Rheumatoid Arthritis Review – Focus Eli Lilly

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Eli Lilly (NYSE: LLY) has been involved in the development of an oral pill for treating Rheumatoid arthritis (RA), an autoimmune disorder characterized by inflammation of joints and surrounding tissue. Today we look at the mixed reports regarding developments on this front and the likely impact on the company’s future prospects.

Rheumatoid Arthritis: Current Treatment Regime

Rheumatoid arthritis is marked by abnormal immune mechanisms resulting in inflammation and swelling, typically in small joints in hands and feet. Unlike osteoarthritis, which causes wear and tear damage, RA affects joint linings and causes painful swelling, which eventually leads to erosion of bones and deformity.

Rheumatoid arthritis occurs when the immune system attacks the thin membrane (synovium) in synovial (freely moving) joints that lines the joint capsule and secretes synovial fluid. The resultant inflammation causes the synovium to thicken, which can eventually invade and destroy the cartilage and bone and the joint gradually loses shape and alignment.

Current treatment regimes include non-steroidal anti-inflammatory drugs (for pain relief), oral disease-modifying anti-rheumatic drugs (for slowing the progress of RA) such as methotrexate and injectable tumor necrosis factor-alpha (TNA-a) inhibitors. TNF is a pro-inflammatory cytokine implicated in the pathogenesis of RA.

Eli Lilly, along with Incyte (NASDAQ: INCY), has been involved in the study of baricitinib, an orally available janus kinase (JAK) inhibitor, for treatment of patients with moderate to severe RA who had an inadequate response to treatment with methotrexate. Independently, the company has also been studying, anti-B-cell activating factor (BAFF) drug – tabalumab.

Recent Developments 

Baricitinib

Baricitinib is into Phase III development as a potential treatment for rheumatoid arthritis and it is in Phase II development as a potential treatment for psoriasis and diabetic nephropathy.

Last month, according to a mid-stage extension study presented in a medical meeting, baricitinib maintained its effectiveness in alleviating symptoms of pain after 24 weeks of treatment. MRI tests revealed that the two highest doses of the drug also effectively restricted joint damage. Earlier, in June 2012, the companies had released positive data after 12 weeks of treatment of patients with mild to moderate rheumatoid arthritis who had inadequate response to methotrexate.

Unlike tumor necrosis factor-alpha (TNF-a) drugs that need to be injected, baricitinib is an oral drug that will allow patients to avoid the discomfiture of taking injections.

Let me remind readers that only last month, in November, the FDA approved a 5mg dose of Pfizer (NYSE: PFE) drug, Xeljanz (tofacitinib); the 10mg dose was rejected. Like baricitinib, tofacitinib is also a JAK (janus kinase) inhibitor oral drug. Janus kinase is a family of nonreceptor tyrosine kinases that transduce cytokine-mediated signals via the JAK-STAT pathway and has been implicated in the pathology of RA.

Baricitinib restricts the JAK1/JAK2 signaling pathway. Pfizer’s drug inhibits JAK3 but baricitinib spares it. This is seen as an advantage as it helps in avoiding some of the side effects that were noticed in clinical trials of tofacitinib. Furthermore, the label of ENBREL (etanercept), a TNF drug, mentions that prolonged exposure does not increase malignancy rate. If baricitinib is approved with the same claim, it would gain further advantageous position over Pfizer’s Xeljanz.

Once the companies complete the trials and clinical studies and get FDA approval, the drug should be in the market and is liable to make a significant impact on the market for rheumatoid drugs.

Tabalumab

Eli Lilly has been involved in the development of another drug tabalumab, as a potential treatment for rheumatoid arthritis patients with inadequate response to the standard methotrexate treatment and for treatment of systemic lupus erythematosus. The drug is an anti-B-cell activating factor (BAFF) and an antibody designed for treatment of autoimmune diseases and B cell malignancies.

The company had to stop one of the three late-stage trials as analysis revealed that it was not likely to meet efficacy objectives. However, since there were no safety issues involved, patients currently enrolled for trials for other tabalumab studies for RA therapy will continue to receive treatment.

The company intends to complete the ongoing RA studies, which will be completed in 2013 and till that time there will be no enrolment of new patients. However, enrolment of new patients for testing the efficacy of the drug in treatment of lupus is to continue.

The financial impact of discontinuation is likely to result in an after-tax charge of 2 cents per share and a drop of 50 cents in discounted cash flows of the company.

Pipeline

Eli Lilly is also involved in testing solanezumab, an experimental drug for treatment of mild cases of Alzheimer’s. The company has announced that it is launching another late-stage study before applying for FDA approval. While intravenous treatment with the drug did not slow memory decline, researchers found statistically significant data when they examined a subgroup of patients.

Also in the pipeline is testing of a humanized monoclonal antibody, ixekizumab, for treatment of autoimmune disorders such as psoriasis and psoriatic arthritis. Other potential medicines in various stages of development include therapeutic areas such as diabetes (four), cancer (three), neuroscience (two), autoimmunity (three) and cardiovascular (one).

The Company

Eli Lilly is global pharmaceutical company with headquarters in Indianapolis and offices in Puerto Rico and 17 countries across the globe. Incorporated in 1901, LLY is involved in the discovery, development, manufacture and marketing of pharmaceutical drugs primarily in the field of neuroscience, endocrinology, oncology, cardiovascular, diabetes, men’s health and musculoskeletal products. The company also operates an animal segment for products related to animal health. It is the 10th largest pharmaceutical company in the world.

Besides drug testing and clinical trials, Eli Lilly has been in the news for financial reasons as well that could potentially affect the performance of LLY in the stock market. 

Just as news of a shareholder friendly move of a share buyback unfolded, Eli Lilly agreed to pay $29.4 million to settle a federal complaint under the Foreign Corrupt Practices Act on SEC charges of making improper payments for procuring orders in Brazil, China, Poland and Russia. LLY agreed to pay up “without admitting or denying the allegations.”

The fine is too small for a company the size of Eli Lilly to make any dent into its stock price, but it did react to the share repurchase announcement and rose by 3.62% on Dec. 18, the day after the news became public. The same day, the company also declared a $0.49 per share dividend for the first quarter of 2013.

The buyback authorization by the board came on the footsteps of the recently completed $3.0 billion buyback program, which was started in 2000. Shares will be bought in the open market at prevailing prices and the company hopes to complete the process in 2013 and will retire all acquired shares.

Eli Lilly has set dates for announcement of financial guidance for 2013 (Jan. 4, 2013) and fourth quarter and full year results (Jan. 29, 2013). At CMP, LLY has a market cap of $57.15 billion and a decent dividend yield of 3.98% and an EPS of $3.68 per share.

The company has a lot riding on the outcome of the baricitinib study. Based on the Phase II studies, it is potentially safer and more effective than Pfizer’s Xeljanz. With very encouraging Phase III results in mid-stage extension study, all it needs is to further confirm the MRI findings and establish that it inhibits progression of bone damage, which the trials of the Pfizer drug had difficulty in establishing.

The world market for rheumatoid arthritis drug is large and growing and expected to grow to $17.3 billion (up from $12.7 billion in 2010). Whatever hesitation rheumatologists might have in prescribing JAK inhibitors would be done over with by the time baricitinib gets launched, as Xeljanz is already in the market and will be used despite the label. In addition, there is hope that the new RA drugs may get labels for treatment of other autoimmune diseases the way Abbot’s (ABT) Humira got approved for ulcerative colitis after first being approved for RA, then for psoriatic arthritis, ankylosing spondylitis, Crohn’s disease, plaque psoriasis and juvenile idiopathic arthritis.

Considering positive results of potential RA medicines, the growing RA drug market, an impressive range of drugs in pipeline and strong financials, I would suggest that long-term investors must have LLY in their portfolio. I may also add here that health care sector is potentially immune to the effects of the so-called fiscal cliff.


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