Eli Lilly and Company (LLY) recently provided an insight into its research and development (R&D) plans and mid-term guidance at a meeting with the investment community. The company outlined its plans for combating the impact of the patent expiration of several key products. About $7 billion of revenues will be lost to generic competition due to the loss of exclusivity of products like Zyprexa, Cymbalta, Evista, and Gemzar.
Pipeline to Drive Long-Term Growth
Eli Lilly intends to continue spending significantly on its pipeline. The company expects to spend about 25% of revenues on its R&D efforts. Eli Lilly currently has about 70 candidates in its pipeline including 33 candidates in phase II and III stages of development. The company expects to launch several candidates through 2017 and is on track to launch 10 new molecular entities by year end.
The company’s key focus areas include diabetes, bio-medicines and oncology. Key candidates in the diabetes pipeline include Bydureon (approved in the EU; response to the US Food and Drug Administration’s complete response letter slated for the second half of 2011), empagliflozin (potential to launch in 2014), dulaglutide ( regulatory submission potentially in 2013), and basal insulins (phase III studies scheduled to commence in the second half of 2011).
Eli Lilly’s bio-medicines (neuroscience, cardiovascular, urology, autoimmune disease, and bone-muscle-joint therapeutic areas) pipeline boasts of candidates like solanezumab (Alzheimer's disease – phase III studies expected to complete in the first half of 2012), mGlu 2/3 (schizophrenia – in phase II and III development), NERI (depression – phase III studies ongoing), anti-BAFF monoclonal antibody (rheumatoid arthritis and lupus – phase III), anti -IL-17 monoclonal antibody (psoriasis, rheumatoid arthritis, psoriatic arthritis and ankylosing spondylitis), and JAK1 / JAK2 inhibitor (potential oral therapy for rheumatoid arthritis and other autoimmune diseases). The JAK1 / JAK2 inhibitor is being developed in collaboration with Incyte Corporation (INCY).
Eli Lilly’s oncology pipeline consists of 13 candidates in phase II and III stages of development. Key late-stage candidates include ramucirumab (different tumor types – first regulatory filing expected by 2014), necitumumab ( squamous cell non-small cell lung cancer – phase III results expected in mid-2013), and enzastaurin (diffuse large B-cell lymphoma with US regulatory submission expected in late-2013).
Emerging Markets, Japan and Elanco Key to Near-Term Growth
Besides investing heavily in its pipeline, Eli Lilly is looking towards emerging markets, Japan and Elanco Animal Health to drive growth. The company is working on increasing its presence in countries like China, Russia, Brazil, Mexico, South Korea, and Turkey. China remains a high-priority area for the company with Eli Lilly expecting sales from China to reach $1 billion by 2015.
Mid-Term Guidance Maintained
Eli Lilly maintained its medium-term (covering the major patent expiry years of 2011-2014) financial outlook – the company expects annual revenues of at least $20 billion, net income of $3 billion and operating cash flow of $4 billion. 2010 revenues were $23 billion.
While almost $7 billion of revenues will be exposed to generic competition, the company believes Japan, Elanco, and emerging markets could contribute more than $4 billion to revenues by 2015. Meanwhile, products like Alimta, Cialis, Forteo and the diabetes care portfolio are expected to provide incremental revenues.
Eli Lilly does not expect to enter into the generics market or diversify outside its core business area. Besides this, the company also does not expect to pursue any large-scale merger or acquisition. The company remains on track to achieve savings of $1 billion through its cost-cutting efforts by the end of 2011.
Neutral on Eli Lilly
We currently have a Neutral recommendation on Eli Lilly, which carries a Zacks #3 Rank (short-term Hold rating). Eli Lilly will enter a tough period in late 2011 with the loss of exclusivity on Zyprexa. Barring significant cost-cutting efforts or additional revenue catalysts, 2013 will be the beginning of a very challenging period with Cymbalta losing US patent protection. On the flip side, strong performance of the diabetes business, the ramp of Effient and upside from the ImClone deal should offer some downside support. We are also pleased to see Eli Lilly pursuing small acquisitions and in-licensing deals to boost its pipeline. Pipeline execution remains very important for the company’s long-term growth prospects.
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