Lilly reported this week 3% growth in revenue and 7% in earnings for Qtr 3 - slighlty better than expected. Nevertheless, Lilly has experienced several setbacks in its pipeline this year. First it lost Semagacestat in a Phase III Alzheimer's trial, yesterday it reported that teplizumab went down in a phase III type 1 diabetes trial, and the prior day was told Bydureon will need to wait at least until the end of 2011 before it can apply for approval for the treatment of type II diabetes.
It also faces the steepest patent cliff in the industry with products coming off patent by 2014 that constitute fully 50% of its current revenues. And, in legal battles this year, a Michigan court invalidated its method-of-use patents for Gemzar and a NJ court did the same to method-of-use patents for Straterra. Both drugs will now face earlier generic competition that will eat their market share.
So what's a CEO like John Lechleiter to do? John holds steadfastly that Lilly will stay the course and focus on its internal R&D capability while coupling that to a strong cost savings program. Lilly has already announced a headcount reduction of 5500 over the next two years and says it has already eliminated about half of those positions, and will continue to prudently reduce headcount. Mr. Lechleiter also reports that Lilly's is growing by double digits in Japan, double digits in its Elanco animal health business and by double digits in its emerging pharma markets. All will add needed revenue as Lilly approches the 2014 cliff.
But will Lilly consider buying a large competitor? Is that back on the table as a possibility? Lechleiter says No. "We continue to believe that our innovation-based strategy while not without risk will provide the greatest value to our shareholders and to society." The CEO further notes Lilly still has 68 assets in human trials, 28 in phases II and III. These include Imclone's 1121B for breast and gastric cancer, another phase III treatment for heatocellular cancer, and a phase III trial for solanezumab.
Smaller niche company buys are on the table. One of those might be Amylin - its partner on Bydureon. Amylin shares plummeted by more than 50% on the news of the FDA decision. Some analysts believe the stock has not yet hit bottom (Seeking Alpha). It would be a very cheap time for Lilly to buy to stabilize its partner and boost its diabetes portfolio.
Analysts from Leerink Swann's and Capital Markets have also nominated: Cephalon, Endo Pharmaceuticals, United Therapeutics and Forest Labs as other possible acquisition candidates. Lilly has more than $5 B on its balance sheet to finance deals. As Lechleiter remains committed to continuing Lilly's annual $2 B dividend - he may also have to buy his way out of the anticipated 2014 corner. (See Fierce Biotech and Seeking Alpha Lilly earnings call).