one of the most widely used antibiotics in history; Dobutrex, a drug used to treat heart failure; and Ceclor, which at one point was the best selling oral antibiotic on the planet. Eli Lilly also developed the leukemia drug Eldisine; the arthritis medicine Oraflex; and the analgesic Darvon.
Acquisitions began to play a more important role in the company's growth, too.
In 1971, Eli Lilly bought the cosmetics company Elizabeth Arden. Then it bought the medical instruments company IVAC Corporation and the heart-disease medical device company Cardiac Pacemakers Incorporated in 1977. In the 1980s, the company's acquisitions included Physio-Control Corporation, Advanced Cardiovascular Systems, Hybritech, and Devices for Vascular Intervention.
In the 1990s, it acquired Pacific Biotech, Origin Medsystems, Heart Rhythm Technologies, and the prescription-drug benefits manager PCS Health Systems. These deals were important because its medical devices and diagnostics division was contributing about one-fifth of its sales by the early 1990s.
The company's R&D team was also hard at work at the time, and in 1987, it won approval from the Food and Drug Administration (FDA) of Prozac, a top-selling antidepressant that contributed tens of billions of dollars to Eli Lilly's top line before it lost patent protection in 2001.
The company also launched the billion-dollar blockbuster drugs Gemzar, Cialis, Alimta, and Cymbalta in the 1990s and 2000s. After winning FDA approval in 1998, Gemzar went on to become widely used in first-line pancreatic cancer, second-line ovarian cancer, and in metastatic non-small-cell lung cancer, until generic versions became available in 2010. The erectile dysfunction drug Cialis won approval in 2003, and the depression and anti-anxiety drug Cymbalta and the lung cancer drug Alimta won approval in 2004.
Gemzar is no longer an important source of revenue for Eli Lilly, but in 2017 Cialis, Alimta, and Cymbalta contributed $2.3 billion, $2.1 billion, and $757 million to sales, respectively. Cialis could face generic competition in 2018, but Alimta might not have to compete against generics until 2022. Cymbalta lost its patent protection in 2013, so its sales will likely fall further in the coming years.
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Eli Lilly's business today: Diabetes
Diabetes treatments are the most important part of Eli Lilly's business. In 2017, insulin and other drugs that help control blood sugar levels in diabetics contributed about $10 billion to the company's overall $23 billion in sales.
Its best-selling drug is the $2.9 billion-per-year, rapid-acting insulin, Humalog; its fastest-growing diabetes drug is Basaglar, a biosimilar to Sanofi's (SNY 0.07%) megablockbuster, long-lasting insulin, Lantus. In the past, Humalog has competed successfully for market share against Novo Nordisk's (NVO 0.16%) mealtime insulin, NovoLog; however, Humalog's patent has expired, and a new biosimilar, Admelog, from Sanofi became available earlier this year.
It remains to be seen whether Admelog can have the same kind of success winning over doctors and patients as Eli Lilly's Basaglar. Although biosimilars, including Basaglar, are inexact copies of brand-name biologics, they offer similar efficacy, usually at a lower price. Basaglar's sales increased 402% to $432 million last year; while that's good news for Eli Lilly, it could indicate that Humalog's sales could decline markedly because of Admelog.
In addition to Basaglar, Trulicity and Jardiance are also important diabetes drugs. Trulicity, a once-weekly GLP-1 (glucagon-like peptide-1) drug that boosts insulin production, saw its sales grow 119% to $2 billion in 2017. Meanwhile, sales of Jardiance, an SGLT2 (sodium-glucose co-transporter 2) inhibitor that increases glucose excretion in urine, increased 122% in 2017 to $447.5 million.
Eli Lilly's business today: Cancer
Alimta's more than $2 billion in annual revenue makes it Eli Lilly's best-selling cancer drug by far, but the company also generates significant revenue from the cancer drugs Erbitux and Cyramza.
Initially developed by ImClone, which Eli Lilly acquired in 2008, Erbitux is used in colorectal cancer, non-small-cell lung cancer, and head and neck cancer. In 2017, Erbitux revenue totaled $646 million, down 6% year over year. Sales are expected to fall, though, because Erbitux has already lost its patent protection. There aren't any approved biosimilars to Erbitux on the market in the U.S. yet, but that could change because multiple companies, including Amgen, are working on them.
Unlike Erbitux, Cyramza still has patent exclusivity, and label expansions allowing its use in gastric cancer, non-small-cell lung cancer, and colorectal cancer could help Eli Lilly offset any drop in demand for Erbitux. In 2017, Cyramza's sales totaled $758 million, up 23% from 2016.
Cyramza will get a little help from Eli Lilly's recently launched cancer drugs Lartruvo and Verzenio, too. Lartruvo is approved to treat soft-tissue sarcomas (STS) that occur in muscles, fat, tendons, and other soft tissues, and according to the National Cancer Institute, there are 12,310 new cases of STS diagnosed annually. Verzenio treats HR (hormone receptor)-positive, HER2 (human epidermal growth factor receptor 2)-negative advanced or metastatic breast cancer. It has the same mechanism of action as Pfizer's (PFE 1.04%) Ibrance, a drug that racked up over $3 billion in sales last year.
Even though it's early days for these two drugs, they could add meaningfully to Eli Lilly's sales in the future. In Q1 2018, they generated combined sales of nearly $100 million.
Eli Lilly and Company's future
Overcoming expiring patents is perhaps the biggest challenge facing Eli Lilly. Threats to Cialis, Cymbalta, Erbitux, and Humalog could put a big dent in Eli Lilly's top-line performance.
Additionally, the company's osteoporosis drug Forteo could face generics as soon as next year, putting $1.75 billion in 2017 sales at risk. And generics are already chipping away at sales of its ADHD drug Strattera; in 2017, Strattera's revenue fell 28% to $618 million.
Those are stiff headwinds, but Eli Lilly thinks it has enough new drugs in the wings to make up for slowing sales of those medications.
In diabetes alone, it has four drugs that are either in midstage phase 2 trials or late-stage phase 3 trials. And it recently entered into trials of a closed-loop, automated insulin-delivery system that could do away with finger sticks and insulin injections.
Eli Lilly's phase 3 diabetes drugs include an ultrafast-acting insulin that can compete against Novo Nordisk's Fiasp, and a hypoglycemia treatment that can be inhaled by patients with ultralow blood-sugar levels.
In phase 2, the company is working on a DACRA (dual amylin calcitonin receptor agonist), and on a drug that's a coagonist for both the GIP (gastric inhibitory polypeptide) receptor and the GLP-1 (glucagon-like peptide-1) receptor. If successful, the DACRA could control weight and improve insulin sensitivity, while the GIP/GLP-1 drug could increase insulin production by more than drugs targeting GLP-1 alone.
Automated insulin systems like the one Eli Lilly is developing combine a monitor that continuously evaluates blood-sugar levels with a wearable pump that automatically doses insulin based on the monitor's readings. So far, Medtronic (MDT 0.28%) and Tandem Diabetes (TNDM +3.38%) are the only companies that have secured FDA approval for closed-loop systems. Medtronic's MiniMed 670G became available in 2017, and Tandem's system is expected to become available in August 2018.
Further out, Eli Lilly is conducting early-stage research to turn adult stem cells into insulin-producing beta cells. If successful, these engineered stem cells could functionally restore insulin production in Type 1 patients, giving diabetics an entirely new way to fight back against their disease. In a move that could accelerate the development of this approach, Eli Lilly recently acquired the rights to a technology that encapsulates cells to minimize the likelihood of an immune-system attack. If that encapsulation approach works, it would overcome one of the biggest obstacles associated with introducing engineered cells into patients.
In cancer, the company also has some intriguing studies going on, including phase 3 trials of Verzenio as an adjuvant treatment for breast cancer, and of Cyramza for bladder cancer, liver cancer, and non-small-cell lung cancer.
In phase 2, it's studying three entirely new cancer drugs: merestinib, an MET kinase inhibitor; LY3023414, a PI3 kinase/mTOR dual inhibitor; and prexasertib, which inhibits Chk1 (checkpoint kinase 1), a global regulator of the mammalian cell cycle. Merestinib is being studied in non-small-cell lung cancer; LY3023414 is being studied in various cancers including relapsing and recurring solid-tumor cancers; and prexasertib is being studied in various cancers including small-cell lung cancer.
Drugs targeting other indications that could move the revenue needle are also in the works. For instance, the FDA is currently evaluating Eli Lilly's migraine drug galcanezumab. And Eli Lilly, in collaboration with Pfizer, has tanezumab in phase 3 trials for cancer pain, chronic lower-back pain, and osteoarthritis pain.
In immunology, the company's recently approved rheumatoid arthritis drug Olumiant is in phase 3 trials for eczema, and its already-approved psoriasis drug, Taltz, is in development for axial spondyloarthritis. Taltz and Olumiant contributed nearly $180 million to sales in Q1 2018, so expanding labels could be important to growth. Further back in the pipeline is a phase 2 study of mirikizumab for psoriasis, Crohn's disease, and ulcerative colitis.
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Is Eli Lilly and Company a buy?
There's an undeniable need for new and better treatments for diabetes and cancer. And as more people are diagnosed with these diseases, that should provide plenty of opportunity for Eli Lilly to grow its sales and continue returning money to investors.
Last year, the company paid investors $2.08 per share in dividends, up from $2.04 per share in 2017; based on June 2018 share prices, that translates into a healthy dividend yield of 2.6%.
The big risk here is that Eli Lilly's new drugs, and the drugs in its pipeline, fail to replace declining sales for its older products. But management is optimistic that it can grow revenue by 5% per year through 2020. Given the size of the markets that Eli Lilly targets, and its long track record of successfully developing drugs in important indications, I'm willing to give it the benefit of the doubt, and suggest it as a solid addition to income portfolios.
