Pharmaceutical giants Pfizer Inc. (PFE) and Johnson & Johnson (JNJ) pulled the plug Aug. 6 on their joint development of a similar Alzheimer’s therapy, after that drug failed to show any benefit in two late-stage studies. Lilly has said it will release its findings by the end of September.
The stakes are high both for the 5.4 million people in the U.S. who have been diagnosed with Alzheimer’s and for Lilly. There are no medicines on the market that slow the progression of the disease, the most common form of dementia. If Lilly’s drug proves a success, treatments could begin as early as next year and the Indianapolis-based company could realize billions of dollars in revenue. Still, company executives have warned that a successful outcome for the drug, solanezumab, is a long shot.
“We’ve said all along that solanezumab was a pretty risky bet,” Derica Rice, Lilly’s chief financial officer, said at a Goldman Sachs investor conference in June.
Lilly could use a big win. It’s facing the loss of $7 billion in sales over the next five years from generic competition to its two best-selling medicines. Lilly has spent more than a decade and perhaps $1 billion or more studying the drug. Yet after Pfizer and J&J pulled out, investors give the Lilly drug a less than 20 percent chance of success. Meanwhile, newer treatments in development by other companies are still years away.
A failure would come as a major setback for the company. Lilly’s stock could drop by as much as 20 percent, wiping out $10 billion in market value, said Jeffrey Holford, an analyst with Jefferies Group Inc. in New York. It may also leave Lilly putting the bulk of its profit toward trying to maintain its dividend rather than investing in the company, he said in a telephone interview.
“They really don’t have many strategic options if their pipeline doesn’t work out,” Holford said. “They just have to hope that it’s going to happen.”
A positive finding may boost the shares as much as 35 percent and could transform the company, said Mark Schoenebaum, an analyst with ISI Group in New York. He says the odds of the drug getting sale approval are just 15 percent.
If the Lilly drug works “it would be euphoria, crazy party-time,” Schoenebaum said in a telephone interview. “It could be the biggest upside surprise in the history of the pharmaceutical and biotech industry.”
Still, Schoenebaum also said a happy outcome is unlikely.
“At least 90 percent of people give this a less than 50 percent chance of working,” Schoenebaum added.
After years of research and billions invested by nearly every major drug company, a cure or even a treatment to slow the progression of Alzheimer’s remains elusive. Little is known about what causes the disease and efforts to alter its course are littered with failures. In 2010, Lilly halted work on another Alzheimer’s drug in late-stage testing, and earlier this year Pfizer ended development of a drug called Dimebon after it failed to show a benefit.
The Pfizer-J&J drug that failed earlier this week, called bapineuzumab, and Lilly’s both target plaque that builds up in the brains of Alzheimer’s patients that some believe may be the cause of the disease. Lilly’s drug targets the floating plaque while the Pfizer-J&J drug goes after the deposits of plaque. There may be other factors as well, such as the over development of a protein called tau.
The only other therapy on the immediate horizon that has shown success against the illness in mid-stage human trials is Baxter International Inc. (BAX)’s Gammagard. The product is an expensive, relatively scarce treatment derived from donated blood plasma that replaces antibodies in people whose immune systems can’t protect them from infection. Results on whether it could slow or stop the mind-robbing disease in a final-stage study may be available next year.
Meanwhile, Lilly remains far more vulnerable to a failure on Alzheimer’s than its larger competitors. New York-based Pfizer, with a market value of $178 billion, and New Brunswick, New Jersey-based J&J, at $188 billion, have made big acquisitions to help them overcome generic competition to their top drugs. Yet much smaller Lilly, with a $50 billion market capitalization, has yet to do a large deal to shore up its pipeline of experimental drugs.
Lilly lost patent protection last year on its top-seller Zyprexa for schizophrenia and will lose the patent next year for its second-best seller, the anti-depressant Cymbalta. The drugs combined accounted for 36 percent of Lilly’s 2011 revenue. Lilly Chief Executive Officer John Lechleiter has said the company’s revenue will not be less than $20 billion and its profits will remain more than $3 billion through 2014.
Starting in 2015, sales and revenue will begin to grow again, he said on a conference call last month with analysts without specifying by how much. In 2011, Lilly brought in revenue of $24.3 billion with a profit of $4.35 billion.
Aside from its Alzheimer’s drug, Lilly has 11 other medicines in late-stage testing, six of which could eventually have more than $1 billion each in peak annual sales, Holford said. Sales from those drugs won’t come soon enough to offset the losses Lilly faces through at least 2017, he said.
Without the Alzheimer’s drug, the percentage of profit going to the dividend would rise to 79 percent in 2014 from 44 percent in 2011, much higher than the payout ratio of other drugmakers, he said. Lilly pays a quarterly dividend of 49 cents a share and had 1.16 billion shares outstanding as of the end of the second quarter.
Lilly’s drug could generate $7 billion in annual sales if it works in a broad population of Alzheimer’s patients, said Jami Rubin, an analyst at Goldman Sachs in New York.
In anticipation of study results on solanezumab, traders have been placing their bets in both directions. The number of outstanding Lilly options that traders use to bet on the stock have surged this year. The stock price has also gone up 18 percent in the past 12 months, outperforming the Standard & Poor’s 500, in anticipation of the results, said Schoenebaum.
“Drugs move drug stocks, and Alzheimer’s disease is the biggest therapeutic disease yet to be conquered,” said Rubin, who expects Lilly’s stock could go up as much as 30 percent on a positive finding or drop 14 percent on a negative result.
Lechleiter said investors should stick with Lilly because its pipeline of experimental drugs will get profits growing after 2014. He has also been cutting costs by firing 5,500 workers and trying to expand sales in Japan and emerging markets such as China where Lilly has a new research center.
“We know that ultimately, this is about getting back to growth and the only way to do that is build our pipeline, which we’ve done,” Lechleiter said in an interview earlier this year. “Those molecules, those future products, hopefully, will be the things that drive us back to growth as we come out of this period.”
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