I guess this fits here - WSJ
Eli Lilly Seeks
To Round Out
Drug Portfolio
By WORTH CIVILS
December 13, 2006
Just as investors try to diversify their portfolios to avoid overexposure to one stock or sector, Eli Lilly is trying to expand its portfolio of drugs to reduce its exposure to one blockbuster. Lilly, the seventh largest drug maker in the world by sales, is taking several steps in this direction: It is taking full ownership of the impotence drug Cialis by acquiring marketing partner Icos, and is expanding the uses of its other drugs, such as the antidepressant Cymbalta. Indianapolis-based Lilly is also developing new drugs like the blood thinner prasugrel, which it hopes can rival Bristol-Myers Squibb's and Sanofi-Aventis's popular Plavix. No matter its course, Lilly can't escape the fact that the patent on its $4 billion-a-year antipsychotic drug Zyprexa will expire in 2011, at the latest. Zyprexa sales have already started to slow amid increased competition, and Lilly's weaker-than-expected outlook for 2007 sent the stock down 1.6% last Thursday. It has yet to rebound, with shares finishing eight cents lower at $53.90 on Tuesday. (Ratings and disclosures follow)
The Bull Case
Cialis Buyout: Lilly will reap the full benefits of Viagra rival Cialis after agreeing to purchase Icos for $2.1 billion. The move should bring an extra $850 million in annual sales, said Kevin Scotcher at HSBC, who expects Lilly's overall sales to increase 12% to $17.5 billion in 2007. Some Icos shareholders oppose the deal, saying the $32-a-share offer is too low, supported by proxy adviser Institutional Shareholder Services. Lilly Chief Executive Sidney Tuarel told analysts and investors recently that ISS's analysis is "flawed" because it compares Icos with larger firms that have more drugs. But Lilly has room to be flexible and could pay more for Icos, said Catherine Arnold at Credit Suisse, and the deal would "still have positive earnings effects." Cialis has 25% of the U.S. market for impotence drugs, compared with 58% for Pfizer's Viagra. But Cialis is gaining ground, especially overseas, and Lilly predicts it will take the top spot outside the U.S. next year as world-wide sales top $1 billion a year.
In the Pipeline: Lilly aims to double the number of its drugs coming to market. It is on pace to launch 14 products this decade, or at least one a year through 2010, considered slightly above average. Lilly has about 30 products in development, including new treatments for Alzheimer's, schizophrenia and brain cancer. And several of its existing drugs are being considered for new uses. It's working on an inhalable version of its insulin treatment for diabetes to compete with Pfizer's Exubera; broader use of its osteoporosis drug Evista to reduce the risk of breast cancer; and use of Cymbalta to treat fibromyalgia and general anxiety disorder. Already, "Cymbalta has shown strong market-share gains in the U.S.," wrote Mr. Scotcher, who expects sales of the drug to increase 35% to $1.55 billion next year. If the fibromyalgia treatment is approved, he estimates Cymbalta revenue could reach $3.35 billion by 2011.
Replacing Zyprexa: Lilly's biggest new-drug bet may be on its blood thinner prasugrel, which would compete with Plavix. Lilly also hopes the drug will help offset lost sales from the 2011 patent expiration of Zyprexa, its top-seller. Studies of prasugrel, which are in late-stage trials, suggest it may be faster-working and more consistent than Plavix and thus "superior" to its rival, wrote Albert Rauch at A.G. Edwards. Lilly is expected to submit prasugrel to the Food and Drug Administration for approval in late 2007. "We don't expect prasugrel to turn profitable before 2010, but we believe it will be an important future contributor," Ms. Arnold wrote. "If successful, it will allow Lilly to weather the loss of brand exclusivity for the oral form of Zyprexa in 2011." What's more, Zyprexa depot -- Lilly's injectable one-month dose that is still being tested -- is patent protected until 2018. "This could suggest the loss of Zyprexa is not as severe as many believe," said Ms. Arnold, who called Zyprexa depot "very important to Lilly's longer-term growth."
The Bear Case
Lowball Outlook: Lilly recently gave earnings guidance1 for 2007 well below Wall Street's consensus estimate. Its stock fell 1.6% on the news. Prudential Equity Group's Tim Anderson called the outlook "disappointing." Lilly could simply be setting conservative goals under a new finance chief, he said, but, "alternatively, it could reflect the company's supposition that it has run into a price ceiling, especially at a time when further big price increases are likely to be scrutinized heavily by watchdog groups under the new Congress." Democrats are pushing to reduce drug prices and make FDA approval tougher. Lilly also said it planned to boost spending on sales and marketing, further worrying analysts. "[W]hile competitors are paring back their respective sales forces, Lilly actually announced an increase," noted analyst Anthony Butler at Lehman Brothers. "Is the arms race slowing or accelerating?"
Risky Bet: Lilly could be too dependent on the success of prasugrel. Mr. Anderson said the drug appears to create a greater risk than Plavix of causing bleeding in patients, a potential side effect since blood thinners inhibit clotting. The drug faces greater scrutiny and a tougher environment for clinical trials in light of recent disappointments from Nuvelo and Bayer AG, whose jointly developed blood thinner failed to meet targets in late-stage tests, and Pfizer's recent decision2 to stop developing the good-cholesterol drug torcetrapib. Prasugrel is in "a discomforting situation," wrote J.P. Morgan's Chris Shibutani. Even in the best case, the drug "will not cover the gaping hole left by Zyprexa," wrote Jami Rubin at Morgan Stanley, noting that the end of Zyprexa's patent protection will cost the company $1 billion in net income in 2012, not even half of which will be recovered by prasugrel. Lilly also will have to split prasugrel profits with Japanese partner Daiichi Sankyo, making the drug even "less of a long-term earnings driver for Lilly," Ms. Rubin wrote.
Zyprexa Zap: Analysts note that sales of Zyprexa are already declining ahead of its patent expiration, which could occur sooner than 2011. Sales of Zyprexa fell to $4.2 billion in 2005 from $4.4 billion in 2004 and are expected to be flat this year. "Zyprexa … trends have been under pressure in the U.S. from increased competition," including Bristol's Abilify, said George Grofik at Citigroup. He warned that Wyeth's bifeprunox, expected to enter the market in about a year, will only put more pressure on Zyprexa. Martha Freitag at Argus Research cites a looming battle with Johnson & Johnson's antipsychotic paliperidone, which is still awaiting FDA approval. Lilly also faces several legal challenges over Zyprexa. It settled a class-action suit in 2005 over allegations the drug contributed to high blood sugar and diabetes, taking a $1.1 billion charge, but still faces other cases not covered by the settlement. That same year, Lilly received a favorable ruling in a lawsuit filed by several generic-drug makers challenging its patent expiration on Zyprexa, but an appeal is pending. A loss could end Zyprexa's protection before 2011.
Write to Worth Civils at worth.civils@wsj.com3
Analyst Ratings
Brokerage Firm Stock Rating 52-Week Price Target Last Update
Goldman Sachs Buy $64 Dec. 7
Banc of America Securities Buy $64 Dec. 7
Credit Suisse Outperform $63 Dec. 8
A.G. Edwards Buy $61 Dec. 7
HSBC Overweight $60.75 Dec. 6
Lehman Brothers Equal-weight $63 Dec. 7
Standard & Poor's Hold $62 Dec. 9
J.P. Morgan Neutral n/a Dec. 7
UBS Neutral $60 Dec. 8
Citigroup Hold $60 Dec. 7
Morgan Stanley Equal-weight $60 Dec. 7
Prudential Equity Group Neutral Weight $59 Dec. 8 |
