Another fail for Lilly’s labs – time to make a deal?

Lilly’s 2015 bubble has burst with the termination of the evacetrapib programme. Its elderly product line and relatively sparse pipeline make its outlook the worst among its big pharma peers, and a big miss on a once-promising heart-disease pill does nothing to improve this.

Lilly should perhaps be praised for its investment in home-grown science at a time in which innovation is left to smaller players. But the evacetrapib disaster yesterday and the perplexing data offered by Alzheimer’s project solanezumab suggest this is a dry hole. It would do well to remember that its big growth driver, Cyramza, came through its last biopharma M&A transaction, and consider opening its chequebook again (see tables below).

R&D and then what?

On numerous innovation metrics Lilly trails the pack. For example, product freshness, a measure of the share of sales derived from older products, shows that just 9% of Lilly's forecast 2015 sales come from drugs approved in the last decade – nearly all of that in the combined sales of Effient, Cyramza and Trulicity. Only the last of these three was invented in Lilly’s labs.

Under a forecast that assumes success for evacetrapib and solanezumab, that number would grow to 43% in 2020. Removing the $978m for solanezumab and the $612m for evacetrapib from Lilly’s forecast cuts the share of under-10-year-old drugs in 2020 to 35%.

FDA approvals for new molecular entities, another way of looking at Lilly’s R&D productivity, look a little bit better – nine since 2010, one ahead of Roche and just a little behind the peer group median of 11. But in terms of sales generated by these NME approvals Lilly again is nearly rock bottom: $2.9bn, just ahead of laggard AbbVie at $2.3bn, though in its defence AbbVie has only been operating for just under three years.

Another way of looking at R&D productivity would be spending, although this is not necessarily a fair analysis as Lilly at an $88bn market capitalisation has less capacity than Pfizer at $204bn. Nevertheless, in 2014 Lilly ranked ahead of just AbbVie and Bristol-Myers Squibb – similar-sized companies – in total human biopharma R&D outlays at $4.4bn, but still behind another similarly-sized group in AstraZeneca, which spent $4.9bn.

Where the growth is

Aside from Cyramza and Trulicity, what could come along to help Lilly in the next five years? Baricitinib has returned positive phase III data, although it will be competing in the increasingly crowded rheumatoid arthritis space, while ixekizumab, a psoriasis treatment, is due an FDA decision early next year; then there is the lung cancer agent necitumumab. These three could account for $2.1bn in sales in 2020.

It might help that Jardiance, the Boehringer Ingelheim diabetes drug that Lilly co-promotes, is the first such agent to show a cardioprotective benefit, causing analysts to raise sales expectations. Indeed, diabetes in general is the foundation on which Lilly can stand somewhat confidently, as its insulin franchise of Humalog and Humulin is standing firm despite patent expiries, while Lantus biosimilar Basaglar could be generating hundreds of millions of dollars of revenue after being launched in late 2016.

The mystery is solanezumab. This beta amyloid-blocking agent has failed once in phase III, and the company has recommitted itself to producing something, anything, that resembles a preservation of cognitive and functional capacity for Alzheimer’s disease patients. The payoff could be a substantial $1bn in sales by 2020; the downside is that the phase III programme is topping 6,000 patients, closing in on half of the evacetrapib totals.

That is a significant amount of growth to be generated from what can generously be called a high-risk bet. This is why Lilly might need to think seriously about business development and the need to buy-in near-term R&D opportunities.

On animal health, the Indiana-based group has been busy, clinching four transactions in four years. But it has gone quiet in human therapeutics since its last big signing, that of ImClone Systems for $6.5bn in 2008 – a deal initially thought to be risky but which brought with it Cyramza and necitumumab.

Identifying the next ImClone will not be easy, to be sure – although many high-flying biotechs are slightly cheaper than they were six months ago (One deal rules them all in the third quarter, October 13, 2015).

Of course, Lilly has no shortage of early-stage projects, publicising more than 40 in phase I or II. The problem is that very few are advanced enough for investors or analysts to assign them any value. Lilly is approaching a slow-growth period. Evacetrapib cannot help, and solanezumab very well might not; it could do with looking outside again.

To contact the writer of this story email Jonathan Gardner in London at [email protected] or follow @ByJonGardner on Twitter

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