TOP CONTRIBUTORS

William Raasch

Mark Chou

Dan Pan

LLY AT A GLANCE

P/E ► -178   EV/EBITDA ► 24.0 VERY HIGH ROA ► 0.2% AVG ROE ► -1.8% AVG Debt to Equity ► 1.74 AVG Current Ratio ► 1.95 AVG Interest Coverage Ratio ► 4.33 AVG

 

 

 

 

 

 

Eli Lilly and Company (NYSE: LLY) is the seventh largest pharmaceutical company with total sales of $20 billion, of which more than a quarter came from Zyprexa, a schizophrenia and bipolar disorder drug (see Antipsychotic Drug Market).^[1][2] Although the patent for Zyprexa will expire in 2011, Eli Lilly has one of the youngest product portfolios in the industry -- the company has $6.64 dollars coming from new products (those launched within the last five years) for every dollar lost from patent-expiring ones, compared to an industry average of only 77 cents.^[3]

Lilly's most promising pipeline products are Effient (prasugrel), a blood-thinner, and Byetta LAR, a long-acting-release version of the diabetes drug Byetta. Compared to Sanofi-Aventis and Bristol-Myers Squibb's Plavix, Effient is more effective at reducing heart attacks but also increases the risk of major bleeding, but for a net benefit.^[4] Effient is under priority review by the FDA.^[4] Byetta's biggest advantage over competitors is that it is just as effective but causes weight loss instead of gain, and there are indications that the long-acting version may be even more effective.^[5]

2008 sales grew by 9.4 percent to $20.4 billion, and was mainly driven by a 28% growth in the depression and pain-management drug Cymbalta and 18% growth in Humalog.^[2]

Corporate Overview

Major Products

Eli Lilly's top eight products have each generated net sales of more than $1 billion for 2008.^[2]

Eli Lilly 2007 product sales^[2]

• Zyprexa (23% of 2008 sales), Eli Lilly's best-selling product, is in the antipsychotic drug market for the treatment of schizophrenia, bipolar disorder, and other psychological disorders. It has also been used off-label for depression and dementia.^[6] A 2005 study showed that Zyprexa was the most effective of its class, but causes significant weight gain -- 30 percent of patients gained more than 22 pounds after a year on the drug -- which leads to an increased risk for diabetes.^[7][6] Since 2005, Eli Lilly has spent $1.61 billion to settle 31,200 lawsuits from patients who claimed that Zyprexa caused diabetes or other illnesses.^[8] The patent for the drug expires in 2011.^[9]

• Cymbalta (13% of 2008 sales) is a treatment for depression, anxiety, and pain management for diabetics (see Antidepressant Drug Market). Sales of the drug grew 60% in 2007 to $2.1 billion due to expansions into new indications, making it Lilly's fastest growing and second largest product. The product's patent expires in 2013. ^[2]

• Humalog (8.5% of 2008 sales) is an insulin analog used for managing diabetes.

• Gemzar (8.4% of 2008 sales) is a chemotherapy drug for lung cancer, pancreatic cancer, and breast cancer. Gemzar mimics a DNA building block, preventing DNA replication and tumor growth.^[10] Like many other chemotherapy drugs, this also stops the division of healthy cells, leading to severe side effects. Gemzar's patent is set to expire in November of 2010, however, as Lilly's method-of-use patent extension through 2013 was invalidated. ^[11]

• Cialis (7.1% of 2008 sales) is the newest and longest-lasting erectile dysfunction drug on the market.

• Alimta (5.7% of 2008 sales) is a lung and chest cancer drug.

• Evista (5.3% of 2008 sales) is an osteoporosis drug only approved for postmenopausal women.

• Humulin (5.3% of 2008 sales) is another insulin analog used for managing diabetes.

Lilly's animal health division operates independently of its main pharmaceutical business and had sales of $1.09 billion in 2007.^[2]

Upcoming drugs

• Forteo is another osteoporosis drug that is approaching blockbuster status, growing 10% to $779 million in 2008.^[2] Unlike most osteoporosis drugs on the market, which only inhibit bone reabsorbtion, Forteo also promotes new bone formation.^[12] The drug is usually reserved for advanced cases of osteoporosis since it requires expensive daily injections.^[7] Its approval was expanded in July, 2009, to extend to patients undergoing systemic glucocorticoid therapy. ^[13]

• Effient is a blood thinner that Eli Lilly is jointly developing with Daiichi Sankyo Co., a Japanese pharmaceutical company.^[14] A 2007 study compared it to the blood thinner Plavix by Sanofi-Aventis and Bristol-Myers Squibb and showed that Effient reduced heart attacks but increased risk of major bleeding -- for every 1000 patients on Effient, there were 23 less heart attacks but 6 more cases of major bleeding.^[4] Effient is under priority review by the FDA.^[4]

• Byetta belongs to a new class of diabetes drugs that is based on a compound from the saliva of the Gila Monster and is jointly developed by Eli Lilly and Amylin Pharmaceuticals. As the first and only drug of its kind on the market, Byetta increases the natural production of insulin, slows digestion, and reduces appetite, which all work to lower blood glucose.^[5] Byetta's biggest advantage is that it is associated with weight loss, unlike most other diabetes drugs, which cause weight ; however, it is more likely to cause stomach problems and requires an injection.^[5] Byetta sales grew by 16% to $751.4 million in 2008.^[2] Eli Lilly, Amylin, and Alkermes are developing a long-acting-release (LAR) version of Byetta that is more effective and requires fewer injections, which is currently under Phase III trials and is expected to hit the market in 2009-2010.^[5][7]

Business and Financial Metrics

2008 growth of 9% to $20.3 billion was mainly driven by increases of 28% in Cymbalta sales and 18% in Humalog sales. Overall, 5% of the sales increase was due to increased volume, 3% due to favorable foreign exchange rates, and 2% due to price hikes. The company's net earnings was ($2.1 billion), largely due to the $4.7 billion acquisition of ImClone. ^[2][15]

Q2 2009 earnings for Eli Lilly beat projections for the second straight quarter. Sales grew 3% to $5.29B from $5.15B and net income grew 21% to $1.16B from $959M the year before. The company cited better margins due to a stronger dollar as partially responsible, and major drugs Cymbalta and Alimta also had particularly strong sales on the quarter. ^[16]

In Q3 2009, Eli Lilly reported revenue of $5.56 billion , a growth of 7% from the same quarter of the previous year. Gross margin increased 3.3 percentage points to 81.1%, resulting in an operating income of $1.14 billion and a net income of $942 million.^[17] These earnings, which totaled $1.20 per share, beat Wall Street projections of $1.02 per share. Total revenue also beat projections, which averaged $250 million less, or $5.41 billion.^[18] Despite the higher-than-projected financials, Eli Lilly shares fell nearly 3% amid worries about upcoming patent expirations.^[19]

In December 2009, Eli Lilly released a forecast of its 2010 earnings, at between $4.65 amd $4.85 per share for a growth of 5.2 to 9.7% over 2009. These results fell in line with Wall Street estimates, however, share dropped 4.4% on the new amid concerns over Eli Lily's coming patent expirations. These expirations, which include patents for schizophrenia drug Zyprexa, antidepressant Cymbalta, cancer drug Gemzar and osteoporosis treatment Evista, will threaten the bottom line of the drug company in years to come. Eli Lilly forecasted revenues of at least $20 billion from 2012 to 2014, with earnings of at least $3 billion. While these numbers were used as a baseline minimum, the forecast fell below analyst estimates.^[20]

Eli Lilly Financial Metrics^[21][22]

Trends and Forces

The Expiration of Zyprexa Patent Exclusivity in 2011

On April 23, 2011, Eli Lilly's most profitable drug, Zyprexa, will lose its patent protection, exposing it to generic competition.^[23] Zyprexa sales ($4.7 billion) constituted 23% of Eli Lilly's total sales for 2008,^[24] and loss of patent exclusivity will cut into market share and lower prices for the drug. As Eli Lilly prepares for this revenue hit, the company announced that it cut 13.5% of its workforce, or 5,500 jobs in an effort to cut annual costs by $5 billion.^[25] Eli Lilly's ability to cope with the loss of its major revenue generator will significantly impact the company's value.

Pipeline Risks

For more detailed information on the FDA approval process, see also Clinical trials.

Lilly's two most promising drugs in development are Effient, a blood thinner that will compete with Bristol-Myers/Sanofi's Plavix, and Byetta LAR, a long-acting-release version of its existing diabetes drug Byetta.

Developing a new drug is a time-consuming and costly endeavor. Hundreds of thousands of candidate compounds must be screened to identify a handful of potential drugs, and even fewer of these candidate drugs are found to be effective at treating a disease. The drug must then pass strict safety standards in several series of clinical trials. The entire process of developing a new drug and bringing it to the market takes up to 10 to 15 years and on average costs $800 million.^[26]

Young Product Portfolio

Eli Lilly has one of the youngest product portfolios in the industry -- the company has $6.64 dollars coming from new products (those launched within the last five years) for every dollar lost from patent-expiring ones, compared to an industry average of only 77 cents.^[3]

When a drug loses patent protection, generic brands of the drug can be made, breaking the monopoly that the brand-name drug originally possessed. Sales of the iconic antidepressant Prozac fell from peak sales of $2.8 billion in 2001 to a negligible amount (out of the company's annual reports) after its patent expired in 2001.^[27] The patent for Zyprexa, Lilly's best-selling drug, expires in 2011.^[9]

Generic Drug Competition

Eli Lilly, like all major pharmaceutical companies, constantly faces the threat of generic copies of its drug portfolio. When patents expire, generic copies can reduce the price of a drug to a mere fraction of the patented original. Even when patents still apply to its drugs, Eli Lilly must still for remain vigilant in looking for any generic competitors and incur legislative costs to enforce any patent breaches.

On December 4, 2008, Eli Lilly filed a case against two Indian companies, Aurobindo Pharma and Lupin, for patent violation of its antidepressant drug Cymbalta. The infringement case is Eli Lilly's sixth outstanding patent lawsuit in the US. ^[28]

Lawsuits

In January of 2009, Eli Lilly pleaded guilty to charges that it illegally marketed Zyprexa for treating dementia in the elderly, an unapproved use. The company will pay a record $1.42 billion in fines, which includes the largest criminal fines the U.S. government has ever imposed on a company. The case began in 2002 and concerned misleading marketing practices in 1999.^[29]

Competition

Zyprexa competes with Pfizer's Geodon, AstraZeneca's Seroquel, Johnson & Johnson's Risperdal, and Bristol-Myers Squibb's Abilify in the antipsychotics market. A studied showed Zyprexa to be most effective in its class,^[7] but the drug causes significant weight gain^[6] while Geodon does not.^[30]

Cymbalta competes with Forest Laboratories' Lexapro and Wyeth's Effexor in the antidepressant market, and Pfizer's Lyrica for diabetic neuropathy.^[7]

Evista and Forteo compete with Merck's Fosamax and Novartis's Zometa in the osteoporosis market.^[7] Amgen's Denosumab is a new contender in late stage clinical trials and may soon enter the market.

Gemzar competes with numerous chemotherapy agents, but is more tolerable than older drugs while retaining effectiveness.^[7]

Humalog competes with other insulin analogs made by Novo Nordisk and Sanofi-Aventis to treat diabetes.^[31] Insulin analogs mimic the role of natural insulin in regulating blood sugar and are generally all very similar in action.

Cialis competes with Pfizer's Viagra and Bayer's Levitra in the erectile dysfunction (ED) drug market. Cialis's primary competitive advantage is that it is effective for up to 36 hours on one dose, compared to the other drugs, which must be taken a short time before anticipated sexual activity.^[32]

Competition in the pharmaceutical industry lies mostly in specific drug markets. For example, a new diabetes drug is not going to have any effect on an existing cholesterol drug, no matter how successful it is. As a result, financial data on the pharmaceutical companies do not tell the whole story. Instead, it may be more appropriate to analyze Pfizer's competitors by each drug market (See section on Major Drugs and Industry Trends).

Note that Eli Lilly's net income is negative largely due to its acquisition of ImClone for $6.5 billion in October of 2008.^[33]

References

1. ↑ Fortune 500 2009: Industry: Pharmaceuticals.
2. ↑ ^{2.0 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8} LLY 2008 10-k pg. 21  
3. ↑ ^{3.0 3.1} Tough Projections for Big Pharmas: Drug Revenues Don't Look Promising.
4. ↑ ^{4.0 4.1 4.2 4.3} Lilly's Prasugrel Is Granted FDA Priority Review.
5. ↑ ^{5.0 5.1 5.2 5.3} Wikipedia:Byetta
6. ↑ ^{6.0 6.1 6.2} Wikipedia:Zyprexa
7. ↑ ^{7.0 7.1 7.2 7.3 7.4 7.5 7.6} Cowen and Company. Therapeutic Categories Outlook. March 2008.
8. ↑ LLY 2007 10-k pg. 19  
9. ↑ ^{9.0 9.1} LLY 2007 10-k pg. 13  
10. ↑ Wikipedia:Gemzar
11. ↑ [1]
12. ↑ Wikipedia:Forteo
13. ↑ [2]
14. ↑ Wikipedia:Prasugrel
15. ↑ LLY 2008 10-k pg. 24  
16. ↑ Trading Markets. "Eli Lilly Q2 net income up 21%." 24 July 2009.
17. ↑ Lilly Reports Solid Third-Quarter 2009 Results; Revises Full-Year 2009 EPS Guidance
18. ↑ Lilly profit tops Street view, but shares fall
19. ↑ Lilly profit tops Street view, but shares fall
20. ↑ Lilly suggests profit stumble after patent cliff
21. ↑ LLY 2007 10-k pg. 40  
22. ↑ LLY 2005 10-k pg. 42  
23. ↑ FDA Orange Book: Zyprexa
24. ↑ Eli Lilly 2008 10-K Annual Report, p.23
25. ↑ Lilly cutting 5,500 jobs before Zyprexa lapse
26. ↑ "2007 Pharmaceutical Industry Profile".
27. ↑ Eli Lilly: Life After Prozac.
28. ↑ TradingMarkets. "Eli Lilly files suit against Lupin, Aurobindo in US." 4 December 2008
29. ↑ http://www.bloomberg.com/apps/news?pid=conewsstory&refer=conews&tkr=LLY%3AUS&sid=aOgHFAH8vV98
30. ↑ Wikipedia:Geodon
31. ↑ Wikipedia:Insulin analogue
32. ↑ Wikipedia:Cialis
33. ↑ Lilly to Acquire ImClone Systems in $6.5 Billion Transaction