Elan (NYSE:ELN) recently announced that it will help manufacture Eli Lilly's (NYSE:LLY) new antidepressant, Cymbalta, in a deal that seems to have very different implications for the two companies.
Details on the pact were scant, but for Lilly, the agreement appears to be another means of spreading out responsibility for Cymbalta, which is due for launch this summer. Lilly has already linked up with contract services outfit Quintiles Transnational to help sell the medicine. Under that pact, Quintiles will provide a sales force over five years, and in exchange, receive an 8.25% royalty on sales for the first five years and 3% for the following three years.
Lilly's agreement with Elan, which is likely structured as a simple contract without royalties, will give the U.S. firm added European manufacturing capacity, since Elan plans to make the drug at a plant in Ireland. Notably, Lilly already intends to invest $51 million at a Spanish site that will produce Cymbalta. Taken together, Lilly's manufacturing and sales-force push suggests the firm foresees an impressive launch for the new treatment.
For Elan, on the other hand, the deal may not be as positive a sign. Typically, pharmaceutical companies only sell manufacturing services when they have excess capacity. Most firms instead seek to use their facilities to make their own drugs, since this is usually much more profitable than producing another company's medicines. Strangely, in 2003, Elan completed a $178 million expansion of the Althone, Ireland, facility where Cymbalta will be manufactured. It seems odd that the company would expand the site only to use it for lower-margin contract work.
On the positive side, Elan's ability to win Eli Lilly as a client will help continue to rehabilitate the Irish company's tarnished reputation in the eyes of shareholders. For a recovering Elan, that may be reason enough for the pact.
Fool contributor Brian Gorman is a freelance writer living in Chicago, Ill. He does not own shares of any companies mentioned here.
