Though Eli Lilly (NYSE:LLY) is best known for drugs such as Cialis and Prozac, it has a number of other drugs under its umbrella through subsidiaries. One of these drugs, Trifexis, is a monthly flea and heartworm medication for dogs that is produced by Lilly's veterinary subsidiary Elanco. The drug has been troubled lately by a horrible accusation: Some pet owners claim that Trifexis killed their dogs.
As of April, 31 complaints had been filed with the Food and Drug Administration claiming that dogs were killed by Trifexis. Elanco, of course, denies that Trifexis is directly involved, with Elanco veterinarian Dr. Stephen Connell stating that "[Elanco has] not been able to identify with all of these reports, any specific trends we can link directly to the use of the product."
Is Trifexis hurting Eli Lilly?
Despite the negative press, rumors surrounding Trifexis are unlikely to hurt Lilly. These rumors have been circulating for more than a year, and despite this Trifexis sales increased 8% in the first nine months of 2013. It is also unlikely that a definitive link between Trifexis and the deaths will be established. The 31 deaths reported to the FDA also occurred over the life of the drug, averaging out to only around one death per month despite Trifexis being prescribed at more than 15,000 veterinary clinics in the United States.
Trifexis and other animal products also play a limited part in Eli Lilly's financials. Lilly reported pharmaceutical income of $5.24 billion in the third quarter of 2013, as compared to only $530 million from animal health products. While the company's animal health segment showed 11% growth in the quarter, this also includes products such as animal food and accessories. Animal foods and companion animal products were large drivers, especially internationally, and benefited from the withdrawal of a competing food product from the market.
Just because the rumors surrounding Trifexis aren't having a major impact on Eli Lilly, though, it doesn't mean the company is doing well. The company has other problems, leading to analysts at Goldman Sachs downgrading the company's stock to "sell."
What's behind the downgrade?
Goldman Sachs attributed the downgrade to a lackluster drug pipeline and a premium valuation compared to other companies in the industry such as Merck and Johnson & Johnson (NYSE:JNJ). Goldman analyst Jami Ruben described the company's leading pipeline drugs as being "undifferentiated or me-too" while some of its current products are likely to face increasing pricing pressure. The firm also believes that Lilly hasn't done enough to prepare for patent expirations that are looming in 2014.
Eli Lilly isn't the only pharma company facing pressures, especially given that Johnson & Johnson recently agreed to a $4 billion settlement concerning faulty artificial hips and was ordered to pay $2.2 billion in penalties related to false advertising and unethical marketing earlier this month. Despite these setbacks, the company is still reporting strong sales. In its most recent quarterly report, Johnson & Johnson reported earnings per share of $1.36 to beat consensus estimates of $1.32 per share. While this was down $0.12 from the second quarter, it showed growth of $0.11 per share compared to the year-ago third quarter.
Even with the company's legal problems, Johnson & Johnson reported a 6.6% increase in worldwide sales to $53 billion in the first nine months of 2013. This was split fairly evenly between U.S. and international companies, with sales of $23.9 billion and $29.1 billion, respectively. This is supported by significant increases sales of drugs such as the prostate cancer treatment Zytiga (which saw a 75% increase in the third quarter alone) and anticoagulant Xarelto (which increased 262% in the quarter.)
While things are rough for Eli Lilly at the moment, it does have a few promising prospects on the horizon. Chief among these is a partnership with Insulet (NASDAQ:PODD), creator of the OmniPod insulin pump. The partnership, announced earlier this year, will see Insulet developing a pump system for use with Lilly's concentrated Humulin R U-500 insulin treatment for type-2 diabetes.
The partnership with Insulet created a convenient treatment option for individuals with insulin-resistant diabetes. The OmniPod delivery system is proving popular, with a 40% increase in new customers reported in Insulet's most recent quarterly earnings report. This drove the company's earnings for the quarter, with 12% year-over-year increases in both revenue (to $61.1 million) and gross profit ($27.4 million) being reported. Operating expenses also increased and caused a $21.3 million loss for the quarter ($0.39 per share), though this was largely due to the company's work to increase production to nearly 1 million units per month.
As the popularity of the OmniPod continues to grow, it could carry Lilly's concentrated insulin treatment with it. Customers and doctors who are used to the device may choose it (and Lilly's treatment) over other options when needing stronger insulin concentrations.
Eli Lilly has been in a rough spot lately, and the rumors surrounding Trifexis certainly aren't helping things. Unless hard evidence emerges to show that Trifexis is definitely the cause of animal deaths, however, it's unlikely that those rumors will have much of an effect on the company. Instead, Lilly has to focus on getting its house in order and improving the quality (instead of the quantity) of drugs in its portfolio. If the company can't improve in a meaningful way then there may be further struggles ahead.
John Casteele has no position in any stocks mentioned. The Motley Fool recommends Johnson & Johnson. The Motley Fool owns shares of Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.