Acadia Stock Report: Business Overview And Revenue Projection

Investment Summary

Acadia Pharmaceuticals (ACAD) is a mid-cap biopharmaceutical company focusing on the development of drugs for neurological and central nervous system disorders. Its stock is currently trading at $23.5 (as of 9/18/13), placing its market cap at $2B.

Acadia's leading drug candidate, pimavanserin, is in Phase III development as a potential first-in-class drug for Pakinson's disease psychosis (PDP). Pimavanserin is a small molecular inhibitor of the serotonin receptor 5-HT2A and has potential applications for psychosis in patients with other neurological diseases, including Alzheimer's and schizophrenia. Acadia plans to file for a new drug application (NDA) for FDA approval toward the end of 2014 for Pimavanserin for Parkinson's disease. If approved, the drug could be in the market by 2015.

The company has had a long-term partnership with Allergan (AGN) to co-develop treatments for chronic pain and glaucoma. The drug candidates are based on alpha-adrenergic receptor agonists and muscarinic agonists discovered at Acadia. The alpha-adrenergic receptor agonist program is in Phase II. Allergan is looking for a partner to conduct Phase III trials. Acadia's R&D pipeline also includes a preclinical program developing inhibitors for ER-Beta and Nurr-1.

In this report, we will address the following questions. First, what is the probability of pimavanaserin approval by the FDA based on its clinical trial results? How big is the market for psychosis and the neurological space? Who are the competitors for Acadia's product?

Second, Acadia has a partnership with Allergan to develop pain-related products. Does the partnership sufficiently pay for the development costs? Or will Acadia need to raise more money through public or private capital markets? More equity offerings will certainly dilute existing shareholders' holdings.

Finally, we will review ACAD's financial status, forecast its revenues and earnings for the next 5 years and derive an intrinsic value for the stock.

This report contains three parts. Part 1 is an overview of ACAD's business model, its key products, and risk factors associated with the company. In Part 2, we will review its partnership agreements with Allergan and point out relevant royalty payments and liabilities that ACAD will incur. A 5-year revenue projection for ACAD will be presented. In Part 3, we will analyze its financials and derive an intrinsic value for ACAD. Our analysis suggests that the intrinsic value for ACAD is ~$31.

Part1: Business Overview

Acadia Pharmaceuticals is a mid-cap biopharmaceutical company that develops serotonin receptor inhibitors with applications for psychosis in patients with neurological diseases, including Parkinson's disease, Alzheimer's disease and schizophrenia. The company currently has a market cap of ~$2.1B with a stock price of $23.5 per share and about 83 million weighted average shares outstanding.

Its leading drug candidate is pimavanserin, which is in Phase III development as a potential first-in-class treatment for Parkinson's disease psychosis (ACAD 10K 2012). Acadia plans to file an NDA toward the end of 2014 for Pimavanserin for Parkinson's disease. Pimavanserin also has potential application for the treatment of psychosis associated with Alzheimer's and schizophrenia.

The company has clinical-stage programs for chronic pain and glaucoma in collaboration with Allergan, Inc. These programs are based on alpha-adrenergic receptor and muscarinic agonists discovered at Acadia.

Key issues

When evaluating a company like ACAD, we need to consider several key issues (or potential risk factors) uniquely associated with the company.

First and foremost, what are the future growth rates for its product revenues and product royalty revenues paid by its corporate partners? When will the company turn profitable? What is the competitive landscape for its drugs? Obviously, the company's profitability is closely tied to its drug sales. ACAD has collaborated with Allergan to develop drugs for chronic pain and glaucoma. How much in milestone payments and royalty from sales will Acadia expect to receive over the next 5 years?

A second issue is related to the expansion of its clinical trials on various fronts. While the company intends to expand its drug franchises to as many indications as possible, there are significant costs associated with each clinical trial. Does the company make wise investments on this front? What is a likelihood of success for these trials? We will review its late-stage clinical programs.

A third issue is related to the company's financial strength or weakness. Due to mostly non-profitable quarters in the past, ACAD's accumulated deficit is $382M as of June 30, 2013 (ACAD 10Q2013). With over $564M additional paid-in capital, Shareholder equity is $181M as of June 2013. In the financial projection section, we will discuss when the company will turn profitable.

As of June 2013, ACAD had $205M cash and cash-equivalent securities. It has no long-term debt nor convertible notes. However, the company has continuously funded its development through stock offerings in both private and public capital markets. These activities have led to significant expansion of stock shares and dilution of shareholders' equity for years. Going forward, the company will need to raise additional funds for Phase III trials in schizophrenia and Phase II trials in Alzheimer's associated psychosis (ADP). It is inevitable that further stock offerings are anticipated. We will discuss the impact of its equity offerings during stock valuation.

Part 2: Product Sales and Revenues from Partnership Agreements

Pimavanserin

Pimavanserin is an inhibitor of the serotonin receptor (5-HT2A), and is currently in Phase III clinical development for Parkinson's disease psychosis. At present, there is no drug approved for PDP. Therefore, pimavanserin could be the first drug approved for this indication. It is estimated that 60% of patients with Parkinson's disease have psychosis that require medical assistance. The potential market for PDP is estimated to be $1B.

Acadia announced pimavanserin Phase III data in March 2013 (Pimavaserine phase III data March2013). The data indicated that the drug is safe and well-tolerated. In addition, it reached statistical significance when meeting primary and secondary endpoints, which include improved motor control and sleep, and reduced delusions and hallucinations. Based on the data, Acadia received a green light from the FDA to file for a new drug application (NDA) for the treatment of PDP scheduled at the end of 2014 (Pimavaserin expediated NDA filing April2013). The expedited progress means that Acadia does not need to conduct an expanded phase III trial, thus speeding up commercialization of the drug to market by 2015.

Psychosis is also frequently associated with other neurological disorders, including schizophrenia and Alzheimer's disease patients. The combined market for antipsychotic medicines was estimated at $28B in 2011, so there is a large unmet need in this space (ACAD 10K 2012).

Therefore, Acadia's strategy is to further expand the potential use of pimavaserin to these indications. The company is currently conducting pimavaserin Phase II clinical trials for schizophrenia (Pimavanserin with risperidone schizophrenia Phase II data 2012). The published Phase II indicated that pimavaserin co-treatment with current anti-psychotic medicine (risperidone) enhanced efficacy and reduced side effects associated with existing medicine. Acadia is considering further studies (Phase III) to pursue this indication, but has not specified whether the company will go alone or seek a corporate partner.

About 20%-50% of patients with Alzheimer's disease suffer from psychosis. Acadia plans to initiate Phase II trials for ADP by 2H 2013. There are around 5 million people with Alzheimer's disease in the United States alone. So, the potential market for ADP is ~$3B.

The competition in the anti-psychotic (PDP and ADP) markets includes Seroquel marketed by AstraZeneca (AZN) and the generic drug clozapine. These drugs are used off-label as they are not officially approved in the US for PDP and ADP.

For schizophrenia, competition includes Zyprexa made by Eli Lilly (LLY), Risperdal by Johnson & Johnson (JNJ) and Ability by Bristol-Myers-Squibb (BMY). The first two drugs are already generic.

We estimate that pimavaserin sales will be about $100M (2015), $200M (2016), and $360M (2017). With an 80% probability of approval, the revenues for Acadia are estimated to be $80M (2015), $160M (2016) and $288M (2017). The slow ramp-up of sales reflects that Acadia is a small company without an existing sales force. In addition, the sales numbers account for the PDP indication only, because an expansion of pimavaserin to ADP and schizophrenia will require completion of Phase III trials and approval of the drug for these indications, which is unlikely to happen before 2017.

Alpha Adrenergic Agonist

Acadia is collaborating with Allergan to develop drugs (alpha adrenergic agonist) for the treatment of chronic pain. Allergan reported preliminary proof-of-concept data in Phase II for visceral pain, fibromyalgia and irritable bowel syndrome. Further studies in Phase III will be needed before regulatory approval and commercialization. Acadia did not disclose the royalty rate that Allergan will pay to Acadia under the partnership agreement. We estimate that it is around 10%-25% of net sales, based on comparable transactions in the industry.

Chronic pain treatment has a big market but also many players. For chronic pain treatment, competition includes Lyrica and Neurontin marketed by Pfizer (PFE) and Cymbalta by LLY. Lyrica and Cymbalta have sales of $4.2B and $5B in 2012, respectively.

Assuming Allergan completes Phase III in 2014, receives the FDA approval in 2015, and launches the drug in 2016, we estimate that revenues will be about $80M (2016) and $144M (2017). With a 70% probability of approval, it will be $56M and $100M, respectively. However, Acadia will only receive a fraction of the royalty from the net sales. If we assume the royalty rate is 15%, the royalty revenues for Acadia will be $8M (2016) and $15M (2017). So, the bottom line is that the royalty revenues from its corporate partnership have a very modest contribution to Acadia's earnings.

Muscarinic Agonist

Acadia is also collaborating with Allergan to develop a drug for glaucoma, based on the muscarinic agonist discovered by Acadia. The program is still in Phase I development, and will thus have little impact on revenues over the next 5 years.

Partnership with Allergan

Acadia has collaborated with Allergan to develop drugs for chronic pain, glaucoma and other indications. The drugs are based on alpha-adrenergic receptor agonists and muscarinic agonists discovered at Acadia. There are separate collaborative agreements between these two companies signed in 1997, 1999 and 2003. The upfront payments and partial development milestones have already been paid out. So, here we only look at future potential payments.

The remaining development milestone payments that Acadia is potentially entitled to receive are $10M, $15M and $13.5M for the three agreements, respectively. Thus, the combined potential milestone payments are $38.5M. We assume that it will be paid out over the next 4 years. This translates to an average of $9.6M in milestone payments each year from 2013 to 2016. The numbers are included in our financial forecasts.

Projected revenues for Acadia

Adding together the product revenues from pimavaserin and the royalty revenues from the Allergan collaboration, we estimate that total revenues for ACAD will be $9.6M (2013), $9.6M (2014), $89M (2015), $178M (2016) and $300M (2017). These revenue numbers will be used for stock valuation.

References:

ACAD 10K 2012

ACAD 10Q2013

Pimavaserine phase III data March2013

Pimavaserin met Phase III endpoints Nov2012

Pimavanserin with risperidone schizophrenia Phase II data 2012

Pimavaserin expediated NDA filing April2013

Disclosure: I am long ACAD, JNJ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)

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Expectations For Eli Lilly's Lung Cancer Drug Rise, But Revenue Concerns Continue

Eli Lilly & Co. (LLY): Expectations For Eli Lilly's Lung Cancer Drug Rise, But Revenue Concerns Continue - Seeking Alpha (function(_,e,rr,s){_errs=[s];var c=_.onerror;_.onerror=function(){var a=arguments;_errs.push(a); c&&c.apply(this,a)};var b=function(){var c=e.createElement(rr),b=e.getElementsByTagName(rr)[0]; c.src="//beacon.errorception.com/"+s+".js";c.async=!0;b.parentNode.insertBefore(c,b)}; _.addEventListener?_.addEventListener("load",b,!1):_.attachEvent("onload",b)}) (window,document,"script","4ffae9d6f05d1da630000008"); if (SA.Data && SA.Data.Cache) { var adata = SA.Data.Cache.get('campaign_content'); }.market_currents_list li .ticker_date_left .mc_list_tickers a{font-weight: normal} var ms_slug = ''; var article_dashboards = '@investing-ideas@sectors@'; var article_sectors_themes = '@long-ideas@us@drug-manufacturers-major@healthcare@article@'; var ratings_hash={}; var ARTICLE_ID = 1667152; var ARTICLE_TYPE = "standard"; var ARTICLE_LOCK = ""; var author_slug = "a-john-hodge"; var pticker_for_ads = "lly"; var time_left; var lock_comments = false; var machine_cookie = readCookie('machine_cookie'); var middle_version = ABTest.identity%10; try { window.sessionStorage.setItem("/article/"+ARTICLE_ID, '1'); } catch (error) {}var mone_article_tags = "{bmy,mrk,lly};;;{healthcare};;;{long-ideas,us,drug-manufacturers-major,investing-ideas};;;{a-john-hodge}"var ord = Math.floor(Math.random()*1000000000);Seeking Alpha Seeking Alpha Portfolio App for iPad Finance (1) var ipadData; SeekingAlpha.Initializer.AddAfterLoad(function(){ if (SA.Utils.Env.isIPad && !/3/.test(SA.Data.Cookies.get("user_devices"))){ Mone.event("ipad_promotion_top","top_ipad_banner_large","ipad_promotion_displayed"); ipadData = new SA.Data.iPad(); ipadData.instanceName = "ipadData"; var responseHandler = new Object(); responseHandler.handleResponse = function(data){ if (!data.averageUserRating) return; var stars = data.averageUserRating Home | Portfolio | Market Currents | Investing Ideas | Dividends & Income | ETFs | Macro View | ALERTS | PRO   This article was sent to 7,235 people who get email alerts on  . Which cover: new articles | breaking news | earnings results | dividend announcements Get email alerts on   » This article was sent to 337,618 people who get the Investing Ideas newsletter. Get the Investing Ideas newsletter » Expectations For Eli Lilly's Lung Cancer Drug Rise, But Revenue Concerns Continue Aug 30 2013, 15:47 by: A John Hodge  |  about: LLY, includes: BMY, MRK BOOKMARKED / READ LATER Bookmarked

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Eli Lilly Co. (LLY), in desperate need of a blockbuster new drug, may have struck gold when its lung cancer drug, necitumumab (IMC-11F8), was shown to extend patient survival in a phase 3 study. Necitumumab has met its primary endpoint in improving overall survival in patients who received the drug in combination with gemcitabine and cisplatin as a first-line therapy for metastatic squamous non-small cell lung cancer (NSCLC) when compared with chemotherapy alone. Necitumumab is a fully human IgG1 monoclonal antibody designed to block the ligand binding site of the human epidermal growth factor receptor (EGFR), which is a target in several anti-cancer treatments because it sparks cancer progression, both by promoting angiogenesis, or the formation of new blood vessels for tumors, and by inhibiting apoptosis, or cell death.

Necitumumab: From The Ash Heap To Blockbuster Drug?

Lilly expects to submit necitumumab for approval to the Food and Drug Administration (FDA) by the end of the year and, if approved, it could be a great revenue source for the company. Globally, the non-small-cell lung cancer (NSCLC) drug market is expected to reach $6.9 billion in 2019 and climb to $7.9 billion in 2022. There are over 1.2 million new cases of lung cancer diagnosed every year and over 1 million lung cancer patients will die each year, and non-small cell lung cancer (NSCLC) accounts for approximately 80% of all lung cancers. The positive results from the drug came as a surprise according to Mark Schoenebaum, analyst with ISI Group LLC, since not so long ago analysts had given up on necitumumab, with "basically zero" expectations as the drug failed in a prior non-squamous lung cancer trial. Bristol Myers Squibb (BMY), Lilly's partner in the drug, even gave it up as the company terminated the collaboration in late 2012. Mr. Schoenebaum added however, "We really need to see the full data to understand risk/benefit."

While necitumumab could be a potent boost to Lilly's product portfolio, the drug could also bring a much-needed new therapy for NSCLC, a cancer that has been proven difficult to treat with the current drugs on the market, such as Genentech's Avastin, which directly target tumors, as opposed to more broadly active chemotherapy drugs. Richard Gaynor, vice president of product development and medical affairs for Lilly Oncology, said in a prepared statement, "If approved, necitumumab could be the first biologic therapy indicated to treat patients with squamous lung cancer." And it is quite conceivable that the drug will dominate the NSCLC market with sales expected to reach $1.75 billion by 2022.

But necitumumab is not without some possible stiff competition, as Merck (MRK) plans to initiate late-stage clinical trials of lambrolizumab in the third quarter of 2013 for both non-small cell lung cancer and advanced melanoma. Lambrolizumab, which received "breakthrough status" in late April by the FDA, is an investigational antibody therapy designed to disrupt the action of the immune checkpoint protein PD-1 and therefore inhibit the ability of some cancers to evade the body's immune system.

Generics Continue To Chip Away At Revenue

Eli Lilly will be in need of new successful drugs to market, as sales of its $4.99 billion blockbuster treatment to combat depression, Cymbalta, are expected to plummet when the company loses U.S. patent protection in December. Cymbalta accounted for 22% of the $22 billion in global product sales in 2012, and $1.5 billion in second quarter of 2013. When a blockbuster drug falls off patent it can be devastating to revenue, as witnessed with Zyprexa, Lilly's once best-selling schizophrenia treatment, which had $2.17 billion in domestic sales the year before its patent expired. However, after the drug came off patent the company sold a mere $360 million in the U.S. as 63% of its sales were gobbled up by generic competition. And Lilly will experience more revenue declines as some of the company's other drugs fall off patent, like its $2.4 billion mealtime insulin, Humalog, which expires in June 2014. And the company will also lose its $1 billion osteoporosis medication, Evista, which falls off patent in March of 2014.

Solid Pipeline May Bring Solid Revenues Down The Line

The future is not glum for Lilly, as the company has spent heavily on R&D over the past few years, with $5.28 billion on R&D in 2012, and has no less than 60 potential new drugs in testing, including three in regulatory review and ten in phase 3 trials. For example Lilly submitted empagliflozin for a new drug application (NDA) for the treatment of type 2 diabetes in adults. Empagliflozin is one of a new class of glucose-lowering drugs which work by increasing urinary glucose excretion with a consequent lowering of plasma glucose levels. The company expects to receive a decision by the end of the second quarter 2014.

Lilly's advanced gastric cancer drug, ramucirumab, showed promising results from its phase 3 trials as the drug showed the median overall survival was better in 238 patients who received ramucirumab than in the 117 patients who received placebo. Earlier this year, the company initiated a fast track review to the FDA. Lilly also submitted the drug for approval for breast cancer patients, which could be where the real revenue success for the drug would be found. According to a recent CitiGroup report, peak sales potential could exceed $3 billion.

Cost Cutting: A Leaner Lilly In The Works

Ely Lilly's management team feels confident that over the next few years it will be able to mitigate the negative revenue impact of its drugs' patent expirations with successful launches of its late stage portfolio. The company is also mitigating its lost revenue with a series of cost cuts by slashing jobs and raising prices on Cymbalta before the patent expires. And these cuts have helped as Lilly's second-quarter earnings are up with reported earnings of $1.21 billion while worldwide revenues rose 6% to $5.93 billion, beating Wall Street expectations of $5.82 billion. Lilly also raised its EPS guidance for the year, to earn between $4.28 and $4.38 per share for the year on revenues between $22.6 billion and $23.4 billion.

The cost cutting will continue according to Lilly's Senior Director of Global Corporate Communications Ed Sagebiel, "We continue to face the most significant challenges in our history." The company will suspend base pay increases for most of its employees next year till 2015. Plus the company will be reducing bonuses by 25% for 2014, and it won't be paid out till 2015. These cuts are expected to shave $400 million through 2016. In May the company announced that roughly 1,000 sales staffers would be laid off, which amounted to 40% of the U.S. salesforce.

Ely Lilly is a $50.09 billion market cap company. Year-over-year the stock is up just under 20%, however the stock's growth has slowed from its late April high of $58.40. The company still has a solid dividend with a yield of 3.74, and carries one of the lower P/E ratios of the major drug companies, at 11.67. And the company holds more than $4.6 billion in short-term liquidity.

Conclusion

Big Pharma is experiencing a glut of generics eating away at what were once their revenue cash cows. However there seems to be new cash cows working their way down the pipelines. Lilly too has been hit hard and will continue to be hit hard by the generics, though the company has done some much needed "belt tightening" to get it through the tough times. And CEO John Lechleiter is quite confident that these measures will get them through, as he commented in a prepared statement: "Continued operating and financial discipline, along with a maturing pipeline of potential new medicines, gives me great confidence in the company's ability to meet the challenges we face from upcoming patent expirations and to resume growth after 2014."

While Lilly may experience a rocky road for the next few quarters, for an excellent dividend stock and a patient investor, Eli Lilly, with its cost cutting measures and perhaps a few blockbuster drugs in the pipeline, should be a good long-term stock to have in one's portfolio.

Source: Expectations For Eli Lilly's Lung Cancer Drug Rise, But Revenue Concerns Continue

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. (More...)

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Expectations For Eli Lilly's Lung Cancer Drug Rise, But Revenue Concerns Continue

Eli Lilly & Co. (LLY): Expectations For Eli Lilly's Lung Cancer Drug Rise, But Revenue Concerns Continue - Seeking Alpha (function(_,e,rr,s){_errs=[s];var c=_.onerror;_.onerror=function(){var a=arguments;_errs.push(a); c&&c.apply(this,a)};var b=function(){var c=e.createElement(rr),b=e.getElementsByTagName(rr)[0]; c.src="//beacon.errorception.com/"+s+".js";c.async=!0;b.parentNode.insertBefore(c,b)}; _.addEventListener?_.addEventListener("load",b,!1):_.attachEvent("onload",b)}) (window,document,"script","4ffae9d6f05d1da630000008"); if (SA.Data && SA.Data.Cache) { var adata = SA.Data.Cache.get('campaign_content'); }.market_currents_list li .ticker_date_left .mc_list_tickers a{font-weight: normal} var ms_slug = ''; var article_dashboards = '@investing-ideas@sectors@'; var article_sectors_themes = '@long-ideas@us@drug-manufacturers-major@healthcare@article@'; var ratings_hash={}; var ARTICLE_ID = 1667152; var ARTICLE_TYPE = "standard"; var ARTICLE_LOCK = ""; var author_slug = "a-john-hodge"; var pticker_for_ads = "lly"; var time_left; var lock_comments = false; var machine_cookie = readCookie('machine_cookie'); var middle_version = ABTest.identity%10; try { window.sessionStorage.setItem("/article/"+ARTICLE_ID, '1'); } catch (error) {}var mone_article_tags = "{bmy,mrk,lly};;;{healthcare};;;{long-ideas,us,drug-manufacturers-major,investing-ideas};;;{a-john-hodge}"var ord = Math.floor(Math.random()*1000000000);Seeking Alpha Seeking Alpha Portfolio App for iPad Finance (1) var ipadData; SeekingAlpha.Initializer.AddAfterLoad(function(){ if (SA.Utils.Env.isIPad && !/3/.test(SA.Data.Cookies.get("user_devices"))){ Mone.event("ipad_promotion_top","top_ipad_banner_large","ipad_promotion_displayed"); ipadData = new SA.Data.iPad(); ipadData.instanceName = "ipadData"; var responseHandler = new Object(); responseHandler.handleResponse = function(data){ if (!data.averageUserRating) return; var stars = data.averageUserRating Home | Portfolio | Market Currents | Investing Ideas | Dividends & Income | ETFs | Macro View | ALERTS | PRO   This article was sent to 7,224 people who get email alerts on  . Which cover: new articles | breaking news | earnings results | dividend announcements Get email alerts on   » This article was sent to 337,202 people who get the Investing Ideas newsletter. Get the Investing Ideas newsletter » Expectations For Eli Lilly's Lung Cancer Drug Rise, But Revenue Concerns Continue Aug 30 2013, 15:47 by: A John Hodge  |  about: LLY, includes: BMY, MRK BOOKMARKED / READ LATER Bookmarked

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Eli Lilly Co. (LLY), in desperate need of a blockbuster new drug, may have struck gold when its lung cancer drug, necitumumab (IMC-11F8), was shown to extend patient survival in a phase 3 study. Necitumumab has met its primary endpoint in improving overall survival in patients who received the drug in combination with gemcitabine and cisplatin as a first-line therapy for metastatic squamous non-small cell lung cancer (NSCLC) when compared with chemotherapy alone. Necitumumab is a fully human IgG1 monoclonal antibody designed to block the ligand binding site of the human epidermal growth factor receptor (EGFR), which is a target in several anti-cancer treatments because it sparks cancer progression, both by promoting angiogenesis, or the formation of new blood vessels for tumors, and by inhibiting apoptosis, or cell death.

Necitumumab: From The Ash Heap To Blockbuster Drug?

Lilly expects to submit necitumumab for approval to the Food and Drug Administration (FDA) by the end of the year and, if approved, it could be a great revenue source for the company. Globally, the non-small-cell lung cancer (NSCLC) drug market is expected to reach $6.9 billion in 2019 and climb to $7.9 billion in 2022. There are over 1.2 million new cases of lung cancer diagnosed every year and over 1 million lung cancer patients will die each year, and non-small cell lung cancer (NSCLC) accounts for approximately 80% of all lung cancers. The positive results from the drug came as a surprise according to Mark Schoenebaum, analyst with ISI Group LLC, since not so long ago analysts had given up on necitumumab, with "basically zero" expectations as the drug failed in a prior non-squamous lung cancer trial. Bristol Myers Squibb (BMY), Lilly's partner in the drug, even gave it up as the company terminated the collaboration in late 2012. Mr. Schoenebaum added however, "We really need to see the full data to understand risk/benefit."

While necitumumab could be a potent boost to Lilly's product portfolio, the drug could also bring a much-needed new therapy for NSCLC, a cancer that has been proven difficult to treat with the current drugs on the market, such as Genentech's Avastin, which directly target tumors, as opposed to more broadly active chemotherapy drugs. Richard Gaynor, vice president of product development and medical affairs for Lilly Oncology, said in a prepared statement, "If approved, necitumumab could be the first biologic therapy indicated to treat patients with squamous lung cancer." And it is quite conceivable that the drug will dominate the NSCLC market with sales expected to reach $1.75 billion by 2022.

But necitumumab is not without some possible stiff competition, as Merck (MRK) plans to initiate late-stage clinical trials of lambrolizumab in the third quarter of 2013 for both non-small cell lung cancer and advanced melanoma. Lambrolizumab, which received "breakthrough status" in late April by the FDA, is an investigational antibody therapy designed to disrupt the action of the immune checkpoint protein PD-1 and therefore inhibit the ability of some cancers to evade the body's immune system.

Generics Continue To Chip Away At Revenue

Eli Lilly will be in need of new successful drugs to market, as sales of its $4.99 billion blockbuster treatment to combat depression, Cymbalta, are expected to plummet when the company loses U.S. patent protection in December. Cymbalta accounted for 22% of the $22 billion in global product sales in 2012, and $1.5 billion in second quarter of 2013. When a blockbuster drug falls off patent it can be devastating to revenue, as witnessed with Zyprexa, Lilly's once best-selling schizophrenia treatment, which had $2.17 billion in domestic sales the year before its patent expired. However, after the drug came off patent the company sold a mere $360 million in the U.S. as 63% of its sales were gobbled up by generic competition. And Lilly will experience more revenue declines as some of the company's other drugs fall off patent, like its $2.4 billion mealtime insulin, Humalog, which expires in June 2014. And the company will also lose its $1 billion osteoporosis medication, Evista, which falls off patent in March of 2014.

Solid Pipeline May Bring Solid Revenues Down The Line

The future is not glum for Lilly, as the company has spent heavily on R&D over the past few years, with $5.28 billion on R&D in 2012, and has no less than 60 potential new drugs in testing, including three in regulatory review and ten in phase 3 trials. For example Lilly submitted empagliflozin for a new drug application (NDA) for the treatment of type 2 diabetes in adults. Empagliflozin is one of a new class of glucose-lowering drugs which work by increasing urinary glucose excretion with a consequent lowering of plasma glucose levels. The company expects to receive a decision by the end of the second quarter 2014.

Lilly's advanced gastric cancer drug, ramucirumab, showed promising results from its phase 3 trials as the drug showed the median overall survival was better in 238 patients who received ramucirumab than in the 117 patients who received placebo. Earlier this year, the company initiated a fast track review to the FDA. Lilly also submitted the drug for approval for breast cancer patients, which could be where the real revenue success for the drug would be found. According to a recent CitiGroup report, peak sales potential could exceed $3 billion.

Cost Cutting: A Leaner Lilly In The Works

Ely Lilly's management team feels confident that over the next few years it will be able to mitigate the negative revenue impact of its drugs' patent expirations with successful launches of its late stage portfolio. The company is also mitigating its lost revenue with a series of cost cuts by slashing jobs and raising prices on Cymbalta before the patent expires. And these cuts have helped as Lilly's second-quarter earnings are up with reported earnings of $1.21 billion while worldwide revenues rose 6% to $5.93 billion, beating Wall Street expectations of $5.82 billion. Lilly also raised its EPS guidance for the year, to earn between $4.28 and $4.38 per share for the year on revenues between $22.6 billion and $23.4 billion.

The cost cutting will continue according to Lilly's Senior Director of Global Corporate Communications Ed Sagebiel, "We continue to face the most significant challenges in our history." The company will suspend base pay increases for most of its employees next year till 2015. Plus the company will be reducing bonuses by 25% for 2014, and it won't be paid out till 2015. These cuts are expected to shave $400 million through 2016. In May the company announced that roughly 1,000 sales staffers would be laid off, which amounted to 40% of the U.S. salesforce.

Ely Lilly is a $50.09 billion market cap company. Year-over-year the stock is up just under 20%, however the stock's growth has slowed from its late April high of $58.40. The company still has a solid dividend with a yield of 3.74, and carries one of the lower P/E ratios of the major drug companies, at 11.67. And the company holds more than $4.6 billion in short-term liquidity.

Conclusion

Big Pharma is experiencing a glut of generics eating away at what were once their revenue cash cows. However there seems to be new cash cows working their way down the pipelines. Lilly too has been hit hard and will continue to be hit hard by the generics, though the company has done some much needed "belt tightening" to get it through the tough times. And CEO John Lechleiter is quite confident that these measures will get them through, as he commented in a prepared statement: "Continued operating and financial discipline, along with a maturing pipeline of potential new medicines, gives me great confidence in the company's ability to meet the challenges we face from upcoming patent expirations and to resume growth after 2014."

While Lilly may experience a rocky road for the next few quarters, for an excellent dividend stock and a patient investor, Eli Lilly, with its cost cutting measures and perhaps a few blockbuster drugs in the pipeline, should be a good long-term stock to have in one's portfolio.

Source: Expectations For Eli Lilly's Lung Cancer Drug Rise, But Revenue Concerns Continue

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. (More...)

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