Eli Lilly Bulls: How Will 2014 Treat You?
Oct 29 2013, 10:08 | about: LLY, includes: BMY, MRK, RHHBY BOOK
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. Fusion Research is a team of equity analysts. This article was written by Satya Prakash, one of our research analysts. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article. (More...)
In our previous article on Eli Lilly (LLY), we discussed the six-month patent extension for "Cymbalta", the blockbuster drug used for treatment of major depressive disorder, or MDD. Cymbalta generated revenue of $5 billion last year and its patent will be expire in December 2013. Evista, another drug of Eli Lilly that is used for preventing and treating osteoporosis in women after menopause, will be losing its patent in March 2014. These two drugs contribute nearly 26% of Lilly's revenue and their patent expiry may hamper its 2014 sales and earnings.
However, we expect Lilly's strong presence in oncology, endocrinology, and cardiovascular markets with drugs including Alimta, Evista, Humalog, Erbitux, and Cialis will drive its earnings in the future. The positive result for its trial Phase drugs will help it expedite the drug approval to further increase its revenue and offset the revenue losses from the patent expiration of Cymbalta and Evista.
On October 23, 2013, the company declared strong third quarter results, mainly driven by high revenue and its ongoing cost cutting plans.
Highlights of third quarter
Lilly reported year-over-year revenue growth of 6% to $5.77 billion.
Gross margin increased 8% to $4.57 billion with net income of $1.2 billion.
EPS non-GAAP increased 41% year over year to $1.11 per share.
Lilly submitted application for "Dulaglutide", a type 2 diabetes drug, for regulatory review in both the U.S. and Europe.
In Phase III trial, as a first-line treatment, its cancer drug, "Necitumumab", met the primary endpoint in treating stage IV metastatic cancer and increasing the overall survival in combination with gemcitabine and cisplatin compared to chemotherapy alone.
The company submitted for approval of "Ramucirumab" as a single-agent for the treatment of gastric cancer in Europe.
Ramucirumab in combination paclitaxel met both the safety and efficacy profile in its Phase III trial.
Opportunity in Gastric Cancer
On September 26, 2013, Eli Lilly declared the results for RAINBOW and ROSE Phase III trials for "ramucirumab." The RAINBOW trial is the global Phase III study of ramucirumab in combination with Bristol-Myers Squibb's (BMY) "paclitaxel", a mitotic inhibitor used in chemotherapy, to treat patients suffering with advance gastric cancer. Ramucirumab was able to meet the primary endpoint in improving the overall survival and secondary endpoint in improving progression-free survival. Under this RAINBOW trial, Ramucirumab with paclitaxel demonstrated the superior efficacy and safety in comparison to the placebo.
Gastric cancer is responsible for worldwide deaths of more than 800,000 patients per year. It is the third leading cause of cancer-related death globally in men and the fifth in women and the second most cause of cancer-related death. It is most prevalent in the countries outside the U.S. and Europe. Gastric cancer cells can travel through the bloodstream and may affect organs like lungs, liver, and bones. We expect the positive Phase III result of ramucirumab provides a great opportunity for the company in the gastric cancer market.
After looking at the superior RAINBOW Phase III trial results, the company is planning to submit an application for ramucirumab in combination with paclitaxel to regulatory authorities for its approval to treat patients with advance gastric cancer. As these cancer cells affect the liver and lungs, it is also testing ramucirumab's efficacy in trial to treat cancer of these organs.
Ramucirumab's superior results in REGARD trial
On October 3, 2013, Eli Lilly announced the Phase III REGARD trial of ramucirumab as a single agent in treating patients with advance gastric cancer compared to placebo. In this trial, around 238 patients were treated with the dose of 8mg/kg of ramucirumab and 117 patients received the placebo intravenously once every two weeks. After the eight week of dosing, patients with the single-agent ramucirumab were able to achieve the overall survival of 5.2 months compared to 3.8 months with the placebo, and it reduced the risk of death by around 22%. The patients treated with ramucirumab achieved the progression-free survival of 2.1 months compared to 1.3 months with placebo.
Currently, there are no drugs specifically approved in the U.S. and Europe for advanced gastric cancer patients. The company submitted ramucirumab as a single-agent for regulatory approval in the U.S. and Europe. Based on its superior results compared to placebo, we expect the company may receive the regulatory approval easily, and ramucirumab will provide a higher growth opportunity for the company.
Growth with other cancer drug
In June 2012, Eli Lilly and Bristol-Myers, with their partner Merck (MRK), received FDA approval for "Erbitux", a colorectal cancer drug, as the first-line treatment in KRAS mutation. Merck has the right to develop and market Erbitux outside North America, while Bristol-Myers and Eli Lilly will market it in North America. Additionally, Eli Lilly, as the owner of Erbitux, is eligible to receive royalties on its sales. Erbitux has generated revenue of $333 million in the second quarter of 2013 for Eli Lilly.
The company has initiated trials for evaluating the efficacy of Erbitux and demonstrated the superior results of Erbitux compared to Roche Holding's (OTC:RHHBY) "Avastin". In a trial it observed that 342 colon cancer patients dosed with Erbitux showed superior efficacy; it has reported the average survival rate of 33.1 months compared to 25.6 months for those treated with Avastin. Erbitux is only approved for treatment of patients suffering with tumors containing the non-mutated version of gene, KRAS, a protein. This protein is responsible for developing many cancers and accounts for 60% of colorectal cancer cases. Eli Lilly is planning to receive regulatory approval in Europe for this drug. It is expected to provide a higher growth opportunity for the company. Erbitux sales are expected to peak at $1.25 billion in 2014 and may slip to $1.1 billion by 2018, as the other drug manufacturers will be free to launch biosimilars in Europe by 2015. This will also help Eli Lilly generate higher revenue and royalties on Erbitux sales through its partners.
On other side, Roche, which is known as the world biggest cancer drug manufacturer, recently posted its third-quarter results. It has reported the year-over-year revenue growth of 6% to $38.2 billion for the first nine months of 2013. This growth was mainly driven by the strong performance of its cancer drugs, which include Avastin, Herceptin, MabThera/Rituxan, Perjeta, and Kadcyla.
The increased uptake of Perjeta and Kadcyla, which have demonstrated superior efficacy in enhancing the survival rates of the women suffering with aggressive breast cancer, and Avastin and Herceptin, its other cancer drugs used for the treatment of advance form of cancer, helped Roche post revenue of $12.67 billion for its third quarter of 2013.
Avastin was approved for treating ovarian cancer in Europe, colorectal cancer in the U.S., and its first approval for newly diagnosed glioblastoma in Japan increased its revenue 13% year over year. With this strong growth, we expect its leading cancer drugs will continue to drive its revenue in the future, and it will be able to maintain its leadership in the cancer drugs market.
Conclusion
We are very optimistic about Eli Lilly's drug pipeline and expect its new drugs to perform significantly in the next few years. The positive response from ramucirumab in treating gastric cancer patients may make it another blockbuster drug for the company, if it reports positive results in treating other forms of cancers also. In its recent guidance, Eli Lilly believes it will generate revenue in the range of $22.6 billion to $23.4 billion in fiscal year 2013. It also expects the EPS growth of 18%-20% in the range of $4.33-$4.38 in 2013. Eli Lilly's stock price witnessed the high of $51 on its result day and generated the return of nearly 4% for its investors.
LLY Chart
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LLY data by YCharts
Further, Eli Lilly, despite patent expiration of its main antidepressant drug, Cymbalta, reaffirmed the revenue guidance of at least $20 billion, net income of $3 billion, and $4 billion in operating cash flow next year. The company also expects to return $5 billion to investors in the form of share buyback and dividends. Recently, it declared the fourth quarter dividend of $0.49 per share payable on December 10, 2013, with the record date of November 15, 2013. Its share buyback plan shows the company's confidence in its future growth and its new drug launches.
We expect the company's initiatives coupled with its strong drug pipeline and the positive response for its new drugs, ramucirumab, Necitumumab, and Dulaglutide, will help the company maintain its future earnings, likely achieve its guidance quite comfortably, and drive the investors' confidence.
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