Lilly Investing In Future, But Staying Out Of The Biotech 'Bubble'

Firm exceeds expectations in the second quarter, but is content to rely on in-house prospects for growth and take a measured approach to deal-making rather than jumping into the fray for the “hot property of the moment.”

Eli Lilly & Co. CEO John Lechleiter said the company, which exceeded expectations in the second quarter, will continue to grow through investments in pipeline programs and new partnerships, but Lillywon't overpay for assets during the current biotech "bubble."

During the Indianapolis, Indiana-based big pharma's second quarter earnings call on July 23, Lechleiter said that Lilly is focused on early-stage licensing and acquisition deals, and select later-stage assets if they meet certain criteria, but the company is "not anxious to go pay inflated prices for the hot property of the moment." Lilly is confident enough about its own research and development to invest internally rather than pursue high-priced deals.

"There's a bit of a bubble right now with respect to valuations on some of those smaller companies in biotech and I think it's a better use of our shareholders' equity to focus on our internal efforts, which are quite strong," Lechleiter said.

Lilly offered proof of its enthusiasm for early-stage investments by announcing alongside its second quarter earnings report that the company will expand Lilly Biotechnology Center in San Diego by 175,000 square feet, adding up to 130 jobs – a 70% increase in the facility's staff. Lilly will recruit specialists in biotech, chemistry, immunology and immunological clinical development to conduct drug discovery work and forge additional partnerships with local research institutions.

Lilly has been in San Diego since 2004 when it completed the $400 million acquisition of Applied Molecular Evolution Inc. The pharma company's drug discovery site was established in 2009 near the University of California, San Diego and the Sanford Burnham Prebys Medical Discovery Institute, among other research institutions. Perhaps with the San Diego site expansion in mind, Lilly signed an agreement with Sanford Burnham during the second quarter to discover and develop immunological therapies.

One of the company's more recent R&D investments, the cancer drug Cyramza (ramucirumab), contributed to Lilly's second quarter earnings surprise with $87.7 million in sales for three FDA-approved indications versus the same period in 2014, when the drug launched in only one indication and generated $13.7 million in sales.

Revenue Rising

Lilly reported $4.9 billion in revenue for the second quarter, which was 1% higher than the same period in 2014 on a GAAP basis, but 4% lower on a non-GAAP basis. Second quarter GAAP earnings per share (EPS) fell from $0.68 in 2014 to $0.56 in 2015, but non-GAAP EPS soared 22% from $0.74 to $0.90. Analyst consensus for the second quarter was $4.89 billion in revenue and $0.73 in non-GAAP EPS.

The company attributed its positive April-through-June performance to revenue added through the acquisition of Novartis Animal Health and the addition of new products to Lilly's portfolio as well as higher prices, higher sales volume or both for the company's marketed drugs. Offsetting those gains were foreign currency exchange issues that lowered the value of ex-U.S. sales, generic competition for two major products and lower sales volumes for some drugs.

Sales totals declined for eight out of 12 key pharma products in the second quarter, while four drugs had stable or increased sales. Generic competition caused second quarter revenue from the depression drug Cymbalta (duloxetine) to fall 32% from $401.3 to $274.1m year-over-year. Also, revenue for the osteoporosis drug Evista (raloxifene) dropped 45% from $108.3 million to $59.7 million.

Those declines were offset by a 40% increase in Lilly's animal health business from $601.2 million to $840.8 million, following the company's $5.4 billion acquisition of Novartis Animal Health.

Second quarter sales declined or were essentially unchanged for Lilly's top three pharma products. Sales for the diabetes drug Humalog (insulin lispro injection) and the cancer treatment Alimta (pemetrexed) each fell 7% to $654.3 million and $664.3 million, respectively, while the erectile dysfunction drug Cialis (tadalafil) was steady at $567.9 million.

In-House Growth Prospects

Cyramza is one of Lilly's great hopes for revenue growth. The vascular endothelial growth receptor 2 (VEGF2) antagonist won FDA approval to treat advanced gastric and metastatic non-small cell lung cancer (NSCLC) in 2014 and FDA granted approval to treat metastatic colorectal cancer in April.

Lilly also won approval for Cyramza this year in Japan for second-line gastric cancer and the company is awaiting Japanese approval for the drug in colorectal cancer. Applications also are pending in the EU for NSCLC and colorectal cancer. Three Phase III clinical trials began earlier this year to expand Cyramza's label in first-line gastric cancer and NSCLC as well as second-line urothelial cancer. Lilly also plans to start a fourth Phase III trial in hepatocellular cancer this year.

Other Phase III initiations in 2015 include a cluster headache study for the CGRP-targeting monoclonal antibody LY2951742 following positive Phase II results, a pain study for the biologic tanezumab in partnership with Pfizer, and olaratumab for soft tissue sarcoma.

Lilly presented new data for its closely-watched Alzheimer's therapy solanezumab on July 22 that showed a 34% slowing of disease progression in a large extension study for patients who received the biologic in the Phase III EXPEDITION and EXPEDITION2 trials versus patients originally treated with placebo. Data from the ongoing EXPEDITION3 clinical trial, which includes a similar delayed-treatment analysis, are needed to determine whether the potentially disease-modifying effect seen in the extension study is repeated and has an impact on Alzheimer's patients' daily lives.

Other Phase III data that Lilly is expected to reveal in 2015 include results from a cardiovascular outcomes trial for the diabetes drug Jardiance (empagliflozin) and more detailed results in psoriatic arthritis for the interleukin-17 (IL-17) inhibitor ixekizumab.

Lilly expects to submit regulatory applications for at least four more indications for pipeline programs this year: Glyxambi (empagliflozin/linagliptin) for type 2 diabetes in the EU, ixekizumab for psoriasis and psoriatic arthritis in Japan, the JAK1 and JAK2 inhibitor baricitinib in rheumatoid arthritis, and olaratumab for soft tissue sarcoma in the U.S.

An FDA decision on necitumumab for squamous NSCLC is imminent after a partially positive FDA Oncologic Drugs Advisory Committee review on July 9.

"We're pleased with the progress that we've made in the past few years, and so far this year, and we believe this progress solidifies our near- to medium-term growth prospects," Lilly Chief Financial Officer Derica Rice said during the call.