The Importance of Alimta

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Eli Lilly (NYSE: LLY) rallied 3.70% on Friday following news regarding its blockbuster drug Alimta, which also led to strong earnings guidance. The company has been battling with generic drug companies for this one product, and if Eli Lilly is successful in keeping market exclusivity it could very well trade considerably higher. Therefore, let’s look at the events, and their meaning, that pushed shares of the company higher on Friday.

The “Patent Cliff”

Eli Lilly, like many large cap pharma companies, has suffered from a massive patent cliff over the last year. The company has lost more than $1.6 billion in revenue over the last 12 months, compared to 2011 because of newly approved generic drugs. In the meantime, generic drug company Teva Pharmaceuticals (NYSE: TEVA) has added nearly $2.5 billion in revenue during the same period, as it benefits from the biotechnology industry’s so-called “patent cliff.”

The threat of losing patents and market exclusivity is a real threat for most of the large pharma companies that have enjoyed many years with high-profile drugs. For the most part, these companies have tried to adapt through acquisitions and have spent a significant amount of money on R&D. However, for Eli Lilly, a company that has already lost Zyprexa and Gemzar to patent expirations, the exclusivity for its lung cancer drug Alimta is crucial to maintain sales and investor sentiment.

The Importance of Alimta  

Alimta recorded more than $2.5 billion in revenue last year; more than 10% of the company’s total revenue. Furthermore, some analysts believe the drug’s sales could climb to more than $3.5 billion by 2016. This means that Alimta is imperative to the future of this company, and is a massive chunk of the company’s operational focus. Therefore, it’s a good sign that Friday’s news may indicate that the company has found a way to keep its blockbuster on patent; this could cause an industry-wide trickle-down effect.

Alimta remains exclusive to Ely Lilly until 2017, but because of its importance, the company is already trying to extend this patent until 2022. Investors have long since considered 2017 to be Ely Lilly’s most significant patent cliff, which is in part due to the possibility of the expiration for Alimta. However, the company is now attempting to win a “method-of-use” patent case regarding the administration of the drug. This reminds me of a very similar case from Reckitt Benckisser.

Reckitt Benckisser is by most accounts a household product company. Yet the company has a biotechnology segment that is driven by one product, Suboxone. Suboxone is a multi-billion dollar drug for the treatment of opiate addiction that was approved in 2002. Since then, Reckitt Benckisser has grown from a $7 billion company to nearly a $30 billion company, and much is due to the success of Suboxone.

Back in 2011 the Suboxone creator was facing a patent expiration, and generic companies such as Teva and Watson were fighting hard to obtain the drug as a generic. However, the company changed the delivery of the drug, from tablet to film, and its patent was therefore extended. This allowed the multi-billion drug to remain exclusive to Reckitt Benckisser. Obviously, there are some differences, but Eli Lilly’s goal seems somewhat similar to that of Reckitt Benckisser.

So what happens now?

Eli Lilly will continue to fight and will hopefully maintain exclusivity until 2022. Teva Pharmaceuticals, the generic drug poised to most benefit, is arguing mightily against the claims by Eli Lilly. The patent expiration of Alimta could add more than $1 billion in annual revenue to Teva. However, it could remove more than $3 billion from Eli Lilly if the company loses the patent. This could be catastrophic to a company that is already poised to lose other patents from now until 2017.

In some ways it might seem strange to place so much emphasis on an event that will occur in four years. However, judging by the performance of the company’s stock you can see how important this drug is to investor sentiment. As an investor, you buy stock in a company based on its future, not its past or present. Therefore, the possibility to lose such a meaningful drug will be closely watched and a massive catalyst for this company, and also generic companies like Teva. This will be an interesting story to follow over the next few years, as the outcome will drastically affect both Ely Lilly and the generic companies that are best positioned to benefit.  

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