We are becoming increasingly impressed with Eli Lilly as the company boasts an enviable stable of new products that should power the company well into the next decade. Lilly is through the bulk of its patent trough, in our view, and its pipeline should set the company up for years of potentially uninterrupted revenue growth. Shares are not necessarily cheap, however.
By Alexander J. Poulos
Key Takeaways
Lilly is aggressively building its oncology portfolio, and we think a new suite of recently-approved products should help power growth into the next decade.
Lilly has opened the checkbook to acquire two additional novel compounds that underscore its desire to become a player in the oncology space.
We view Lilly’s appetite for deal making as an additional affirmation that 2018 will be a busy year on the M&A front by big pharma as they look to bolster their respective pipelines.
Oncology Aspirations
The primary therapeutic area of focus for Eli Lilly (LLY) has pivoted from its leadership position in diabetes towards the lucrative, yet fiercely competitive, oncology space. Lilly has established an initial toehold in oncology with Alimta, a chemotherapy agent combined with Cisplatin for the indication of non-small cell lung cancer. Alimta generated over $2 billion in worldwide sales in 2017, a blockbuster number, but sales declined 10% versus 2016’s tally as the effect of new entrants most notably Keytruda has lessened demand for Alimta (sales were up 2% in the first quarter of 2018, however).
Lilly remains aggressive in defending the patent on Alimta which has lapsed, but a clever technique known as the vitamin regimen patent should ensure worldwide sales of Alimta through 2021 and US exclusivity through 2022, in our view. We are not fans of these techniques as we view them as forestalling the inevitable, and our focus remains on the vitality of the underlying product pipeline. In any case, in what we view as a stroke of good fortune for Lilly a district court judge recently upheld the patent, thus ensuring the patent estate well into 2022—a distinct win for Lilly.
Lartruvo
Lilly’s attempt to broaden its oncology pipeline is beginning to take shape as recently approved Lartuvo is a notable step in building an impressive suite of oncology products. Lartuvo is approved in combination with Doxorubicin to treat Sarcoma which is defined as soft tissue cancer that can affect a wide range of areas such as muscle, tendons, fat and blood vessels to name a few areas. We do not expect Lartuvo to morph into the next Keytruda as the overall estimated target market is approximately 12,000 patients. Instead, we view the treatment as a critical differentiator in Lilly’s oncology aspirations. The FDA granted Lartruvo marketing approval in October of 2016 with full-year sales in 2017 tallying $203 million, an impressive start thus far.
Portrazza
Lilly attempted to build on its lung cancer portfolio with the approval of Portrazza for squamous non-small cell lung cancer. The product was granted orphan drug status underscoring the narrow patient population for this treatment. Portrazza is administered in combination with Gemcitabine and Cisplatin, but the combination is becoming less relevant as new advances are being made. Portrazza generated sales of $10.3 million in 2017 versus sales of $14.8 million in 2016, underscoring the declining market for this treatment as a new innovation has disrupted Portrazza’s revenue potential.
Verzenio
Lilly is attempting to muscle into the lucrative breast cancer market with its novel CDK4&6 inhibitor Verzenio. Lilly is late to the game, however, with Pfizer’s (PFE) Ibrance well establishing its dominance thus far by posting sales of over $3 billion in 2018—the star performer of Pfizer’s Innovative Health division which houses its newest molecules. Verzenio was originally granted second-line status which limits the overall uptake of the product as witnessed by a modest $21 million in 2017 sales. Lilly was able to win first-line approval in February of 2018, an event that may help level the playing field.
From our view, the side-effect profile will go a long way in determining who will carve up the largest slice of the overall market with Pfizer possessing a clear advantage. Verzenio causes a greater degree of diarrhea than Ibrance, but it does not cause as much Neutropenia (a decrease in white bold cell count which can make the patient more prone to opportunistic infections).
The basic worldwide patent estate of Ibrance will lapse in 2023, thus opening a unique opportunity for Lilly to fill the void, as Pfizer will cut back marketing the product as the patent lapse comes closer to fruition. We view Verzenio as an important asset for Lilly going forward.
Lilly Goes on a Buying Spree
Underscoring the view that 2018 will go down as the year big pharma (XLV) will finally open the checkbook and aggressively purchase new assets, Lilly has stepped into the fold on May 10, with an aggressive bid of $1.6 billion for ARMO Biosciences. ARMO Biosciences’ lead asset is Pegilodecakin a cytokine IL-10 that is currently in phase 3 trials for the treatment of pancreatic cancer.
Pegilodecakin targets the CD8-T cell for activation with the underlying goal of infiltrating the tumor and hastening the tumor’s demise. Thus far, the results shared by AMRO indicate its lead product Pegilodecakin in combination with FOLFOX (fluorouracil (5-FU), leucovorin, and oxaliplatin) demonstrated 74% of patients in the trial did not experience additional tumor growth with 43% showing prolonged survival.
We would like to caution about the sample size of 21 patients, however, and Lilly is now funding a much larger trial with active enrollment underway. A larger sample size could yield less impressive stats, which may negatively impact the overall commercial potential of the product. In any case, we applaud Lilly’s aggressive move in staking out a position in pancreatic cancer. If the product can duplicate its current results, the price paid by Lilly will seem like a real bargain.
Lilly quickly followed up the AMRO announcement with a smaller deal, this time with an upfront payment of $110 million for AurKa Pharma. AurKa’s lead compound is AK-01, a molecule originally developed and sold by Lilly. Lilly reacquired the asset as it looks to develop the compound to treat a wide range of solid tumors.
We can’t get excited about the asset at the present time as the molecule remains in phase 1 with a long road ahead of it. AurKa Pharma can reap a total of $465 million if full regulatory and sales milestones are met, and we’re viewing the deal as an attempt to bolster Lilly’s early-stage oncology clinical pipeline.
Conclusion
We remain impressed with the progress Lilly has made in differentiating its product lineup. Pharma giants such as Lilly should never be viewed in the same vein as the high growth biotech sector (IBB), as the appeal of big pharma is stable growth coupled with a generous dividend. On this score, we rate Lilly very highly as evidenced by its strong dividend coverage metrics. Lilly registers an impressive 1.9 on the Dividend Cushion ratio, which underscores our belief the company will have little trouble in maintaining and paying its dividend or the foreseeable future. Such a metric should be watched closely in any case, ans it does change over time. As Lilly’s new product suite matures, we expect Lilly to use a portion of the proceeds to reward shareholders with generous dividend hikes. Shares yield 2.6% at the time of this writing, but aren’t necessarily cheap.
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Heathcare and biotech contributor Alexander J. Poulos does not own shares of companies mentioned in this article. Some of the companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.